Most fast-growing companies today are fuelled by some form of growth capital. Traditionally, there are three types of funding for any company that’s looking to scale:
1. Private equity growth capital for established companies.
2. Early-to-mid-stage capital, such as venture capital.
3. Seed capital, such as angel investments.
What is Growth Capital and Why Does It Matter?
Growth capital, also known as expansion capital or growth equity, is a type of funding that allows relatively mature companies to meet the financial requirements to grow their business. It is leveraged by companies looking to fund a transformational event in their business lifecycle.
Growth capital can be used to upgrade technology, software, or hardware required to scale the company. It can be leveraged to fund talent or customer acquisition. A scale-up might require this capital to expand into new markets or geographies. Alternatively, it can be used to offer liquidity to shareholders or run marketing campaigns.
This funding vehicle acts as a growth driver for companies looking to push beyond the current growth rate and self-generated cash.
Companies that have already established themselves in the market and show great potential for more profits usually take on growth capital.
Growth capital funds are best suited for companies that have reached the product-market fit (PMF) and are looking to create a more robust business model that can be profitable for customers and the company.
Growth equity marks the stage in a company’s lifecycle when the risk shifts from whether a product can gain market adoption to whether the company’s products or services can be sold profitably. Companies may not expect to see profits immediately at the time of investment but would be expected to see profits sometime in the future.
Let’s try to understand some differences between growth capital and other forms of investment.
Growth Capital in Action
Airbnb, which started as a company that connected people with rooms and people looking for rooms, expanded itself after it received growth capital in 2017.
Funding of $447.8 million enabled the company to make a profit in the second half of the year and expand its services. Following the funding, Airbnb started allowing its users to experience a city as if they were locals and book travel via the Airbnb platform.
The frequency with which business travelers expensed an item from Airbnb increased by 32%, according to a report by Concur.
Growth Capital vs Venture Capital
While in hindsight, growth capital, and venture capital seem similar; there are a few essential differences between the two that are note-worthy.
Growth capital is usually leveraged by more mature companies, whereas VC funding is meant for relatively newer companies that are yet to prove their business model.
Growth equity investments generally have a lower holding period of around three - seven years on average, while VC investments have an average holding period of five-ten years to accommodate more time for early-stage companies to realize their potential.
For VC investors, the primary source of return is the introduction of the company’s products or services to the market. For growth equity investments, the source of returns is based on how the company manages to scale its operations and growth.
The risk factor in the case of growth capital investments can be considered to be less than VC deals since VC investments are tied to many markets and product risks. Growth equity investors generally invest in companies that have gained market adoption but might or might not yet be selling profitably. Although some risk is tied to growth equity, it can be considered a medium risk as opposed to the high risk involved in VC investments.
Growth Capital vs. Angel Investments
Angel investors are usually individuals rather than a firm or a company of investors, as in the case of growth equity investors. Angel investors typically invest in early-stage companies in cases where the company’s goals and beliefs are similar to those of the angel. Angels typically invest between $25000 and $100,000, although this number can vary.
Angel investments are ideal when the company’s product is still just a little more than an idea or just at its minimum viable product (MVP) or proof of concept (POC) stage.
Growth Capital is Exactly What the Name Suggests — A Growth Driver
Along with growth and scale, equity investment usually comes along with some business expertise and connections and helps provide companies with a source of guidance and training to lead the business in the upward direction.
Growth investors usually do not require returns to be paid back to them monthly. As a result, the focus can remain on the business needs and the rate of its growth.
Challenges of Raising Growth Capital
Finding potential investors can be time- and energy-consuming. It is essential to follow a rigorous research process to determine what can attract trustworthy investors.
There is a possibility that the investors will sell shares of the company to third parties outside of the business, which can result in opposing views, and contradictory company vision and mission.
Recurring Revenue Financing for Growth: Investor and Founder-Friendly Funding
Recurring revenue financing (RRF) is proving to be a quicker and more flexible way of procuring growth capital. It is focused on providing quick capital to the business. RRF does not require companies to give up any equity or make personal guarantees.
In this financing model, investors only connect to your existing business tools and don’t ask for any shareholding in your business. Recurring revenue financing will come from lenders that are confident in your business’ potential to increase revenues, without requiring any personal guarantees.
Recurring revenue financing is non-restrictive, flexible, and fast. At Recur Club, businesses can get non-intrusive and non-dilutive, hassle-free capital to drive growth. Investors can take advantage of the Recur Club platform to identify companies with promising business propositions and invest based on the goals and risk.
Sign up on Recur Club today!