How To Get Startup Funding: What Investors Really Look For

Most founders hear this stat early: 7 to 9 out of 10 startups fail. The deeper you read into the data, the harsher it gets. The odds of building a unicorn are closer to less than 1 in 1,000.

On paper, startup funding looks irrational. Investors pour money into companies that lose cash for years, and the majority never pay it back. Yet the system keeps going, and some investors do incredibly well.

This is the tension at the center of startup funding. It is not built around steady profits or safe returns. It is built around a few rare outcomes that cover a long list of broken bets.

In this guide, we will unpack why investors invest at all, why talking about profits can actually hurt your pitch, how exits really create returns, and how to decide which funding path fits the company you want to build.

The High Stakes Of Startup Funding

When you strip away the buzzwords, early-stage investing is simple to describe and tough to stomach.

• Most estimates put startup failure rates between 75% and 90%. Recent reviews of startup failure rate statistics are consistent with that range.
• Out of the survivors, only a tiny slice grows big enough to matter at a fund level.
• Out of those, only a microscopic fraction reach unicorn status.

Investors are not hunting for comfortable single-digit returns. They are hunting for that outlier that can return a whole fund on its own.

So when they look at your startup, they are not asking, “Will this be a solid business?” They are asking, “Could this be that 1 in 1,000 outlier, and do these founders have a real shot at getting it there?”

That is the frame that explains almost everything that follows.

Why Even Bother Investing?

Given the odds, why does any rational investor walk into this game?

Because, if they can get into a company early enough that later sells or goes public at a huge valuation, a single check can turn into 30x, 50x, or even 60x. With those numbers, a few wins make up for almost everything that dies on the way.

The catch is that this math only works under a very specific rule: the payoff must come from selling shares, not from yearly profits.

Why Talking Profits Scares Investors

A common mistake in pitch decks is to highlight how quickly the startup will become profitable and how soon it might start paying dividends.

That sounds responsible. It sounds safe. In the logic of venture investing, it is actually bad ROI.

Let us run the scenario that many founders feel proud of, and see it from an investor’s seat.

The “Profitable Startup” Scenario

1. You raise $1 million for 15% of the company
   This is a pretty standard early-stage deal for a promising tech startup. At this point you may only have a product prototype and a small team. The valuation is based mostly on potential.
2. You grow to $10 million in annual revenue
   You build a software product, sell it well, and after a few years you reach $10 million a year in revenue. For a SaaS business, your gross margin might be around 90%. The cost of servers, AI tools, and hosting is high-level but still small compared to revenue.
3. Operating expenses cut that down to a 20% net margin
   Now you pay for everything that keeps the company running:
   • Founder and team salaries
   • Customer support
   • Development
   • Marketing
   • Office space or remote tools
     After all of that, a solid software company might sit at 20% net profit. On $10 million, that is $2 million in pre-tax profit.
4. Taxes reduce that to roughly $1.5–$1.6 million in net income
   If you pay around 20% in taxes in the US, you keep something in the range of $1.5–$1.6 million in after-tax profit.
5. Investor’s share is only about $230,000 a year
   The investor owns 15% of the company. If the company decides to distribute all profits as dividends (which is already a generous assumption), the investor gets:
   • 15% of roughly $1.5 million
   • Around $225,000 to $230,000 in dividends each year, before the investor pays their own taxes

To make this easier to scan, here is the simplified math.

Item	Value
Initial investment	$1,000,000
Equity owned	15%
Annual revenue	$10,000,000
Net profit margin	20%
Net profit (after tax, approx.)	$1,500,000
Investor share of profit	~$225,000 per year

Even in this optimistic case, it takes about 5 years for the investor to simply earn back their original $1 million, and that is before counting their own taxes.

During those same 5 years, they also watched several other portfolio companies shut down, each one a full loss.

Why This Is A Red Flag For Many Investors

From a founder’s view, $10 million in revenue and 20% net margins feel like a big win. And in normal business terms, it is a strong result.

From a venture investor’s view, this scenario has a set of problems:

• Slow payback: It takes years just to recover the initial investment, with no real “win” yet.
• No control over dividends: At 15% ownership, the investor cannot force the company to pay dividends. The board might choose to raise salaries, or reinvest in the product instead.
• Portfolio reality: Those modest dividends do not come close to covering the money lost on the many startups that failed.

