Growth Equity: Definition, Growth Capital, Advantages, vs. Venture Capital

When it comes to running a successful business, growing the company is very important – one way to do this is by using growth equity.

By understanding how growth equity works and how to use it, businesses can make better decisions and achieve their goals faster.

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As the name suggests, growth equity is a type of investment that focuses on providing capital to companies that are looking to expand and grow.

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So by using growth equity, businesses can have access to necessary funds to invest in new opportunities and take their company to the next level.

Table of Contents

What is Growth Equity?

Growth equity, alternatively known as growth capital or expansion capital, represents a specific form of investment. This investment targets companies that, although fairly established, are experiencing pivotal changes in their lifecycle.

These are not just any changes; these are transformational events that could catapult the company to new levels of growth and success.

The unique aspect of growth equity is its focus on businesses that have already proven their worth but are now ready to take on a significant leap forward.

It’s not about investing in fresh, untested startups; it’s about fueling the next phase of growth for mature companies.

For example, let’s say a successful e-commerce company wants to expand internationally but lacks the necessary funds. This is where growth equity investors step in, providing the capital needed for this crucial expansion.

Growth Capital Benefits

Here is a list of some of the key benefits of growth capital

Expansion Opportunities

Growth capital allows companies to explore new territories and enter different regions or markets.

This funding helps businesses put their marks in places where they weren’t before, tapping into fresh customer bases and increasing their reach, which can lead to more sales and growth opportunities.

Product Development

With growth capital, companies can focus on creating new and improved products or services. This funding enables them to innovate and come up with offerings that meet changing customer needs or preferences.

Scaling Operations

Companies can use growth capital to make their operations bigger and better. This means they can increase the scale of what they’re doing without compromising on quality.

It might involve things like improving production processes or upgrading technology, all of which help them handle more business effectively.

Strategic Acquisitions

Growth capital allows companies to buy other businesses that complement what they’re already doing.

This could mean acquiring companies that offer something related but different, helping the main company expand its reach or offer more to its customers without starting from scratch.

Enhanced Competitiveness

By investing in resources and capabilities, growth capital helps companies become stronger and better able to compete. It could mean hiring more skilled people, investing in better equipment, or improving customer service.

Difference Between Growth Capital and Venture Capital

There are a few significant differences between growth capital and venture capital – here are some of the main ones

Risk and Return: Venture capital involves higher risk due to investing in early-stage ventures, aiming for significant returns. Growth capital carries a lower risk, targeting steady growth and expansion in more mature businesses.
Holding Period: Growth capital investors typically hold their investments for 3-7 years, while venture capital investors might have to wait for 5-10 years before seeing a return on their investment.
Stage of Business: Growth capital is typically invested in established companies experiencing growth, while venture capital is injected into early-stage startups with high growth potential.
Investment Focus: Growth capital often supports operational improvements, expansions, or acquisitions in existing businesses. Venture capital primarily funds innovative ideas, new technologies, or untested business models in startups.

Conclusion

Growth equity is simple yet powerful – it provides established businesses with the necessary funding to take the next step in their growth journey. Whether it’s expanding into new markets, developing new products, or enhancing operations, growth capital can be a game-changer for companies looking to scale up and stay competitive.