The Secret VC: Exit Math Is Destiny - Midwest Funds and Mega Funds are playing different games

Founders love to talk about their vision. Investors, meanwhile, talk about “support”, adding value… and the latest release from Patagonia. Just me? 

Strip away all the BS though, and venture capital could be viewed in the simplest terms as a machine that turns an equation of fund size + ownership + time into a required outcome. That outcome is usually expressed as an exit valuation, but the valuation is really just a scoreboard we keep for something more brutal: can this single company move the needle for the entire fund?

That’s the fundamental difference between smaller funds and the mega funds: not thesis or values, but size. It’s the math you’re both stuck with from the venture.

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The mega-fund reality: you’re either enormous, or irrelevant

For mega funds, there’s no outcome that matters except one that’s huge. And lately, “huge” has a habit of getting huger and huger.

When you’re managing a massive pool of capital, you don’t have the luxury of caring about “pretty good” returns. What most funds would consider a solid outcome can still be a failure in portfolio construction terms for a mega fund. That’s not because their partners are evil, it’s because the fund is an industrial-scale product: the checks are big, the ownership targets are set, and LP expectations are baked in.

So while most funds need to be able to believe that your company can, by itself, return the entire fund, for the mega fund that’s also the very first question, before even “is this a great business?”

For funds of this size, the desired outcome often starts at unicorn and creeps upward. The detail that matters for founders isn’t whether that bar is set at a dollar amount. It is this: mega funds aren’t structurally set up for outcomes that may be life-changing to you if they’re meaningless to them.

That’s the first thing founders misunderstand. They think the investor’s excitement is about them. Whereas a lot of it is about whether your ceiling matches the investor’s minimum.

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Small fund reality: the ceiling can be lower, and still be a win

I contrast this with what we see more often here in the Midwest: smaller funds, often connected to institutions that aren’t trying to run a Silicon Valley playbook at full volume (despite what some so-called ‘secret’ founders may say about Cosplay.) These include foundations, entrepreneur support orgs, endowments, and family offices. I may be generalizing, but the point stands: those capital sources often come with a different tempo and a different return profile.

Smaller funds can be more patient. Not because they’re nicer people, but because they’re not staring at the same deployment pressure and they’re not trying to turn half a billion dollars into several billion dollars.

And here’s the part founders should tattoo on the inside of their eyelids: smaller exits can still matter. A business that might look like “meh” to a mega fund can be a very real success for a smaller fund - simply because the ownership math and the fund-size math make it so.

This is where Midwest founders often get tripped up. They’ll say, “I want a top-tier investor.” What they often mean is: “I want an investor with a famous logo.” But logos don’t pay the bills. Outcomes do. And you can’t eat prestige. Even in Silicon Valley (although who knows what they really eat.)

If you’re building a company that can plausibly become a great $200M business, you need to be honest about what kind of capital is aligned with that path. Some investors will treat that outcome like a victory. Others might treat it like a rounding error.

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Exit math isn’t a thesis: it’s a constraint.

Let’s look at the backward math - and why it's so critical.

We need to work backward from the typical investment check size and the expected dilution over time. This reverse calculation shows how an investor's ownership often settles into the mid-single digits (e.g., 4-6%). This final ownership percentage is the key figure, as it directly converts a company's exit value into a meaningful financial return for the fund.

And if you’re a founder, you shouldn’t be squeamish about this. It’s not gauche or cynical. It’s literally the mechanism that determines whether your investor is sprinting to the same finish line as you are.

When an investor ends up with, say, 5–7% after dilution, the difference between a $100M exit and a $1B exit is not a rounding difference. It’s an entirely different universe. For a smaller fund, an outcome in the tens or low hundreds of millions can be enormously impactful, to them and even everyone in their ecosystem. For a mega fund, it can be functionally invisible.

That’s why I keep coming back to knowing the game you’re playing. Because the game isn’t to raise money. It’s to pick the set of expectations you’re willing to live inside - along with those providing the capital - for the next decade or so.

