Founders must ask if venture capital aligns
A report argues founders should critically assess whether to raise venture capital at all, as it commits a company to specific growth paths and exit
Founders are flooded with advice on how to raise venture capital but receive little guidance on whether they should do it in the first place. This fundamental question is critical, as taking outside investment commits a company to a particular path with specific owners, milestones, and timelines.
The decision is especially significant in health technology, where long sales cycles and cautious buyers can make the implications of venture capital particularly profound. For some businesses, customer revenue may be a better source of financing and a better fit for their long-term ambitions.
The core questions for founders
Before pursuing a new funding round, founders at any stage should ask themselves several key questions. Where should the company be in ten years? How much of it do I want to own? What will this round force the company to become, and is that what I actually want?
The answers depend on the company's stage. Early on, the issue is whether outside capital is genuinely needed to reach the next proof point or if customers can fund that progress. Later, the pressure to raise may come from investors, peers, or the expectations surrounding venture-backed companies rather than a true business need.
How market and fund size dictate the path
The size of a company's target market dictates how much capital it can responsibly accept. While early checks can test product-market fit, later rounds can force a company to outgrow its core market. Capital demands growth, and expanding prematurely into adjacent segments or foreign regulatory regimes creates unnecessary risk.
Similarly, the size of the venture fund shapes the company you agree to build. Larger funds require vastly larger outcomes to generate their targeted returns. The report provides a comparative example of the exit values required by funds of different sizes.
| Fund Size | Target Return | Required Portfolio Exit Value (at 10-15% stake) |
|---|---|---|
| ~€2 billion | 3x capital (~€6B) | Over €40 billion |
| ~€100 million | A fraction of the above | Significantly lower, enabling patient investments |
Taking money from a large fund means committing to build a company capable of a massive exit, with the corresponding growth rate, burn rate, and timeline. The trend toward concentration in venture capital has raised the bar for early-stage founders. In 2024, a large proportion of capital raised by US venture funds went to established, mostly large managers, with a small number of firms capturing three-quarters of all capital raised. These managers are now pushing larger check sizes into the Seed stage, inflating round sizes, valuations, and growth expectations before a company has proven it needs such a trajectory.
Viable alternatives to venture capital
For many startups, customer revenue is a superior financing source. Signs that a business may grow better on revenue alone include recurring revenue covering costs, customers paying for capabilities you would otherwise fund, high gross margins, a repeatable sales process, and a low burn rate. In healthcare, where buying decisions depend on clinical validation, revenue is often the strongest proof of value.
The test is straightforward. Founders should compare the value of the equity a funding round would consume at today's price with the cost of achieving the same milestones through revenue funding. When the equity is worth more than the capital it buys, the decision becomes clear.
Other scaling methods exist without venture capital. Bank options like asset-backed loans and invoice financing provide working capital without affecting equity. Revenue-based financing allows repayment via a percentage of future sales. Startups can also apply for grants, especially in European HealthTech, to fund milestones without dilution. Strategic partners, including large pharmaceutical firms and health plans, are increasingly writing checks alongside co-development agreements. Foundations are making more equity investments in healthcare startups where impact and financial return align.
The heightened cost of a misstep
In the current climate of slowed exits, scarce liquidity, and correcting valuations, the cost of accepting the wrong capital is higher than ever. The report states, "In this environment, having the discipline to say no is a genuine advantage." This is not an argument against venture capital, as some startups need multiple rounds to secure enough growth to eventually be financed by customers.
The difference between founders who take substantial capital and those who take minimal or none is not their appetite for risk but the shape of the desired outcome: the market size, the exit it can support, and the required speed. Some opportunities warrant large investments because they can return significant value, while others are structurally unable to deliver huge exits. For an investor, this discipline is how a Seed fund preserves the ownership that lets a winner return the fund and how the rest of a portfolio avoids being buried under preference stacks it can never clear. The goal should be to build the right company, on the right terms, for the market you actually have.
