I don't think this is a huge problem, but it is something that probably makes people a bit wary of having visual novels on their steam accounts and such. Differentiating the ones with and without more probably would help though, as many tend to think of porn when they hear of visual novels, if they even know about them at all.
I don't think it's the setting that is the main issue, it's more the way they tend to be written. But more neutral or "western" settings would probably help, not everyone is in love with Japanese culture.
I do believe it is doomed to be a niche, it is not a great way to neither read nor experience a story. Perhaps the mechanics could be developed to present the story more fluidly, with less text and more video or gameplay-ish content, but would it still remain a visual novel? I don't know.