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The Midwest fundraising habit that quietly hurts founders

A lot of Midwest founders fundraise like they’re collecting Pokémon.

They’ll take any meeting. They’ll pursue every check. They’ll tell themselves the strategy is “momentum” when the strategy is actually a mild form of panic disguised as hustle. 

And I get it. Midwest founders are often under-networked relative to coastal founders. They don’t have the same default access. So they compensate by widening the net until it’s basically a dragnet.

But here’s the consequence: if you don’t choose your investors intentionally, you can end up with misaligned capital. And misaligned capital doesn’t just give you annoying board meetings, it fundamentally reshapes your company.

That’s because the moment you accept investment from someone whose fund needs a mega outcome, your company becomes a vehicle for that outcome. The milestones change. The risk tolerance changes. The timeline, your next round, your hiring plan… all change. Even your product roadmap changes… because now you’re not just building what potential customers need - you’re building what the potential customers who can help deliver that mega outcome need.

That’s not automatically bad, but it is when it’s accidental.

Midwest founders, especially first-timers, have a habit of stumbling into these constraints without naming them. And then they’re confused two years later when the investor is pressuring them toward a path that doesn’t match the business they actually have.

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Investors aren’t innocent here

Let me also be equally blunt about the investor side: While founders often don’t ask enough questions, investors don’t usually volunteer enough truth.

Many investors are not especially forthcoming about the “how this really works” part. This includes fund expectations, which outcomes matter, what reserves look like, what happens if growth isn’t venture-shaped, and what an acquisition offer would mean for the fund. Founders are left to infer the rules of the game by watching who gets celebrated and who just… disappears.

A lot of investors - particularly in ecosystems still working on their venture muscles - come from a finance posture more than an operator posture. That doesn’t make them bad, but it does make some of them more likely to treat venture as a set of transactions rather than a long-term team sport with brutally human tradeoffs.

In other words: there are investors who will happily take your pitch, happily write your check, happily post the announcement… and never once make sure you understand the exit math you just signed up for.

And then, when the company doesn’t fit the venture arc, they’ll act surprised. Or worse, they’ll act disappointed in you. That’s because parts of our ecosystem still have investors who want the identity of being venture funds without doing the hard, unsexy work of aligning incentives with founders upfront.

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The sophistication gap isn’t intelligence. It’s reps.

Coastal founders get cultural education by osmosis. Their peers have done it. Their mentors have done it. In the Midwest, founders often have to learn fundraising like they might learn plumbing: on the job, in the dark, while water is already pouring through the ceiling.

So here’s what I want Midwest founders to take from this article, without me turning it into a checklist: your fundraising strategy should start with investor math, not charisma.

If you’re raising from a small fund, understand what a “win” looks like for them. If you’re raising from a mega fund, understand what “not losing” looks like for them. Because these are very different things. Then, decide whether you actually want to build the company required to produce any of these outcomes.

Ask about fund size, ownership targets, and reserves. Ask what a “good” exit looks like from their seat. Ask what happens if you get an acquisition offer that would be life-changing for you but not meaningful for them.

If an investor gets weird about those questions, that’ll tell you something as well.

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The takeaway

We have great founders, but we still under-teach the rules of venture. Too many people treat fundraising as a relationship game instead of a math game with human consequences.

But a meaningful slice of investors won’t tell founders the full truth about incentives unless founders force the conversation, and some are operating from a finance-first posture that can leave founders carrying the alignment burden alone.

Too many of our founders are optimizing for access and validation - “any check is a good check” - and accidentally selecting a future they didn’t mean to choose.

This isn’t a rant.

The Midwest doesn’t need more founders chasing famous money for the dopamine hit. It needs more founders who can look at a fund, understand the exit math, and say with confidence: this is the right partner for the game I’m actually playing.

Because in venture, the fastest way to lose years of your life is to run someone else’s race with your name on the bib.

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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.