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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.
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Almost every fast-growing online business uses some growth capital.
Traditionally, there are three types of funding available to any company seeking to scale:
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.
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 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.
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.
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.
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.
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:
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).
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:
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.
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.
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.
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.
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:
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.
Depending on your needs, you can choose between different types of financing:
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.
Raising growth capital can provide several benefits to a business, including:
If you decide to go down this path to obtain funds, there are several steps you can take to increase your chances of success.
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.
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.
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.
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.
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.
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:
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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.
Growth capital is typically reserved for businesses with strong growth potential, and established businesses looking to expand.
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.