Why VCs Aren't Looking for Good Businesses

Venture capital is the default assumption for a lot of new founders. You have an idea, so you need investment, so you build a deck. It is what the ecosystem talks about, what the podcasts cover, and what gets announced.

Most of the founders reading this should not raise venture capital. Not yet, and in many cases not ever. Here is the arithmetic behind that, because it is more persuasive than the advice.

The maths that governs everything

A venture fund invests in ten early-stage companies. Roughly six of them fail outright. Three return some or most of the money put in. One returns ten, fifty, a hundred times the initial cheque, and that single company generates most of the fund’s return.

This is not a pessimistic view of venture, it is the model working as designed. A £100m fund that deploys £50m across ten companies needs one of them to return £500m or more. That is what the whole structure is built around.

Now think about what that means when you are sitting across the table.

A fund is not assessing whether your business is good. It cannot use a good business. A company that grows steadily, pays its founders well and returns three times the investment over eight years is a fine outcome for you and a rounding error for the fund. What the investor is assessing is whether you could plausibly be the outlier. Almost nobody is, and they know it, which is why they say no so often and so quickly.

What to take from it: a rejection is usually not a verdict on your business. It is a verdict on whether your business fits a specific and quite narrow financial model.

Whose money you take changes the answer

The same startup gets genuinely different responses from different funds, and it has little to do with the startup.

A £50m early-stage fund writes cheques of a few hundred thousand, holds for a decade or more, tolerates high risk and makes many bets. A £2bn growth fund writes cheques of tens of millions, wants a return in three to seven years, and takes fewer and safer positions.

Show the same company to both. The first says the team and the potential are exciting and this is exactly what early-stage is for. The second says it is interesting but too early, come back with traction. Neither is wrong. They are answering different questions, because fund size dictates cheque size, return target, time horizon and risk appetite.

Founders take this personally and should not. Before you spend three months on a fundraise, work out which kind of investor your business could actually suit, and speak to those. Half of the rejections most first-time founders collect were unwinnable before the meeting started.

What to take from it: know who you are talking to. Fit matters more than pitch quality.

A valuation is a promise, not a prize

The part of fundraising that new founders misread most badly is valuation. It is treated as a score. It is closer to a debt.

Raise at £10m and you need strong growth to raise again at £20m to £30m. Raise the same business at £30m and the next round needs to be north of £150m to look like progress. You have not been given £30m of value. You have been given a target, and you have agreed to hit it.

Miss it and the next round is flat or down, which is materially worse than a modest valuation would have been. The dilution is heavier, the terms are harder, and the signal to the market is poor.

I would rather see a founder own more of a business that grew into its valuation than less of one that started too rich. The best number to raise at is the one you can defend next time, not the one that reads best in the announcement.

What to take from it: treat a valuation as a milestone you have committed to, and ask honestly whether you can hit it.

So what should you do instead?

For most very early businesses, the honest answer is: customers.

Revenue from customers is the only funding that does not dilute you, does not commit you to a growth trajectory, and does not require you to spend a quarter of the year in meetings. It is also the thing that makes you fundable later on better terms, if you decide you want that.

There is a broader point here. Investors do not fund spreadsheets. They fund conviction backed by evidence — a real problem, proven traction, sound fundamentals, a market with room in it. Every one of those is built by running the business, not by raising for it. Which means the work you would do to become fundable is largely the same work you would do to not need funding, and you can find out along the way which you would prefer.

Some businesses genuinely need capital up front. Hardware, deep science, anything with a long build before the first revenue. If that is you, raise, and raise from the right kind of fund. But a software business selling to other businesses can usually get its first customers on very little, and doing so puts you in a far stronger position whichever route you eventually take.

The question worth asking first

Before the deck, before the list of funds, one question: what would I do with the money that I cannot do without it?

If the answer is specific — hire two engineers to build the thing forty customers have already asked to pay for — that is a real case. If the answer is vague, or amounts to buying time to work out what the business is, the money will not solve it. It will give you eighteen months of salary and a set of obligations, and the underlying question will still be sitting there at the end.