Founders have to decide from the start whether the goal of the business is a big exit for investors or profits for owners

You’re developing a useful new technology. You’ve talked to a hundred customers and confirmed a big market need. Wonderful. But before accepting investment, whether you realize it or not, you’re at a critical fork in the road for what kind of business to build.

There are two choices and only two choices, and you have to choose. There is no middle ground. You can either build:

  • A venture business where the goal is to reach a massive exit for investors.
  • A profits-based business where the goal is to generate an ongoing stream of dividends for owners.

The Venture Business

Every startup founder is familiar with the venture-backed business, though many miss the critical implications.

In a venture-backed startup, investors put in money to help the company launch and grow. So long as the company keeps growing exponentially, investors keep putting in more money for 5 to 7 years until the company reaches $100M in revenues and is acquired by an industry giant. Or investors continue putting in more cash to grow the business towards $1B in revenues and shoot for an even bigger IPO.

Investors expect 90% of venture-backed startups to fail. That means the 1 out of 10 that does succeed needs to return 10x for the investor to break even, and 40x to beat investing in S&P 500 index funds. To be a truly successful investment, venture investors are betting on a shot at 100x or even 1000x return.

If you’ve built a successful $20M business but growth has slowed, sorry, no more money for you. And since you’re losing millions on a corporate infrastructure to support the $100M target, without a fresh infusion of cash, you’re dead. Investors shrug. Oh well. Another write-off.

The venture business model is ideal if you’re planning to take over an industry. Invent a new battery chemistry? You’ll need hundreds of millions to build a gigafactory, but if you succeed, the market is measured in the tens of billions. Building a new LLM to beat OpenAI? The chances of success are low and you’ll need to spend billions buying Nvidia chips, but if you succeed, the rewards are in the trillions. These are venture businesses.

For the venture business, profits don’t matter. In fact, if the business is generating profits, that means you’re not investing enough in growth. In the end, the business will be sold before it reaches profitability, so the only thing that matters is revenue growth.

Investors in venture business are the usual suspects: venture capital funds, corporate investors, angels, accelerators, and everyone else populating the venture ecosystem. Investing in venture businesses is easy: write a check, wait ten years, hope the company is successful. No work required, no business building, maybe a week of diligence review.

But if you’re building a consulting business to help companies navigate tariffs? Or AI to aid beekeepers in maintaining bee health? Those are great niche businesses that can generate nice profits, but they’re not venture-scale businesses.

The Profits-Based Business

In contrast to the venture business, the goal of the profits-based business is…well, to generate profits for the owners. Notice I said “owners” rather than “investors.” I’ll get to that critical distinction soon.

The “profits-based business” used to be just called “business” because the goal of business is to make money, but venture capital has changed the game for startups that fit the venture model.

Unlike a venture business which has to be large enough to become an acquisition target for an industry giant or even bigger to support a public stock marketing listing, the scale of a profits-based business doesn’t matter. A $100K consulting business can be a success since most of that $100K goes straight into the consultant’s bank account. A $2M sandwich shop that generates $500K in profits is a great business, as is a $10M tariff consulting firm generating $3M in income.

The profits-based business has to reach profitability as quickly as possible to minimize up-front capital. Even then, someone needs to fund the initial losses, and that’s the job of the owners. Once the business reaches profitability, the owners then get to decide how much of that leftover money they want to keep for themselves and how much to invest in future growth of the business.

The challenge of a profits-based business is getting it to breakeven. You may need to build a product, open an office or retail shop, hire employees, invest in marketing, pay legal fees, and many other operating expenses. All of which require money.

How to Fund the Profits-Based Business

If you decide you want to open your own law firm, or perhaps a coffee shop, your funding options are straightforward.

The simplest is personal funds. Hopefully you have a big pot of savings. If you’re married, your spouse’s salary can pay the bills while you spend years in law school. If you’re lucky, you have family who can help pitch in. If not, you need to cultivate successful, generous friends.

Loans are another option. Student loans, small business loans, mortgage refi, credit cards. Many successful businesses owe their start to American Express.

Depending on the business, you may be able to take on part-time or consulting work to pay the bills at the beginning. Ideally, the work is related to your industry and helps build the product and customer base.

It’s also possible to grab funding from business partners. Think of distributors, resellers, and suppliers who will benefit from your success. Get them to donate free supplies, loan you expensive test equipment, offer development support, and provide needed lab or working space. Even if they don’t give you cash, in-kind support can reduce the capital required to get started.

For an innovative technology or medical product, grants are often available. In the US, the SBIR program helps thousands of startups develop and commercialize their technology. There are also state grants and handouts from private foundations for worthy causes.

But the very best place to find funding is from customers themselves. If they’re desperate enough for your solution, they may be willing to put down a deposit or even better, pay for non-recurring engineering to develop the product to meet their specific needs.