This is why talking about dividends or profit-first plans in a pitch often sends the wrong signal. Even if you reach those numbers, the return profile is still too slow and too small for a classic startup funding strategy.

If your goal is to understand how your numbers could look under both profit-first and growth-first plans, a tool like Slidebean’s financial model builder can help you see both paths on one dashboard.

The Profit Path: Slow And Steady

There is nothing wrong with a profit-focused company. In many ways, it is safer and more peaceful.

If you choose this route, you accept that:

• Growth will usually be slower.
• You may rely more on customer revenue and smaller investors.
• You probably will not raise at “classic startup” valuations like $1 million for 15% on just a concept.

You are building a business that pays for itself instead of one that trades short-term profit for a shot at massive scale. That is a valid path. It is just a different game from venture-style startup funding.

Investors Want Exits, Not Profits

To understand why venture capital behaves the way it does, swap one key assumption.

Instead of assuming investors make money from yearly profits, assume they only make real money when they sell their shares.

That is the mental model behind most startup funding.

The High-Growth, Exit-Driven Scenario

Let us rerun the earlier story with a different strategy.

1. Same starting point: $1 million for 15%
   The investor writes the same check. Same team, same product stage.

2. The company focuses on growth, not profit
   The founders use the money to hire faster, build faster, and spend more on marketing. They are not trying to be profitable in the short term. Every spare dollar goes into growth.

3. More rounds follow, and everyone gets diluted
   Because growth is expensive, the company raises more rounds. New investors join, the total number of shares grows, and early investors’ piece of the company gets smaller over time.

   After several rounds, that original 15% might shrink to around 4%. The founders’ stake shrinks too. This is dilution, and it is a normal part of this type of funding.

4. Seven years in, the company becomes a unicorn
   After about seven years of fast growth, the startup hits unicorn status. The last funding round prices the company at $1 billion.

5. A strategic buyer acquires the company for $1.5 billion
   A larger company steps in. Maybe they want to remove a competitor, secure the technology, or absorb the team. To get all investors to agree, they pay a premium over the last valuation and buy the company for $1.5 billion.

6. The original investor now owns 4%, which is worth $60 million
   Even after dilution, that early investor’s 4% turns into:

   • 4% of $1.5 billion
   • $60 million

On a $1 million check, that is a 60x return in roughly seven years.

There is no profit distribution story here. The company probably lost money on paper most years while it was scaling. The value was in the exit.

It is not hard to see why investors prefer this profile when they are picking where to place their bets.

Compared to dividends from a $10 million revenue company, a single $60 million outcome would cover dozens of losses and still leave a big win on the books.

If you want more context on how often these outcomes happen and how they balance against all the failures, reports like this startup failure rate breakdown or this broad startup statistics guide are useful reading when you are stress-testing your own expectations.

Dilution As The Price Of Speed

It is natural to feel anxious about dilution. Founders often get stuck on the shrinking percentage of the company they own.

The important detail is that percentages are not the full story. What matters in the exit-driven game is the value of your slice, not only its size.

Owning 80% of a small, slow-growing business might be great for a lifestyle company. Owning 8% of a company that exits for billions is a different kind of outcome, both for you and for your investors.

The flip side is that this path is unforgiving:

• Growth at this pace is cash-hungry.
• If you run out of money between rounds and cannot raise more, you are forced to cut deep, slow down, or pivot to profitability under pressure.
• When growth slows, potential buyers stop paying high premiums. The story changes from “category leader of the future” to “distressed asset”.

This is why investors care so much about momentum, market timing, and your ability to raise future rounds. The whole model depends on reaching that exit window before the fuel runs out.

VC Funds Are Built For Multipliers, Not Steady Profits

At fund level, the math is even starker.

A typical venture capital fund knows that most of its portfolio will fail or return small amounts. The model assumes:

• Several companies will shut down with zero return.
• A handful may return the original investment or a bit more.
• Only a few will return 10x, 20x, 50x, or more.

Those few need to be large enough to cover everything else and still produce a solid result for the fund’s own investors.

