Last week, I caught up with an entrepreneur who shared an update on his company’s progress. The business has been growing steadily, boasting a critical mass of over 1,000 customers. Now, they’re contemplating their next round of financing. From a business perspective, the company checks many boxes that investors look for: high gross margin software, a solid growth rate that’s fast but not hyper-growth, and a large market with low single-digit overall growth.

However, the challenge lies in potential scale. In its current form, the company is unlikely to grow large enough to become a standalone, publicly traded entity. To attract analyst coverage and interest from broader markets, a publicly traded company typically needs around $500 million in annual recurring revenue (ARR) and a growth rate exceeding 30%. For this business, that target feels unattainable under current circumstances.

The startup has already raised some capital and has been relatively efficient, burning roughly $1 for every dollar of recurring revenue. Now, the entrepreneur faces a crossroads in the financing market. Growth equity investors might offer a modest valuation, aiming for a three- to fivefold return in three to five years. On the venture capital side, high-profile VCs seek moonshots with the potential for a hundredfold return—something this company doesn’t currently fit. Yet, the entrepreneur is highly ambitious and determined to build a large, standalone business.

So, what’s the next step? Should he explore new product lines to transform the company into a multi-product business, despite its modest scale and limited resources? Or should he consider finding a home for the business now, allowing him to pursue his next idea in a year or two? This is a high-class problem, as the entrepreneur has already achieved a notable level of success but aspires to do more.

My recommendation was to align the next round of funding with the business’s current potential and evaluate whether a smaller amount of capital could maintain optionality. Too often, entrepreneurs raise as much money as the market allows, which isn’t always best for the business. Here, raising capital requires careful consideration, especially since the entrepreneur aims to build a larger business than the current market supports. He’ll need to either expand the product line, adding complexity, or temper his ambitions and consider building another company in the future.