Often called expansion capital, growth equity is the next stage of a developing company’s funding process once they have passed the point of venture capital. After an initial round of funding to establish a company, the company moves into the growth cycle where they have become large enough to expand, but still lack the funding to do so. Referred to as growth equity, this investment in a company is often more difficult to secure but has a higher success rate than venture capital.
Growth equity is typically used to facilitate the expansion of a company, the acquisition of other companies or the entrance of the company into new markets. It may also be used to reduce the amount of debt a company has, or purchase new equipment. The investor is often provided with common or preferred equity in the company in exchange for their investment. This is usually a minority investment.
Risks Involved in Growth Equity
Companies that are seeking growth equity are generally considered to be safe investments, as they have already established themselves as a growing company with a proven product line. If the market is large enough, the potential for return on the investment is large, while the downside to the risk is relatively small. Establishing a well-functioning management team is one of the primary issues for a growth stage business and can be the tipping point for a potential growth equity investment.
The availability of growth equity may be more difficult to find, as companies are generally looking for large, fast returns on their investments. However, the diligent investor will consider the growth equity method of investing as a safe and effective means of increasing equity holdings while enabling companies to continue to grow. Some of the things investors look for include: growing revenue, cash flow positive, no prior institutional investment, investor does not have issue with minority holding.