A year ago, our firm rebranded to Straylight Capital. To commemorate our one-year anniversary, I thought it would be fun to discuss why we exist and why diversity in capital solutions matters.
Let’s start with a story I've seen play out over and over again: A software company in a non-coastal city, doing $5 million in revenue, growing 50% a year, close to profitable, with a tenured customer base. The founder sees enough meat on the bones to really grow this thing, so they spend the next year in Series A meetings, with investors who pass without a real look because the growth is too slow. Sound familiar? The result: a founder who believes they haven’t built a great business because venture was the only option anyone had ever suggested to them.
What nobody tends to ask, including the founder, is whether the business is actually shaped to have a venture outcome in the first place.
For a lot of Midwest companies, the honest answer is no. Which is not a knock at all; plenty of incredible businesses were never going to see a venture outcome, but I think the capital markets around here haven't caught up to that fact yet.
Venture Capital is often the only visible option
Founders default to venture mostly because it's what they can see. Accelerators run demo days built for seed investors. Funding rounds make the news. Ecosystem programs measure success in venture dollars raised. If you're building a company in the Midwest, almost everybody around you says that your path can only run through a limited amount of VC dollars.
Growth equity, by contrast, is mostly invisible until you're already at scale. Growth investors don't sponsor pitch nights, and most of them don't talk publicly about how they work. So founders are picking a capital model before they even understand the return math attached to it.
A venture fund makes most of its money from a handful of companies, due to the power law. You may have heard of it, but without oversimplifying, for a fund to return its investors' capital several times over, one or two portfolio companies have to become enormous: outcomes north of $1 billion, for example. That means every check a VC writes needs a plausible path to that size. A company that sells for $200 million barely registers for that fund.
Growth equity - which is what Straylight is - works the other way around. We need most, if not all, of our companies to work. We're aiming for roughly 3–5x on a typical investment, and our biggest risk is losing money, not missing a moonshot. So we underwrite what already exists: revenue, retention, margins, how efficiently the company grows, rather than the size of everything that is possible.
Neither model is better than the other; they're just built for different businesses, and knowing this can not only save you time and effort… but may also be a better outcome for your business.
How good companies can be stranded by Venture Capital
A lot of this has to do with how Midwest companies get built from the beginning.
Starting with scarcity. Founders here usually raise less, and later, than their coastal peers. That forces discipline. You spend what you have, you sell to real customers early, and you figure out your unit economics because you don't have a choice.
Discipline shows up as lower burn. Salaries and rent cost less here, and founders who've bootstrapped don't rush to spend. These companies grow steadily (30%, 50%, 70% a year) on a fraction of the capital. That's an excellent business, but it isn't the tripling-every-year curve a venture valuation needs.
And that shapes the exit. The realistic outcome for many of these companies is a sale in the $100–500 million range, often to a strategic buyer in the industry they serve, a manufacturer, a logistics company, or an insurer. For the founder and early employees, that can be life-changing but for a venture fund that needs that billion-dollar outcome, it's actually lackluster.
Here's how that plays out in practice and something that comes across my desk weekly: a founder building a vertical software solution shows promising early traction. They have product-market-fit, raise an $8 million series A, grow to $5 million in revenue at 60% a year and can’t raise a Series B because that profile no longer suits their valuation and is too capitalized for a clean sale or buyout.
What often traps these companies is the cap table. Those early rounds were priced for a different trajectory and came with the structure to match, preferences included. None of that is a problem while the company is growing into the valuation. It becomes one when the company still has years of wood to chop and no clean way to fund the work, because new capital has to be priced around existing investors' capital.
What makes it harder is that nothing looks broken. The company is healthy, the team is intact, revenue grows every year. It's young enough that nobody feels any urgency to do anything about it. So the business keeps running, the cap table keeps aging, and the most important stretch of the company's life goes unfunded.
To be clear, venture capital does work in the Midwest: Duo Security, Root Insurance, and StockX are real venture outcomes that were built here, and Cincinnati was even recently named one of the world's fastest-growing venture ecosystems. Some Midwest companies are rockets, and they should raise like it. I'm not arguing venture is wrong for this region, but we do need to stop prescribing it as a one size fits all solution.
The missing middle aka The Magnificent Middle
Say a founder understands all of this. They know they're building a compounder, not a rocket. Where do they go?
At $3–13 million in revenue, the options thin out fast. On one side is venture capital that wants a moonshot. On the other is buyout private equity that wants control, often adds debt, and usually wants a company bigger and more profitable than this one is yet. In between sits very little capital built for durable growth and even less of it based here. Most growth equity firms are on the coasts, write bigger checks, and rarely make the trip to Detroit or Fort Wayne for a $10 million deal.
There also isn’t a well-worn path from one kind of capital to the other. When an early-stage fund has a portfolio company that’s healthy, growing, and no longer on a venture trajectory, there’s no obvious phone call to make. We’d like to be that call. A company in that position hasn’t failed, it just turned out to be a compounder, and growth equity can give the early investor real liquidity while giving the founder a partner for the next chapter. That beats a good business quietly aging while everyone waits on a round that isn’t coming.
Capital built for this middle looks different:
- It underwrites what's real — revenue, retention, margins, and how efficiently the company grows — not a market-size slide.
- It takes a minority stake, so the founder keeps control of the company.
- Its return math works on a $150–400 million exit, so the founder and the investor are rooting for the same outcome.
- It's patient about timelines and doesn't push a company to outgrow the market it's in.
That's the model we built our firm around many years ago and finally have the name to match.
Four questions to ask before you raise capital
If you're a founder deciding what kind of money to take, start here:
- What's my realistic exit, not the dream, the likely one? If it's under $500 million, most venture funds will see it as a miss, no matter how good it is for you.
- What growth rate can my market actually sustain?
- Who would buy my company? If the answer is strategic acquirers in your industry, look at what they've actually paid for companies like yours.
- What does each path cost me? Model your ownership and the preference stack at a realistic exit and your dream exit.
This might feel like an ad for Straylight Capital but StartMidwest gave me the platform, and I’m going to use it :) Besides, I truly believe that this capital solution can remind founders that they really have built an amazing company. The Midwest builds compounders. Businesses that grow steadily, serve industries that aren't going anywhere, and last. We should be proud of that and put money to work like we believe in that.
Caroline Wolanin is an Associate at Straylight Capital, a growth equity firm for “the magnificent middle”, based in Detroit. As an associate, she helps source and vet deals for the firm. Outside of her work, she writes pieces like the one here and was once a pastry chef.
