April 6, 2023
min read
Written by: 
Nikolaus Hilgenfeldt

Growth Capital - What It Is and How to Get It In 2023

Are you ready to take your business to the next level?

Growth capital is a form of funding companies use to finance their growth initiatives. 

The typical use is to fund expansions, acquisitions, and other projects that require a significant capital investment. 

This blog post will discuss growth capital, how it works, how you can obtain it, and possible alternatives.

Stop waiting and start growing – explore how growth capital can help your company reach it.

Let's dive in!

Growth Funding Overview

Almost every fast-growing online business uses some growth capital.

Traditionally, there are three types of funding available to any company seeking to scale:

  • Private equity (PE) is a type of growth capital for existing businesses. 
  • Venture capital is an example of early-to-mid-stage money.
  • Seed capital, such as angel financing.

There is a common denominator among these various financing models: you have to part with some of your company's equity in exchange for cash and advice. 

We'll look at all three kinds of growth capital and alternatives to growth capital that you can use to fund your business without giving up equity.

💡 Angel investors and venture capitalists focus on funding businesses in their early stages.
💡 Private equity firms, on the other hand, will invest in more established companies if they have a chance to grow quickly.

What is Growth Capital?

Growth capital, or growth equity or expansion capital, refers to investments aimed at already mature companies to help them expand and speed up an existing growth plan.

This type of capital usually comes from private equity firms, venture capital firms, and other institutional investors. 

Unlike other forms of financing, such as debt or equity financing, you shouldn't use growth capital to fund day-to-day operations

Instead, you can use it to finance projects that have the potential to generate significant returns on investment. 

Some examples include funding for:

Growth Capital Key Takeaways:
💡 Best for mature, already established companies
💡 Funding used for driving growth
💡 Minority ownership is more common among private equity investors than full ownership.

Growth Capital Vs Venture Capital

Growth equity is different from venture capital primarily because of where a business is in its life cycle.

Growth investment rounds usually happen after a company has been in business for a few years, has proven its business models, established positive unit economics, and has a large customer base.

In contrast to the venture companies that invest in companies in their early stages. 


Growth Capital Vs Angel Investments

Angel investors are beneficial in the beginning stages because they are often successful entrepreneurs with plenty of great advice up their sleeves. 

They hold you and other senior people in business accountable for achieving or missing targets.

Also, they can put you in touch with their more valuable connections, like possible customers or suppliers.


How Does Growth Capital Work?

Growth capital typically comes in the form of a minority investment, which means that the investor does not have control over the company's operations. 

It is in contrast to other forms of private equity investment, such as leveraged buyouts, which involve the acquisition of a controlling stake in the company.


Growth Capital Funding Example

For example, a rapidly growing ecommerce business may seek growth capital to expand its product line, improve its logistics and inventory capabilities, and invest in marketing to reach new customers. 

With growth equity funding, the company can accelerate its growth and capture a larger ecommerce market share.

They could take on debt for this purpose. Still, the payback costs would be too high, impairing their ability to operate profitably.

Instead of continuing at their current rate and simply using the cash generated by their business operations to fund expansions and developments, the investment allows the companies to grow at a faster rate.

Furthermore, growth equity companies can frequently provide professional guidance and consultation that benefits business growth. 

Who Is Growth Capital For?

Late-stage businesses may require capital to join a new market or compete with a larger, better-resourced competitor. 

Here is where growth capital comes into play.

Growth capital funds typically provide $5–50 million you can spend on significant projects to drive growth.

But, remember, when a company reaches its growth objectives, growth equity funds seek an exit. 

The two most common exit methods are:

  • Initial public offering (IPO) 
  • Selling business  to another company.‍

You can also use growth capital to restructure a company's balance sheet, specifically to reduce the quantity of leverage or debt.

Most growth capital comes in the form of preferred equity.

Still, some investors will use hybrid securities that give them an ownership stake in the business and a contractual return (like interest payments).


How to Get Growth Capital

Growth capital exists at the crossroads of private equity and venture capital. As such, it comes from a diversity of sources. 

The kinds of investors who provide growth capital to businesses include equity and debt investors, private equity (PE) firms, mezzanine funds, hedge funds, sovereign wealth funds, startup advisors, and family offices.

❗ Remember, to help the company rapidly increase its revenue, profits, and market share in preparation for an initial public offering (IPO) or a sale of the business within the next five years, investors will likely demand a seat or two on the board of directors.

Here are the potential investors:

1. Owner Investments

An owner will inevitably have to invest personal funds to expand their company. 

When business owners want to start something new, they can rarely get all the money they need from outside sources. 

Ownership capital can demonstrate the investor's conviction in the company's future success. 

When an owner goes all out on their business, it can send a positive message to potential investors.

2. Venture Capital Corporations

Venture capital firms invest in businesses on behalf of their clients. 

They have a personal interest in the company's future and usually put a lot of money into it. 

A representative from the venture capital company may want to join your board if you decide to take their money. 

Because no debt repayments or liabilities are attached to equity investments, you can use them for expansion without risk. 

However, this reduces your overall shareholding percentage.

