> "They aren’t looking for a guaranteed $1M, they want a chance at $1B or $100B. This is really weird, because software business that are profitable might not be fundable."

Huh. Sounds like an inefficiency on the funding side. Or is it that these biz's profitability typically enable self-funding? Why does a profitable startup that doesn't have VC-style growth potential need funding?

If you're in a growth market (or a perceived one), the impending influx of well funded competitors can wipe you out.

I've seen this story before - worked for a company with very disciplined management, focusing on steady predictable growth - 25% a year, not 200% a year, but doing so profitably without VC capital. And then the venture backed competitors who didn't care about making a profit popped up...

It is a vicious cycle - once a market attracts the attention of VCs, it becomes really hard not to join in.

There are other options - first of all debt financing. Equity is tricky because of the principal agent problem. The manager or whoever contrlos the company can easily keep the profits low while paying himself or his friends much. There are some ways out:

a) strict management/information rules - so burdensome that it is available only for big companies - i.e. corporations

b) startups with scaling - that is high growth business - where growing is the only option for the manager

c) having a partner with money who takes part in the management

Imagine your business was making a solid $1m/year in profit. But, if you had a one-time cash injection of $10m, there's a good chance you could expand to $5m/year in just 2 years. That's a risky but potentially profitable investment that is not interesting to big name VCs. It is an inefficiency on their part. But, their schedules are already overfull juggling the moonshots. I expect there are people working in that space, but they don't get a lot of press coverage.

My point with the "involuntary" aspect is that if you had this thesis, you'd still get power law returns. I'm not sure this has been pushed as hard as it could be, but this is very consistent feedback from VCs.

And my personal experience of investing.

> you'd still get power law returns.

Yep. My scenario was told from the POV of an individual company. That's not a good way to explain the behavior of investors deciding between companies.

Who are the companies (or types of companies) investing in that space?

Lower middle-market private equity firms are probably the most likely investors. Often, they'd want to buy the entire business, but in some cases they might look at taking a minority stake with some control rights.