6 types of businesses that are NOT venture backable

When it comes to starting a business, venture capital often comes to mind. Venture capital is an attractive option for entrepreneurs since it can provide them with the significant funding they need to get their ideas off the ground. However, not all businesses are venture-backable, meaning they are not eligible to receive venture capital funding. In these cases, other solutions are necessary for entrepreneurs to get the startup capital they need.

This article provides an overview of six types of businesses that may not be venture-backable, but may still be viable business opportunities for entrepreneurs looking to launch their own business. These types of businesses include professional services, retail, franchises, food service, home-based businesses, and consulting.

Each of these types of businesses has potential but requires a different type of funding than venture capital. This article will explore the different funding options available for each of these types of businesses and their potential.

1. Lifestyle businesses

Lifestyle businesses are often overlooked when it comes to venture capital funding - but they shouldn't be! It's becoming increasingly popular for people to create and run a business from their own interests and passions, which might not bring in much money but keeps them happy and passionate about their life.

These businesses usually operate on a smaller scale than startups and are generally not considered for venture capital funding as it is only profitable for investors when the businesses scale up. Lifestyle businesses may generate an income for the founder, but are usually self-sufficient and non-scalable. This means that the investments of venture capital firms cannot be put to good use, making this type of business unsuitable for venture capital funding.

Examples of lifestyle businesses include bloggers, freelance writers, photographers, illustrators, artisans, indie-business, and any other type of self-employed sole proprietorship. Although these businesses can be lucrative, they're not suited to investors looking for a return on investment - which is why they're not venture-backable.

2. Solopreneur businesses

Solopreneurs, or single-person businesses, are growing in popularity due to the surge in technology and the increase of people who prefer to be their own boss. Unfortunately, solopreneur businesses often don't qualify for venture capital or other forms of startup funding.

This means that without external capital, these businesses are limited in their ability to grow. The types of solopreneur businesses not eligible for venture capital funding are wide-ranging and include:

1. Freelance Consultants – Freelance consultants, such as web and graphic designers, copywriters, and coaches, are often sole proprietors, meaning they are independent and don’t have any employees. Many of them have highly specialised services, making it hard for investors to make back a return.

2. Home-Based Services – Home-based businesses providing services such as pet-sitting, grocery delivery, and meal-planning also may not qualify for venture funding as they tend to serve a smaller customer base with limited scalability.

3. Dropshipping – Dropshipping businesses, although a popular option, is a type of business that generally works on a low-margin and high-volume model.

This means that, although the potential to catch lightning in a bottle is there, venture capitalists may look elsewhere for more established businesses with a track record of success.

Solopreneur businesses are undoubtedly on the rise, and while they may not qualify for venture capital funding, they can still be successful. For entrepreneurs looking to launch a business quickly and independently, learning to manage the business and funds effectively is the key. With a smart strategy, these businesses can reach their potential without external funds.

3. Small market-size business

Small market-size businesses often don’t make the cut when it comes to venture capital funding. Startups in narrow or saturated markets simply provide too much risk for investors. Unless the product or services a business offers have immense market potential, investors are more than likely to steer clear of them.

Businesses in small, niche markets are not able to scale beyond a certain point as they maxx out the total addressable market for their product/service. It’s not a huge surprise then that these companies have little negotiating power when it comes to venture capitalists who prefer the assurance of larger markets.

It could be a challenging feat for small, market-size businesses to make them venture worthy. A huge number of investors are more likely to invest in large, increasingly tech-driven markets that promise quick returns of interest.

Small market-size businesses don’t always come with the same security or guarantees. VCs are often not persuaded to invest in small market-size businesses because they lack the potential to emerge as a strong player in the industry or generate sizable returns. As a result, this type of business can be difficult to back with venture capital.

4. Slow-growth businesses

Slow-growth businesses often don't move fast enough to keep up with the speed of innovative startups, and as such they may not be eligible for venture capital. These businesses may be too conservative, have low-profit margins, experience difficulty in scaling up, or have a very slow-burn path to success. Therefore, they may not be attractive prospects to investors.

Examples of slow-growth businesses that may not be backable include family-owned boutiques, restaurants or shops. These types of businesses typically operate on small margins and require excessive amounts of hands-on care and maintenance to keep going. While their success may very well be guaranteed, they often don't expand quickly enough to entice venture capitalists.

Next are self-sustaining semi-profitable companies. It may sound counterintuitive, but companies that make enough money to stay afloat but not enough to spur growth may fall below investors' radar. As a result, these companies may never receive funding or be able to scale up in the competitive market.

Finally, any business that is not tech-based may be low on the list of considerations for venture capital firms. Non-tech industries, such as sustainable agriculture, may not be equipped to scale up to the level necessary to take advantage of venture capital. Therefore, they may never have a shot at venture-funded success.

5. Non-scalable businesses

Non-scalable businesses represent a significant portion of businesses that simply don’t have the capacity to become venture-backable. Such businesses may be small local stores, or even home-based businesses, and are usually not seeking or open to growth or expansion beyond their current constraints.

The reach of non-scalable businesses is limited to the basic geography of their current customers, making it difficult to attract venture capital funding. Most venture capitalists generally focus on businesses and startups with the potential of a massive return, which non-scalable businesses can’t offer.

Additionally, these businesses don’t have the right metrics to qualify for venture funding, and often don’t have the technological advances that venture capitalists look for. As such, non-scalable businesses remain out of reach of venture capital and other funding sources.

The core strength of these businesses lies in the loyalty of their customer base and consistent demand for their services or products. The owners of such businesses are often content in running the business as a way of making their livelihood and may not be interested in any grand changes.

At the end of the day, non-scalable businesses simply don’t have the ambition or capability to be eligible for venture capital or other types of funding. As a result, investors must look for other startups or businesses with the potential for growth and development if they are looking to create a viable investment opportunity.

6. Businesses with no competitive advantage

Businesses with no competitive advantage are often overlooked when it comes to venture capital. Companies that don’t have a true advantage over their competitors – whether it be in price, product, or service – will struggle to obtain the funding they need to stay afloat.

In addition, startups that don’t offer a product or service that’s better than what already exists in the market are also unlikely to draw the attention of venture capitalists. Startups without a competitive edge will naturally have difficulty accessing capital due to the non-existence of an economic moat.

While a company may have a unique angle, if its rivals can easily duplicate its delivery or proposition, then the startup is at a massive disadvantage. Investors are on the lookout for businesses with long-term, undeniable advantages over their competitors, and without these dynamics, startups are unlikely to get the much-needed venture funding.

Not being able to obtain venture capital can put a significant strain on the business, stifling growth and causing them to miss out on opportunities to compete in the market. As a result of this, companies that don’t have anything special to offer their customers are not a smart bet for investors. To help combat this, companies should always strive to create value for their customers and maintain a competitive edge; otherwise, the potential for capital investment is slim to none.