---
title: "Business Models VCs Avoid"
section: "Choosing a Business Model"
sectionId: "business-models"
date: "2026-05"
---

## The Venture Scale Test

VCs typically avoid business models that are not **venture scale** — meaning they can't realistically reach $100M in revenue within ten years. The models below usually fail that test.

## Direct to Consumer (DTC) / CPG

DTC and Consumer Packaged Goods businesses have lower margins than software and scale more slowly. To attract VC attention, a DTC company usually needs at least one of:

- **Elite product or brand** — e.g. Eight Sleep, Warby Parker, Dollar Shave Club, Away Luggage
- **Elite acquisition strategy** — mastery of TikTok, Instagram, or Facebook advertising, or a strong organic channel

Without a genuine edge in brand or acquisition, DTC is a difficult business to make venture scale.

## Hardware

The famous saying: **"Hardware is hard."** Hardware businesses have historically low margins, scale much slower than software, and often face a race to the bottom on price as competitors copy the product.

**The exception — HaaS:** If your hardware has a meaningful software component, you can sell it as **Hardware-as-a-Service**. This recurring revenue layer makes the business far more attractive to investors. Examples: **Density** (occupancy sensing with a data platform) and **Cafe X** (robotic coffee with subscription software).

## Advertising

Ad-based revenue only works at massive scale, which makes investors sceptical of early-stage companies pursuing it. The model requires enormous traffic or user bases before it generates meaningful revenue — and even then, it is highly cyclical.

Major advertisers cut their ad budgets **first** during economic downturns, which means advertising revenue is among the most volatile and least predictable of all models. Examples of companies that made it work: Google, Facebook, Amazon, Yelp, Twitter, Snapchat. All required enormous scale before the model became viable.

## Service-Based

Service businesses are generally not venture scale. They tend to grow linearly with headcount rather than exponentially with product adoption, which caps the return profile. They can be good businesses for founders but are rarely suitable for VC-backed growth.