The Secret VC: Everyone want to ‘invest’, no one wants to lead.

Almost nobody f*cking leads a round - anywhere - across this entire region.

I'll soften that, slightly: almost nobody can close an entire round. It's a structural problem that the region won't even admit to itself. We have angels. We have small funds. We have economic development capital, university capital, state programs, accelerator checks, pitch competition prizes. What we are missing - almost entirely - is the kind of investor who can sit across the table from a founder raising a million dollars and say, here's your million dollars. Not "here's a piece, as long as you can go find the rest from eighteen different places." A real lead. A genuine round-closer.

What we have instead is a system that gives founders just enough to keep them going, at every stage, without ever giving them enough to break out. The problem this creates is that it stalls momentum, strings people along, and has compounding consequences over time.

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The stage-to-capital mismatch

For a first-time founder in our region, the cycle they usually run through goes something like this…

They get a few ‘investor’ meetings. They meet a class of people I've previously called cosplay investors. This is capital with a costume, but no operating instructions. A lot of folks here act as if they’re investors, and angels in particular. If you go to most of the angel groups around here, they’ll ask founders to walk in with a certain level of revenue. If you’re asking for $10k MRR, a complete team, and repeatable GTM motion before writing a $25k check then you’re not an angel investor. You’re acting like a seed fund that forgot its checkbook.

An angel round is a vibe check, in both senses of the word. At least, that's what it's supposed to be: I like you, I like what you’re doing, I think you can get there, so here is a small check to help you get to the next inflection point. I've done that. I've written checks where my honest internal monologue was, "I'm probably not getting this money back, but here's a person who I think has what it takes to succeed and could use the leg up, and maybe this gets them the momentum they need to get to the next round."

Broadly speaking, Angels around here don't do that. So a founder - especially a first-time founder - walks into what they think is an angel conversation and gets diligence-grilled like it's a Series A. They get confused and they get frustrated. They ask why it feels like a job interview even, a fair critique in case you’re asking. They also start reading everything they can find about what angel rounds are supposed to look like, and none of it matches their actual lived experience here. Eventually they conclude - correctly - that the Midwest is not speaking the same language as the rest of the venture world… and they go find a community that is.

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The problem: hint - it is NOT the founders

This gets repeated a lot, and I've also been guilty on occasion of propagating it myself.

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The data doesn't support it. StartMidwest published a report with Dealroom that showed that pre-seed to seed graduation in the Midwest is around 28%. Northeast and West Coast are sitting around 32%. That's a four-point gap on a sample size of thousands. Plus, the gap barely shows up later. If you started with 100 companies and took them through the figures below all the way to Series C, 1.9 of 100 Northeast companies would survive, while 1.1 Midwest companies would survive. While that is admittedly a significant difference, if you apply the same figures to 100 companies on the west coast, then 1.2 would survive. You can’t tell me with a straight face - based on these outcomes - that Midwest founders are any less capable?

We have great founders. We don't have enough of them, sure. That they don’t raise enough at the same stage is also true - but the ratio of good ones is comparable to anywhere else in the country. What we simply DO NOT HAVE is a system that consistently prepares our local founders for success.

So when I hear people say "we don't have quality founders," I want to push back on that, because I think it's the wrong diagnosis, and the wrong diagnosis leads to the wrong programs, which is most of what I'm expressing frustration with here.

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The problem with Grants

Additionally, a lot of what passes for early-stage capital here is grant money. The problem isn’t that grants exist. The problem is that grants are being forced to do a job that private capital should eventually take over. State programs, university funds, ESO checks, pitch competition prizes. The largest investors in our states are very often the state itself and one or two major research universities. That is, when you actually look at it, an odd structural fact for a region that wants to be taken seriously as a venture market.

I'm 70 to 80% in agreement with the critique that this also strings people along. The other 20 to 30% is this: in the absence of private capital actually showing up at the early stage, government money is filling a gap that would otherwise be a chasm. The principle of subsidy is that it should go to stages where private capital won't go but that we know is necessary for our collective future. So at the very earliest pre-ideation, founder-figuring-out-their-ass-from-their-elbow stage, I think it's actually fine, and probably necessary. The belief is that the top 10% graduate into something private capital then takes over.

But too often - in my view -  local private capital doesn't pick it up. So the grant cycle continues, indefinitely, for the same founders, on the same companies, year after year. That isn't a subsidy serving its purpose, but instead is a semi-permanent life support for businesses that the market is still in the process of validating.

What - if nothing else - is the point in calling it venture capital in that case?

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What would actually help

If you've made it this far, I owe you something constructive, so let me try.

One. We need entities who can write larger checks and lead full rounds. Somebody has to be the lead. Until that exists, founders will keep limping toward eight, ten, eighteen partial commitments that never quite stack into a closed round in any reasonable timeframe. Or they'll leave, and they’ll often be the ones we wish we could keep.

Two. Capital needs to know what stage it's writing for. If you're an angel, write angel checks with angel expectations. Don't ask for $10k MRR and a sales team in exchange for $25k. If you're a seed fund, do seed-fund diligence and seed-fund work. The stage-to-capital mismatch is the single most fixable problem in this region, and it's fixable for free. It just requires honesty about what you actually are.

Three. The capital community and the founder community need to be on the same page about the game being played. That's an education problem, on both sides. Founders should know what an angel round actually is. Investors should know what they're actually offering. Both sides should know what comes next, and who is supposed to lead it, and what metrics are realistic to expect at each step. The amount of pain in this region that's caused by people simply not agreeing on what stage a conversation is happening at - it's enormous, and avoidable.

Four. Stop treating activity as outcome. Twenty pitch competitions a quarter is not an ecosystem. Twenty founders moving cleanly through a closed round on a reasonable timeline, is. A pitch competition that writes a real check to a real company is a real thing. But a ribbon-cutting or photo-op for photo-op sake is not, and we need to stop confusing the two when we tell the story of how we're doing.

The Midwest has the founders and the data proves it. What we don't have, in sufficient numbers, are investors who behave like investors at the stage they claim to be operating at, and we don't have anyone who can close a round on their own. Fix that, and a lot of the rest of this gets easier.

Don't fix it, and the founders who can leave will keep leaving - and the ones who can't will keep grant-cycling until they age out of the ‘dream’.

I appreciate it isn’t a simple act of deciding we want it to happen. We don’t snap our fingers and magically create an organization who can do it. But we know the money is here and we know the founders are as well. So… I'd rather we just go ahead and fix it. Wouldn’t you?

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The Secret VC is a genuine and experienced investor, based here in the Midwest. They will remain anonymous as long as they choose to, so please don't ask us who they are. The goal here is to inform, and share some home truths while we're at it. If you'd like to submit a topic or questions to be covered by The Secret VC, then go ahead and contact us here.