Lastly, consider business models that require less funding. If you’re developing advanced materials for batteries, for example, instead of opening your own factory which will cost at least $100M, you could license the technology to existing battery material companies and focus on research instead of factory operations and supply chains.

For developers of new and unique technologies, licensing is a great way to create a profits-based business. The revenues from licensing are usually too low and exits too small to build a venture business, but if you’re able to license the technology, the business can be nearly pure profit to the founding team.

Who Owns the Business? You!

For a venture business, investors acquire equity and become the business’ owners. Venture investors don’t want dividends — they want a big acquisition or IPO to pay their own investors before their fund closes in 10 years.

For a profits-based business, the goal is a stream of dividends. Cash flow. Income. But income is the small amount leftover after all the bills are paid. That creates a big conflict between the management team and any outside owners.

Imagine I provided you with the capital to build a SaaS platform for bowling alleys. Now it generates $5M in revenues and $1M in profits. You own half the business, and I own the other half but I’m not actively involved in the business. You could pay out that $1M in profits as dividends, half of which would go to you and half to me. Or you could decide that your $100K salary is below market rate and raise it to $250K. And for the company’s success, you decide to award yourself a bonus of $250K. You also want to give your management team raises and bonuses. Pretty soon, that $1M of profits is gone. Because really, why should you pay me, your outside investor, who did nothing but write you a check years ago, when you could use that money to reward yourself and your team?

Unless I have some way to control the company’s budget and watch over every expense, it doesn’t make sense to invest as an outsider because I’m unlikely to get a return. And it doesn’t make sense for the company to have outside investors because a fight is inevitable over every item on the budget. Every dollar the company spends is a dollar not going to investors. This is very different from the simple venture model where nobody gets anything until everyone gets rich together in the exit.

The solution is simple: don’t sell equity in the business to outsiders. Not even your rich aunt. If she’s willing to give you money to help you get started, structure it a loan rather than a share of the business. All investments by outsiders should be loans rather than equity.

A loan forces a fixed payback on a fixed schedule, so there’s no arguing over the budget. That leaves the founders and managers free to decide amongst themselves how much of the remainder to dispense as profits and how much to reinvest in the business.

Co-Founder as Investor

You need $1M to develop your business until you can reach break even. But you’re fresh out of school, burdened by student loans, and don’t have a rich aunt to drop you a million. You’re absolutely certain that the coffee shop you want to build will be an easy success, but no customers are going to prepay for coffee, and the business doesn’t qualify for a bank loan. So what can you do?

My usual advice is to get a regular job and build up a cushion of saving before risking penury on your own business. But if you’re a true entrepreneur, you’ll ignore my advice and start the business anyway.

The way to build the business is to add a co-founder. The co-founder may be a friend who can split the costs with you, or it may be someone with more financial resources. It might be a retired executive from the industry who already knows everyone worth knowing. The co-founder may contribute more cash while the original founder contributes the sweat equity to develop the product and business. Either way, unlike the disinterested venture investor, the co-founder is actively involved in the business, even if it’s only a few hours a week.

The co-founder might even be the owner of a similar business. For example, if you want to open a coffee shop, you might find the owner of another coffee shop across town to be your partner. He’d not only provide funding, but bring critical expertise and shared purchasing and marketing resources. He’d get cut of the profits without having to run two coffee shops himself. If you’re developing a chatbot for bowling alleys, partner with the founder of a successful chatbot for car dealers.

To reduce the risk for such an operating partner, the financial arrangements are more complex than the simple SAFE used by venture businesses. It’s likely to include a quick payback of the initial principal to reduce the risk. It includes a salary, consulting fee, or management fee for time spent working in the business. There may be a minimum guaranteed return before anyone begins receiving dividends. Then there is the partner’s share of profits continuing on forever.

These early payments help reduce the upfront risk so that a stream of dividends can make an attractive risk-adjusted return. In contrast, venture businesses deal with the high risk by offering the potential for 100x returns.

Which Fork Will You Take?

Before you accept any investment, you have to choose which path to take: the moonshot or profitability. Once you accept venture investment, whether from angels, accelerators, or venture funds, you’ve committed to the path of unicorns striving for a monster exit. Once you’ve deposited the investor’s check, there’s no going back to aiming for profits.

So here’s your choice: If you pursue the venture path, at the earliest stage you have perhaps a 1 in 100 chance of success. If you do succeed, the business will be worth $1B, and you and your co-founder will take home $100M each. In other words, a small shot at a huge return.

Or you can go take the path towards profitability. If you plan well, you have probably a 50% chance of success. Even if the company generates only $10M in revenues, you and your cofounder can split $2M in profits every year forever.

Of course, the math differs depending on the specific business. But in general, though the path to profitability doesn’t have the glamour of the venture world and is unlikely to make you into a billionaire, it is the far smoother, easier path to business success and life changing wealth.

Want to build a profits-based business but need some investment and assistance to reach profitability? Take a look at Unventure Capital, our startup cofounder+investment group.