Growth Capital: Here’s Everything You Need to Know

Growth capital refers to the funding a company receives to support its expansion plans and fuel its growth. This type of capital can take many forms, including venture capital, private equity, and strategic investments.

When a business receives growth capital, it can invest in new products, technologies, and services that can help it capture new markets, increase its market share, and improve its overall profitability. Growth capital can also be used to finance acquisitions, hire new employees, and upgrade infrastructure and facilities.

By providing the resources needed to take advantage of new opportunities and scale operations, growth capital can help businesses achieve their growth objectives and reach new heights of success. Whether you’ve heard about it or not, growth capital has fuelled most fast-growing online businesses you know.

When it comes to funding, companies looking to scale typically choose one of three options:

• Private equity (PE) growth capitalfor proven companies. Growth capital is traditionally defined in this way.
• Early-to-mid stage capital, including venture capital. 
• Seed capital in the forms of angel investments

The common denominator among all these funding types is that you surrender some of your company’s shares in exchange for money and expertise. Each of them is best suited for your growth stage, so we should consider them steppingstones.

Specifically, we will look at the three types of growth investments and alternative financing options for entrepreneurs that don’t involve equity contributions.

What is growth capital?

Growth capital is a form of funding that businesses can obtain to support their growth and expansion plans, which can include investments in new products, markets, and technologies, as well as acquisitions and hiring.

 Growth capital could be utilised in the following ways:

• To grow customer acquisition
• Launch your venture into new markets
• Develop your team or upskill your existing team by training them in management or team leadership
• Upgrade and improve your technology
• Fund acquisitions
• Offer liquidity to shareholders

Companies tend to take on this strategy when they’re mature, have a demonstrated track record of profitability (or a clear path to it), and see there’s an even bigger opportunity for them out there.

Who is growth capital for?

Taking on a larger, better-resourced competitor or entering a new market might require an injection of capital from late-stage businesses. Capital for growth plays a vital role in that process.

An investment in a growth capital fund typically provides between £5 and £50 million for major projects that drive growth, such as product development, customer acquisition, or competitor acquisition.

Growth equity funds exit businesses when they have reached their growth targets. IPOs and sales to other companies are the most common forms of exit.‍

How growth capital works

A company that takes on growth equity is usually already profitable, but struggles to generate the cash needed to:

• Fund expansion
• Invest in technology
• Develop new products
• Buy other companies

It would be possible for them to take on debt for this purpose, but the repayment costs would significantly impact their cash flow. A growth equity fund provides funding to these entrepreneurs in exchange for shares in their company.

A variety of organisations provide capital, including PE firms, mezzanine funds, hedge funds, sovereign wealth funds, startup advisors, and family offices.

A majority stake in the company and a large role in strategy are important to most growth capital deals.

With the goal of floating on the stock market or selling the company within 5 years, investors will probably want a seat on the board to help grow revenue, profitability, and market share.

Growth capital in action: Deliveroo 

The high-growth start-up Deliveroo entered the food delivery market relatively late, so it faced well-established competitors like Just Eat that were well-funded and institutionally backed.

Having raised £275 million in October 2016, its goals include investing in technology, expanding into new markets, buying out competitors (such as Maple and Cultivate), and growing its UK market share.

On the London Stock Exchange, Deliveroo created a serious windfall for its growth equity investors by investing the capital quickly and effectively.

The company’s shares were worth £5.1 billion in March 2021, a big return for its investors who invested £1.2 billion before its IPO.

Read more: Raising funds for business growth

Growth capital vs venture capital

Venture capital investors focus on younger companies with high growth potential, while PE growth capital is for later-stage companies.

Though venture capital firms take a larger risk than private equity firms, they take a minority shareholding in your company.

They take a greater risk because, although they see the potential of your idea to generate revenue, they have a lower level of certainty that:

• Market demand is sufficient
• The sustainability of market demand
• You won’t be copied by big players and rolled out faster
• Profitability is never far away

It is likely that you are still working on defining your product’s long-term value at this stage, even though you are gaining traction.

In your young company, your venture capitalists see lots of potential and are impressed by your team. To achieve high growth and deliver your product to a wider market, they will be able to provide you with advice.

Because they don’t have the time to closely support you during this process, PE investors prefer to see a solid team and a well-established board already in place.

How do these capital investments benefit VCs? It is possible to reap big rewards by taking big risks. VCs can make a lot of money when it goes right.

Growth capital vs angel investments

An angel investor provided the first funding for many of today’s hottest online companies. In the early stages of the development of your product, angels can be the difference between a successful product and a failure.

At the beginning, you’re likely to have few customers and uneven revenue. Government tax rebates often offset angel investors’ risks by investing in your business.

A show of faith in your product is often required from angel investors before they invest in your company.

The following are some reasons why angel investors are valuable in the early stages:

• It is possible for them to introduce you to their more valuable connections, such as potential customers or suppliers
• Your product or service can be developed quickly with their involvement
• As entrepreneurs themselves, they often have plenty of great advice to offer
• If you fail to meet targets, they hold you and other senior employees accountable

Angel investors help you grow your business during the growth capital journey, usually when you are preparing for your Series A round.

