My point isn't that it is moonshot or bust - but that you may (like a friend of mine) find yourself having raised $5m to create a business that is very nice, but won't scale to the level the VCs expect or want. And the exit might be good or might be bad depending on market timing. But the contrast here is that he'll often talk about how much happier he'd be if he'd just bootstrapped the company. Now you can make the argument that he may not have been able to - but the point remains - he's got a good, non-scalable business where his investors are expecting him to magically solve for scalability. Not a great place to be.

Your numbers are a bit off compared with what I'm thinking as well - "say you have a $10m business" - that misses the point - he starts the business and there is little to no revenue. He raises a bunch of money but doesn't know if he can create a business that can get bought for $20m. He takes the money and then discovers he has a nice $2m business - but he can't scale it anymore. Because he doesn't have a great growth plan, no one is buying him out for 10x revenue. Thus he's a bit stuck.

I think this happens a lot more than people realize. At that point, it's like being stuck in a bad marriage with lots of kids. No easy options.

The worst part about it - if the company exits at a low value, it's likely to be classed as a 'failure' - even if it is profitable and has happy customers.

It's impossible to know in advance which companies will only scale to a certain size - hence the problem.

I guess the solution is to only take on money when you can show that you have a scalable business that just needs more investment to fly higher.

If you have sold 50% of your business to the VC, then you no longer have control of the business. (Seed-round investors may have stock; employees and/or cofounders certainly will.) You won't be able to close a deal that the investors don't like.

My understanding is that even if you take less, so that investors don't have outright controll, VCs will have incentive and substantial power to push small wins toward becoming either big wins or big failures. And they begin that push early, so that it's easy for VC-funded startups to end up in a grow-or-die situation, even if they theoretically might have taken a different path.

Note that there's some selection bias involved. If a VC thinks that the business is only going to be a $20m business, they won't invest. They also won't invest if the founders seem like the kind of people who will stop early. They're in the business of finding 10:1 odds on 100:1 money.

As an aside, it's a little dangerous to do valuation math like that. The valuations at A-round levels are highly speculative. If you take your $10m company and add $5m in cash, in theory it's a $15m company. But it's mainly fantasy. It's very different than a $15m operating business whose valuation is based on revenues and profits.

If you're $10MM pre-money and raise $5MM, you give up 1/3, not 1/2 of the equity. The preference doesn't mean the investor gets more shares.