3. Angel Investing

Angel investors are a subset of the broader venture capital industry. They are typically wealthy individuals or groups looking to make a particular investment, as opposed to investment firms acting on behalf of their clients. 

Due to their lack of institutional affiliation, they are free to spend based on their genuine enthusiasm for the company's products and goals.

Like VC companies, angel investors may want to have a say in a company's board of directors or offer strategic advice. 

They can often help a company owner expand their clientele and vendor base by introducing them to one another.

4. Borrowed funds

Debt can be a valuable tool for expanding a small company. 

There will be no dilution of ownership or attempts by the bank to direct or influence how you spend the money.

However, substantial debt repayments may stunt a company's expansion.

The loan payments can become a burden if it takes longer than expected for the company to increase profits. 

Furthermore, unlike shareholders, banks have a claim on the money they lend and expect you to repay the loan even if the company is struggling.

Growth Capital Alternatives

To avoid having to give away equity, what other choices do you have as a business owner? First, you could approach conventional loan providers like banks, although this process can be daunting and slow, with higher rates.

Other options include alternative lenders that provide:

Pro Tip From Myos

Sometimes your business needs a substantial amount of capital for growth. However, you still want to avoid giving control to a third party.

That's quite understandable.

Myos offers non-dilutive loans that allow you to get between €10.000-2.500.000 of working capital based on the value of your assets.

Depending on your needs, you can choose between different types of financing:

Myos doesn't ask for personal guarantees, so your business is safe when investing in inventory or marketing, launching new products, hiring new team members, or paying for renovations.

With flexible repayments of up to 24 months, you can focus on the growth of your business, whether you are a startup or an experienced business owner.

What Are the Benefits of Raising Growth Capital?

Raising growth capital can provide several benefits to a business, including:

  • Expansion by investing in new markets, products, or services. It can increase revenue, market share, and profitability.
  •  Innovation and competitive advantages by using growth capital for funding research and development.
  • Improved productivity by hiring new employees or investing in training existing staff.
  • You can use growth capital to acquire other businesses, which can help the company enter new markets or gain access to new products or services.
  • More efficient and effective operations by investing in infrastructure, such as technology, equipment, or facilities.
  • Increased business valuation, which can attract more investment or lead to a higher price in the event of a sale or IPO.

Disadvantages of Growth Capital Funding

  • Dilution – You'll have less say over hiring, spending, strategy, stock sales, and debt issuance.
  • High costs, for example, extensive documentation, legal fees, finding the right investors, etc.
  • Exit strategy – Your investors can sell your business wherever they want under the terms they see fit.

How to Prepare for a Meeting With Potential Investors

If you decide to go down this path to obtain funds, there are several steps you can take to increase your chances of success.

1. Build a Strong Business Plan

Your business plan should clearly outline your growth objectives and how to achieve them. 

In addition, it should include detailed financial projections and a description of your target market, competition, and marketing strategy.

2. Identify Potential Investors

These investors include venture capital firms, private equity firms, or other institutional investors that have experience in your industry. You can find potential investors through online research, networking events, and industry conferences.

3. Develop Relationships with Investors

It may involve attending meetings, pitching your business plan, and providing regular updates on your progress. 

Developing a solid relationship with investors is critical to obtaining growth capital. 

In addition, it can help build trust and confidence in your company.

4. Prepare for Due Diligence

It means reviewing financial statements, conducting market research, and speaking with key stakeholders in your company. Also, ensure that your financial records are up-to-date and that you clearly understand your company's strengths and weaknesses.

5. Negotiate Terms

Once an investor has conducted due diligence and is interested in providing growth capital, you will need to negotiate the terms of the investment. For example, the acquisition size, the equity stake the investor will receive, and any conditions or restrictions attached to the investment.

Wrapping It Up

If your company has ambitious growth plans, you should look into raising growth capital. 

While it's true that this strategy can help businesses cover their expansion efforts, it's important to be aware of a few possible drawbacks.

First, it can be difficult for some businesses to handle the high cost of capital that comes with growth capital due to interest rates and other fees.

Second, it may take considerable time and energy to negotiate the terms of growth capital financing. 

It can be particularly daunting for startups and small businesses with fewer connections and financial resources.

Last but not least, growth capital providers look to put their financial resources into companies that show promise for rapid expansion, which can cause company leaders to place short-term gains ahead of long-term viability.

So, if you need quick, hassle free funding, take a look at Myos financing benefits:

  • No personal guarantees, only goods as collateral
  • €10.000-2.500.000 funding amount for any purpose
  • Flexible repayments without early-repayment penalties
  • Easy online application and fast funding process up to 72 hours.

Sign up with Myos today and elevate your business fast and hassle-free!


How Does Growth Capital Work?

Growth capital is typically provided by investors, such as private equity firms, venture capitalists, or angel investors, who invest in businesses in exchange for a stake in the company.

What Types of Businesses Are Eligible for Growth Capital?

Growth capital is typically reserved for businesses with strong growth potential, and established businesses looking to expand.

How Do I Obtain Growth Capital?

To obtain growth capital, businesses typically need to present a solid growth plan to potential investors, demonstrating their potential for high returns and a clear path to profitability.

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