I think you might find that the failure rate goes down significantly with business models that are targeting smaller market segments and intend to make smaller businesses generally with the intention of just being profitable, not selling.

To take my company as an example, we are a online game specifically targeting players who were addicted to playing Diablo 2 for an extended amount of time. This is because we felt we understood what that exact market wanted better than anyone else and had a unique opportunity to deliver on it.

The intention from the start was to make a business that makes a profit, not to make a company with the intention of selling out. Infact, when we did do a capital raise at one point we were very clear in our pitch to investors that the intention was to distribute profit via dividends.

We have been successful at doing that and the project felt like a reasonably sure thing from beginning to end even when it took a lot more time and budget than we were expecting. We were 100% confident that the exact market that we were targeting existed and that they would give us money when we were done. In our minds, the only thing that could go wrong was failing to finish the product by running out of money.

Now admittedly this particular tale is probably just survivorship bias so you should take it with a grain of salt.

However, my point is just that there are a lot of little markets that VCs will not care about because they are too small. They are just waiting for someone to walk in a grab the few millions of dollars a year of profit that are sitting on the table.

Everyone thinks (or at least when pitching will claim) they have a unique understanding that lead them to a product that fits the market they are targeting better than anyone else. As an investor the problem is trying to figure out who actually does have a potentially successful product and who doesn't. That happens to be incredibly difficult, so when looking at a business that doesn't have assets that are worth something even if the business fails, generally an investor is going to want a high potential payoff.

Either niche companies or companies in slower growth industries.

In regards to the latter, EdTech is a good example. Time to exit is at a minimum double what it is in the enterprise or consumer space. This is driven by the bureaucratic nature of the sales process which in turn leads to much longer sales cycles (think 6-18 months to close a deal). The upside of course are things like high customer retention / low churn and almost guaranteed collection rates.

Companies that operate in industries like these reach a point where they have a proven product and real product, but profit may not be high enough or is not growing fast enough for the founders to make the investments they KNOW will generate additionally growth.

Large VCs are turned off by these companies because the industries they operate in are not big enough to sustain the large 9-10 digit exits they seek, while smaller VCs looking for smaller exits are equally turned off because the ROI comes too slow.

For these companies, oftentimes the only option is either private Angels who are personally vested in the space or bank loans. It's hard to find the former and even then they can't offer much $$$ and the latter tends to be unworkable because of either the lack of assets, misunderstanding of the business models, or established (5+ years) historical revenue track.

Just my $0.02

The failure rate at this kind of business model goes significantly down. Perhaps it also depends on how you describe a failure / success from an investor perspective.

I'm citing from W. Draper III's book, the Startup Game, "Tim Draper's First Six Investment": "... Tim intoned the name and and fate of each company. The first five, as I recall, were as follows: 'dead, dying, bankrupt, probably won't make it, and not so good'." Investment No. 6 was "Home run!".

A VC (or LP of a VC) would describe a venture as a success, when it brings a multiple of its initial investment 10x, respectively a better IRR the LP would get in other markets (e. g. real estate, money lending).

They also would take the risk to invest in companies with zero cash flow and only a chance of having revenues at some point. So that's high risk, while comparing it with targeting small companies with a positive cash flow and with none to small growth, prevented from growth by cash, network or experience of the founders, that would be a nice target for an investor who wants to see a ROI in the next five years and everything which comes on top makes his (paid) investment more valuable. It's more like a traditional investment approach. I don't only think there is a niche for this kind of investments I would even say that more "companies" / founders are fitting in that description than in the VC criteria.