Why Most Businesses Don’t Qualify for Venture Capital Funding

Recently I had dinner with a friend, and she mentioned that she wants to start her own business. I shared my experience that there are really two types of startups: one is the SME, or small and medium enterprise, which focuses on building a profitable business; the other is the venture capital-backed startup, which is a completely different game. Many people don’t realize how stark the difference is, and this misunderstanding often leads entrepreneurs to chase the wrong kind of funding.

Venture capital is a highly specialized business. Great companies can still be terrible VC investments. The first big misunderstanding is about profitability. Entrepreneurs naturally want to build profitable companies. Venture capitalists, however, are not interested in profits, at least not in the short term. Profits usually mean slowing down growth, and growth is the only thing that matters to investors. They prefer companies that reinvest or even overspend every dollar to capture markets as quickly as possible. If a company ever finds itself generating more cash than it can reinvest effectively, investors will usually push for a sale, an IPO, or even a leadership change to keep the money flowing back into growth.

Margins are another critical issue. Reasonable margins might look appealing to most business owners, but venture capitalists want outrageous margins. Software that can be copied endlessly, drugs that can be sold globally, and technologies that scale without much additional cost are far more attractive than services. Businesses that require adding more people or more assets for every increment of growth simply don’t fit the VC model. Platforms or products that scale exponentially with minimal cost are what investors are after.

Another mismatch is return expectations. Doubling an investor’s money sounds impressive, but in venture capital it is not nearly enough. Because of the way funds are structured—with 10-year horizons, management fees, and the need to offset inevitable failures—VCs need to aim for tenfold returns just to stay competitive with the stock market. A steady business that can deliver consistent but limited gains will never satisfy those requirements.

Even if the economics made sense, the personal side often doesn’t align. Venture capitalists look for certain founder profiles: entrepreneurs they’ve already backed successfully, people with high-profile achievements in related industries, graduates of elite schools, or extremely charismatic personalities. Many solid business operators simply don’t fit the mold. Bias also plays a role, as women and minorities have historically been funded at lower rates. The truth is, who you are matters almost as much as what you’re building.

Fundraising itself is also a massive hurdle. For most first-time founders, raising a VC round takes six to twelve months of full-time effort, often ending with nothing. Meanwhile, the business they were supposed to be running suffers from lack of attention. For someone trying to manage operations day-to-day, that trade-off is impractical.

And then there’s the issue of control. Running your own business comes with freedom, but raising venture capital usually means adding investors to the board, and those investors have the power to replace you. Many founders don’t fully realize that taking VC money also means taking on a new boss.

So should you raise venture capital? Maybe. If you’re building software, biotech, or another kind of business that can deliver the explosive growth and outsized returns investors demand, venture capital can accelerate everything. It provides not only money, but also connections, credibility, and confidence. But for most businesses, there are better options. Revenue-based financing, crowdfunding, or simply reinvesting profits are often better aligned with the goals of the company. At the end of the day, venture capital isn’t about building good businesses. It’s about building VC-scale businesses. And that’s a very different thing.

Being in Singapore, I see a unique dynamic. Despite the government providing a lot of funding schemes and initiatives to cultivate startups, the local culture is not particularly entrepreneurial in the VC sense. At best, it leans toward SME-style ventures—focused on steady profits and sustainability, rather than aiming to grow fast, burn money, and get rich quickly through an IPO.