Why Your Startup Isn't Venture Backable
Too often, founders assume venture capital (VC) funding is what they need to be successful. But the truth is, most companies are not a good fit for the VC model. Or perhaps I should say the VC model is not a right fit for most startups.
Founders may find this out after pouring weeks or months into fundraising efforts, only to hear, over and over again, that the company is not “venture backable”. So what does this mean? And does it mean the company won’t succeed? In this article, I will attempt to break it down for you.
Venture capital: a high risk, high reward asset class
To understand how VCs work, first know that VC firms have their own investors, called Limited Partners. These are often large institutions like pension funds, which spread their investments across various assets like real estate, bonds, public companies, and private companies.
VC (private equity) is the riskiest asset class of the bunch— most startups fail, meaning the investment could be lost entirely. To offset this risk, these institutions expect the potential for massive returns.
Think about it like buying a $100,000 house vs. spending $100,000 on roulette. The house investment is unlikely to go to $0, but also unlikely to have a 10x ROI in a short timeframe. Roulette, on the other hand, is likely to result in a complete loss. However, the small chance– 1 in 38– of winning straight up on one number yields a 35x return.
(I realize this isn’t a perfect analogy because Roulette is 100% luck whereas real estate and startup investing is lots of luck with some skill. But you get the point).
VCs want one thing: their money back, many times over
VCs try to invest in companies with the potential for explosive growth. And because they want their money back, many times over, they need these companies to have a huge exit. What sort of return on investment (ROI) are they looking for on each investment? It depends on the stage:
Angels / seed investors hope for a 100x+ return
Series A investors look for 10x+ return
Growth stage investors look for 2-5x+ return
Seed investors expect most of their investments will go to zero, that’s why the ones that do win need to win big. Companies become more stable and predictable over time, while the chance that they go to zero decreases (that’s not to say late stage companies don’t fail, because they do all the time, just not at the same rate as early stage companies). Because later investors take on less risk, they can accept a lower return than angels and seed investors who take on the most risk.
No matter the stage, VCs are laser-focused on how they'll eventually get their money back— and then some. That’s why exit potential drives VC decision-making.
All other attributes of a company— market size, team, product, unit economics— all ladder back to the chances of a good exit. From the riskiest seed investment to the later growth rounds, it's about finding those companies that can deliver the outsized returns that make the whole VC model work.
There are phenomenal businesses that can fill an unmet need in the market, become sustainable and profitable, and make their founders rich... and still not be right for VC funding. So when a VC passes because and says your startup is not “venture backable”, know that it says more about them than you.
Ripple effects
If you take VC money, you have to build to sell. This has ripple effects for how you grow and operate your company, as it shapes what investors expect from your startup:
Ownership: In exchange for funding, you'll give up a significant chunk of equity with each round. This dilutes your ownership stake over time.
Control: VCs often get a board seat, giving them influence over major strategic decisions.
Growth: VCs prioritize rapid growth, even if that comes at the expense of other goals.
Scale: The numbers need to demonstrate the scalability and profit potential that will excite acquirers or the public market.
With venture funding, you should be able to scale your team and operations faster than if you were bootstrapping. But this is the double-edge sword: VC backing comes with intense pressure to meet growth expectations. Time and time again we see this lead to sacrificing long-term strategy for short-term boost in valuation. Funding can also tempt founders into overspending, like throwing marketing money at the wall hoping something will stick, leading to unsustainable acquisition costs and a dangerous burn rate if those growth targets aren't met.
Sometimes, this path makes sense. But other times, VC is simply not the right route for a company.
Many venture-backed startups struggle to balance spending in order to meet growth expectations with conserving cash in case the next round doesn’t come together. Whereas a bootstrapped business focuses on profitability and grows steadily, a venture-backed business is essentially borrowing from the future. That means if a company doesn’t live up to its potential, it becomes increasingly hard to raise more funding or find an acquirer. It becomes a downward spiral.
What to do if your startup isn’t venture backable
I get why founders want VC funding. There’s a prestige to it, and there’s also the validation that can help with things like recruiting employees and getting press.
A good VC has deep industry knowledge and connections. They can help you think through big problems, avoid costly mistakes, and can even open doors to strategic partnerships or potential customers.
But if investors continue to pass on investing in your company, it doesn't mean your idea is bad or that your company shouldn’t exist. It might just not fit the VC model. At this point, you have two choices:
Forget about them! Build your company on your terms, focusing on the metrics that matter to you – profitability, customer satisfaction, impact. If you absolutely need funding, seek it elsewhere.
Take those "no's" as feedback and change your path forward. Can you pivot to a larger market, prove you can grow faster, or get the margins VCs want to see?
There's a whole world of successful companies outside the VC world: Spanx, LEGO, Mailchimp, Atlassian, Craigslist, Braintree, Patagonia, and Basecamp to name a few. Bootstrapping or alternative funding allows you to build on your own terms, focusing on profitability and maintaining control.
"Not VC backable" doesn't mean unfundable. There are many ways to bootstrap and fund your startup beyond relying on VC funding including loans, crowdfunding, grants, and the most sustainable path of them all — revenue. Focus on getting your product or service into the hands of paying customers as early as possible. Even modest early revenue can be reinvested into growth.
So if VC backing isn't the answer, then what? Don't let "not venture backable" derail you. It's a signal to reassess your goals and explore the many other paths to building a great company. The world celebrates the VC-funded unicorns, but there's power in forging your own path.
"Not venture backable" might just be the best news you never wanted. It means you're free to create success entirely on your own terms. So, prove them wrong! Embrace the challenge, and join the ranks of those who built amazing companies outside the confines of the traditional VC model.