That is why funds prefer companies that:

• Can absorb large amounts of capital.
• Operate in markets big enough to justify billion-dollar outcomes.
• Have a credible story to scale fast and defend their position.

To an outsider, this can look like hype: investors push valuations up, tell big stories, and aim to sell while the company is still growing fast. It can feel a bit like a bubble machine or even carry a “Ponzi scheme” vibe if you see only the surface.

The deeper reality is more grounded. Many of these companies, once they are done with the aggressive expansion phase, settle into strong, profitable business models. The early years are about building reach and product strength, even if that means accepting losses on the way.

But in the startup funding version of the story, those future profits are a bonus. The central engine is still the exit, and the return multiple that exit generates within a 7 to 10 year window.

Also Read: Who Really Controls OpenAI and Anthropic? The AI Mega Deals Reshaping Power

Two Startup Funding Paths For Founders

Once you internalize how investors think, a simple fork appears in front of you.

You can build:

1. A high-growth, VC-backed startup that aims for an exit, or
2. A profit-focused, investor-light business that grows slower but pays its own way.

Both are valid. They just ask for different expectations, habits, and investor types.

Path 1: The VC-Backed Growth Story

On the VC path, you are signing up for a specific mode of operating.

• You raise at relatively high valuations early, often with only a product vision and a small team.
• You accept dilution in exchange for more capital and more speed.
• You push for market share, product strength, and top-line growth first, with the plan to sort out margins and optimization later.

Here, “fake it till you make it” is less about lying and more about moving a bit ahead of the current numbers. You tell a story about where the company can be in 3 to 7 years, and then you spend the next few years trying to grow into that story.

In return, you get access to capital, networks, and the chance, however small, to build one of those rare outliers.

Path 2: The Profit-Focused Business

On the profit path, your incentives shift.

• You care less about explosive growth and more about resilient cash flow.
• You might still raise money, but often from investors who expect dividends or a share of steady profits, and they may ask for a larger piece of the company.
• You are less exposed to fundraising cycles and market moods.

The trade-off is that you probably will not see unicorn-style valuations, and you are less likely to attract classic venture capital. Your pool of potential investors is smaller, but your control is often higher, and your stress profile is different.

This can be a healthier choice if your market is smaller, your product is more niche, or your personal goals lean toward stability and ownership rather than chasing a huge exit at all costs.

Choosing The Path That Fits You

What makes this decision hard is that it is not only about money. It is about how you want to work for the next decade.

Once you commit to the VC path, it is tough to change course halfway. The company is tuned for speed, your investors expect growth, and the expectations around future rounds are already in place.

Switching from that to a quiet, profit-first mode often requires deep cuts and a hard reset of expectations. It is not impossible, but it is painful.

On the other hand, if you build a profit-first company, you will not usually have the story or structure that venture investors need. Trying to “flip” into a hyper-growth narrative later can feel forced and rarely convinces experienced funds.

So the real question to ask yourself is not only “How do I get startup funding?” but:

• What size of company am I actually trying to build?
• What level of dilution and outside pressure am I comfortable with?
• Do I want to optimize for ownership and control, or for speed and potential scale?

This is where honest reflection matters more than pitch-deck polish.

A Quick Note On “Pies” And “Bricks”

People often describe equity as a “pie” you slice among founders, employees, and investors. That picture is simple and useful, but it hides a key detail.

High-growth tech companies behave less like a static pie and more like a stack of bricks being added over time. Each funding round adds new bricks on top, and past bricks become a smaller share of the total, even as the whole structure grows taller.

Once you start to see your cap table that way, dilution feels less like loss and more like part of the building process, at least on the growth-focused path.

Conclusion: What Really Convinces An Investor

At the end of the day, startup funding is not mysterious.

Investors say “yes” when they see a team, a market, and a product story that could lead to a large exit in a reasonable amount of time, and they say “no” when the numbers suggest a decent small business that will never throw off venture-level returns.

If you want their backing, you need to show how your company can become that rare outlier, not just a tidy profit machine.

If you prefer the calmer, profit-first road, own that choice and look for investors whose expectations match it. You will trade some potential upside for more control and often a saner day-to-day life.

Either way, clarity about which game you are playing is one of the most powerful gifts you can give yourself as a founder.