I think this would be much more healthy than the multi-phase aim-for-the-moon approach everybody takes today. And quite likely brings better results for both the investor and the founders.
If the business is already on the path to a small profitability, it is much more likely to get into large profitability than something that wasn't even started. And much less likely to get into a total loss.
Your points also seem a bit odd:
> Less availability of capital
There's no reason for that. If the investments are less risky, there should be more capital, not less.
> More dilution
Yep, at least more dilution per round. Companies doing that shouldn't do multi-round or have a very small first round followed by a second one.
> Less faith in "visionary founder" CEOs and more desire by investors to bring in professional management
Hum... Bringing management is a VC only thing. Their desire to bring management is clearly one of the forces stopping them form investing on less risky ventures. It's a non-performing choice for risky startups, and it's a non-performing choice for less risky ones. I'll just not call it stupid because there are handful of contexts where it's not, but doing it by default is clearly stupid. The good thing is that it's not viable for less risky bets.
> Long and protracted due diligence processes before the check even lands
>If the investments are less risky, there should be more capital, not less.
That's not the right metric. An investment balances risk and reward. If the reward of the less risky business is too low, then there will be less capital. If I guarantee your money back, and also zero growth (I'll just hold the money then return it), no one would invest - not enough reward.
Next, you have to outperform other risk/reward outcomes, such as bond or stocks or real estate, etc. Otherwise investors should (and likely will) put their money elsewhere.
For some market to get significant investment, it has to do well on the risk/reward frontier compared to alternatives.
Those reasons are why there is not massive VC type funds investing in companies like these. It's not that VCs are stupid, or investors are stupid. It's that the risk/reward for such companies has to compete against all other options for that capital.
Concerning "And quite likely brings better results for both the investor and the founders.":
That "[it] brings better results" for some groups does not imply that it more healthy for this group. Also the other way round: "more healthy for some group" does not necessarily imply "better results for this group".
In this sense I did not think that this phrase was to be considered an answer to my point.
Hum, ok. You are interpreting "better results" in a strict monetary sense, without accounting for second-order problems from bad deals.
It looks more healthy for both groups. I do expect it to bring better both first-order and second-order results. (Those two are always correlated, and on investment relationships they are very strongly correlated.)
If the business is already on the path to a small profitability, it is much more likely to get into large profitability than something that wasn't even started. And much less likely to get into a total loss.
Your points also seem a bit odd:
> Less availability of capital
There's no reason for that. If the investments are less risky, there should be more capital, not less.
> More dilution
Yep, at least more dilution per round. Companies doing that shouldn't do multi-round or have a very small first round followed by a second one.
> Less faith in "visionary founder" CEOs and more desire by investors to bring in professional management
Hum... Bringing management is a VC only thing. Their desire to bring management is clearly one of the forces stopping them form investing on less risky ventures. It's a non-performing choice for risky startups, and it's a non-performing choice for less risky ones. I'll just not call it stupid because there are handful of contexts where it's not, but doing it by default is clearly stupid. The good thing is that it's not viable for less risky bets.
> Long and protracted due diligence processes before the check even lands
Hell yes. That's the largest difference.