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Venture capital explained: when to raise it and when to avoid it
Executive overview
Most startups shouldn't raise venture capital. VC funds need billion-dollar outcomes — a profitable $20M business is a failure by their model. Indie funding has emerged as an alternative for the other 99% of founders.
Build a great business first; investors will come to you.
How venture funds work
- Two main players: general partners (GPs) who run the fund, limited partners (LPs) who invest in it
- GPs earn via "two and 20": 2% annual management fees plus 20% of profits (carried interest)
- On a $10M fund, expected outcome: 4 failures, 4 break-even, 1–2 massive winners (100–500x)
- The home-run model forces VCs to ignore markets below billion-dollar potential
When VC makes sense
- Massive, fast-growing, winner-take-all market
- Willing to burn capital aggressively to dominate (think Facebook, Amazon, Apple, Google)
- Comfortable with extreme risk and pressure to scale at any cost
Why most founders should skip VC
- 99% of startups are not suited to the VC model
- A $10–50M exit is life-changing for a founder but a write-off for a VC fund
- Many VC funds don't even beat the S&P 500
Indie funding as an alternative
- Indie funding (e.g. TinySeed) targets SaaS bootstrappers where smaller exits are viable
- A $10–50M exit returns adequate profit for both founder and fund
- Represents startup funding for the 99% VC ignores
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