Seth Godin offers a concise and well reasoned argument on when not to go looking for venture capital to fund a new business. Particularly useful is his distinction between freelance and entrepreneurial ventures. The latter aims to create an opportunity where "...you scale and suddenly you own real estate or media properties or technology or a system or a brand that people pay for without you actually doing any incremental work yourself." That 'no incremental work' qualifier is the entrepreneur's equivalent of the VC's exit. It's only feasible if a self-sustaining institution has been created.
In contrast, "A freelance venture is one where you work to get paid." In other words, it's a services business of some sort. It scales on people coming to work each day. Not so coincidentally, it's the kind of new business that VCs generally avoid.
Running this analysis is especially important these days, even on businesses that superficially seem to be about technology, where the potential to follow the entrepreneurial scaling path suggests taking the product road to market. It's at least worth running the case: "What would happen if we used this to create a low/no-cost offering that in turn enables a sustainable services business?" If nothing else, you should understand the implications if someone else takes that approach.
Where Seth needs to do further analysis is in proposing non-VC funding models: "The alternative... is not to fund the business. It's to fund the project" - drawing the analogy to the Hollywood studio system for movies. This sounds reasonable, but carries some serious implications itself. Project level funding deliberately punts the issues of creating marketing and distribution for the results, as well as building a sustainable organization.
Note that I'm not trying to attack the premise. It actually fits quite well, for instance, with my own analysis of winners and losers in a Web 2.0 world. Just analyze that road as critically as the full-entrepreneurial approach. Not funding marketing and distribution means obtaining these in some other way. VCs logically do not like this risk profile, because it's mitigated by ownership of brand, channels, and platforms, and we don't have those assets.
The implication is becoming captive to someone else's channel or platform, and they may not be offering the type of revenue splits that Seth suggests. Go have a chat with a few game authors, if you doubt me. It also suggest that the funding at a project level should be sought from those with expertise and exposure in the intended market, so they can realistically assess risk, and partially mitigate through their own connections.