What makes a startup 'VC backable'?

If you’ve been around the startup ecosystem for a while, you’ve probably heard the term ‘VC backable’. It sounds absurd if you’re on the outside (even sometimes from the inside) -  yet another piece of exclusive jargon. 

But what does this actually mean? What do businesses that are not VC-backable look like, and why does it even matter?

To understand this, let’s first understand the business model of VCs themselves. If we look at the capital markets line, it’s clear that venture capital is a high-risk, high-reward asset class. The VC business model is an outlier business. VCs expect the vast majority of their investments to be worth $0, which is why they’re always looking for companies that can deliver outsized returns to their investors. And these returns also need to be generated within a 10-year fund lifecycle.

This doesn’t mean that businesses that are not VC-backed can’t grow or deliver returns. It just means their growth trajectory and return potential don’t fit a VC’s business model. 

Let me explain that better with math -

Imagine a fund that plans to invest in 30 startups. They put a $5M average first check and reserve 100% for follow-ons, leading to a total fund size of $300M.

If one of their startups sells for $100 million and the fund owns 15% (which is very optimistic), they get $15M back - 3x their initial $5M investment. 

3x sounds like a win, though, right? Let’s find out. 

For this $300 million fund to just break even, they'd need 20 of these 30 companies to sell for $100 million each. And that's assuming they still own 15% at exit, which is extremely optimistic after multiple funding rounds. However, for the founder who raised $5 million and sold for $100 million, they might walk away with $30 million personally. That’s a massive win for them.

But for a venture fund, the math is totally different. 

If just one of their companies sells to Google for $35 billion (looking at you, Wiz), and they own even 4% at exit, that single deal brings in $1.4 billion. Suddenly, all those $15 million returns from other companies look inconsequential.

That's the fuel behind venture capital: one massive win can make the entire fund successful, while smaller wins barely make a difference, and this massive win is what VCs are looking to back. Understanding this is crucial to understanding whether your startup is the right ‘fit’ for venture funding or not - and whether you’d be better off taking alternative funding approaches. 

Now that we’ve (almost) understood how VCs work, let’s move on to the second part - 

What do VCs look for in businesses that are ‘venture-backable’? 

Revenue and Growth

If your company has to deliver outsized returns in 10 years, then a steady 30% y-o-y growth will simply not cut it. Or, if your revenue comes from selling one-time products, or offering services (consulting, installations, etc), scalability and revenue growth are a big question mark.

In simple terms, VCs want startups with recurring and high-growth revenue. While industries and business models work differently, a great example that fits in this model is SaaS. The revenue models for SaaS companies are recurring because they sign annual contracts, without which users cannot use the product. It’s also super scalable because you can massively grow revenue with a marginal cost. There’s minimal additional cost of serving extra customers, unlike a shoe manufacturing company, where the cost of serving a new customer includes the cost of producing a new shoe just for them.                                                                   

CAC and LTV

A business needs to make more money from a customer over time than it spends to acquire them. Think of the big discounts Amazon or Zomato offered when they started - that was a part of their customer acquisition cost (CAC). But now, most of us have spent ~10x that amount on these platforms, meaning our lifetime value (LTV) is much higher than what they paid to get us as customers. This CAC and LTV play is why certain industries become difficult bets for VCs. The prime examples here are D2C and hardware companies. 

D2C brands face higher customer acquisition costs, as compared to their B2B counterparts. For example, a skincare brand selling a ₹500 product needs 20,000 customers to hit ₹1 crore in revenue, whereas a B2B CRM at ₹1 lakh per contract needs just 100. However, these are just a few examples, and in no way reflective of D2C as a whole. Brands like Mokobara and Minimalist have seen unprecedented success, proving that with the right execution, even complex business models can scale profitably.

Understanding what makes a startup "VC backable" isn't about creating a universal checklist, but about recognising the unique ecosystem of venture investing. It's a high-stakes game where astronomical success can overshadow multiple smaller wins. 

If you’re reading this as a founder, the takeaway is: 

Know your business model, understand your growth potential, and choose a funding path that genuinely serves your vision. Whether that means pursuing venture capital or charting a different course, success shouldn’t be defined by external validation but by creating sustainable value for your customers and stakeholders.