Advantages and disadvantages of growth capital

We will now run through the pros and cons of growth capital.

Advantages

Private equity, venture capital, and angel investments allow you to make critical investments that you might not otherwise be able to make. Developing new products, pushing into new markets, and acquiring businesses will be easier because you’ll be able to absorb risks better.

In addition to lending you their expertise, growth capital investors will provide you with access to their network of professionals. Your growth will be accelerated as you connect with experts. With a name like growth, it should come as no surprise.

Disadvantages

Dilution

Dilution increases with the amount of money you seek.

PE investors prefer to appoint their own people to boards at mature companies. Thus, you will have less control over hiring, budgeting, business planning, M&A activity, and equity and debt financing.

The role of these investors on the board will be very beneficial when they bring useful advice. In particular, private equity firms and venture capital firms (on average 44% of VCs sit on boards), while angel investors are less likely to do so.

Most deals are costly

Investors can be hard to find, and it can take a long time to find them. For venture capital and private equity investments, you will need to prepare a considerable amount of documentation.

In the course of listing your company or selling it to another company, you’ll often have to pay out for legal fees and closing costs. If your investors are insistent on majority ownership and ‘drag-along rights’, they can sell the company whenever they want.

Alternatives to growth capital

There are a number of alternatives to growth capital these include:

Debt financing

What are your other options if you don’t want to give away equity?

Banks and other traditional lenders may be able to assist you. There is, however, a painful process involved in getting a traditional loan. An effective business plan includes financial projections for the next 3-5 years, an indication of how your targets will be achieved, and how your money will be spent.

When a bank lends you money, you’ll repay it over time – along with interest and fees. It may also be necessary for you to pay the lender warrants that allow them to buy back the shares at a certain price in the future.

Debt financing advantages

Your equity or shareholding does not have to be surrendered with commercial loans. As well as being in charge, you’re also in control when it comes to how the cash is spent once the deal is sealed.

It doesn’t come with any surprises either. Fixed loan costs mean you always know how much you owe.

Debt financing disadvantages

There are some hiccups along the way, however. The fixed and variable costs of your business will increase if you’re looking to grow rapidly. Additionally, you have a limited window in which to increase revenue, and you’ll be penalised if you don’t make payments.

The most stringent requirement is the requirement that you sign a personal guarantee. In the event of business failure, you and the other shareholders are liable for repayments. Founders may be forced to give up their assets to lenders, which could put them off becoming entrepreneurs.

Revenue based financing

Now let’s talk about the newcomer. It has become increasingly popular to take on growth capital through revenue-based financing. Similar to merchant cash advances (which you are probably already familiar with), it provides quick funding for online businesses.

It is not always necessary for businesses to make personal guarantees or give up equity to qualify for revenue-based financing. You will be charged a monthly fee instead of a cut of your future revenue. A typical percentage ranges from 6% to 12%.

A company with a lot of potential for growth is a good candidate for this approach – particularly an online business.

Revenue based finance advantages

Revenue-based finance providers don’t require any equity ownership in your business, and they can make investment decisions within five days. Why not? To begin with, different tools are used by lenders.

By connecting to your existing business tools, they don’t need to comb through your records and create their own models. They can conduct their due diligence based on data obtained from platforms like Stripe and Shopify. In exchange for that confidence, they do not ask you for personal guarantees about your business’s revenue growth potential.

‍On the funding they advance you, flexible investment capital providers charge between 6% and 12%. For example, if you borrow $500,000 and pay a 6% interest rate, you will pay back $30,000 within a few months.

Revenue based finance disadvantages

Because revenue-based lenders do not ask for the following information from the businesses they lend to, they tend to take a greater risk with their loans:

• Personal guarantees
• They have a say on how you run your company
• Shareholding or equity
• Business plans, cap tables, or pitch decks

Providers want to collect between 6% and 12% of all your company’s revenues until the loan is fully repaid. The amount you repay will increase and decrease with your company’s monthly revenues.

Their reason for this is that they want to recover funds quickly so that they can reinvest them elsewhere. If your business isn’t growing as fast as you expected, some revenue-based lenders will take action to recover your loan.

In addition, you may not be able to access a network of advisors that can help you make the best decisions for your business when it comes to longer-term debt funding.

Should you take growth capital?

In recent years, entrepreneurs who want to fund their businesses have had more options than ever before.

You might not get the best deal if it doesn’t work for others. Consider carefully whether you need growth capital for your business or if it is at the right stage to receive it.

Consider these factors when making your decision:

• Your current and future level of control over your business
• You and your organisation may be affected by the costs
• How you will be able to afford the payments associated with growth capital investments
• Whether you need the capital immediately
• You can get capital with or without advice

A range of growth capital sources are likely to be used in practice. I hope you will find something useful in every post on this blog. The different tools will help you take your company to the next level at different stages of its development.

Frequently asked questions

What types of businesses are eligible for growth capital?

Typically, businesses that have a proven track record of growth, strong management teams, and a solid business plan are more likely to be eligible for growth capital. However, eligibility requirements can vary depending on the type of investor or institution providing the funding.

How is growth capital different from other forms of funding?

Growth capital is specifically designed to support businesses looking to scale and expand their operations. Unlike traditional loans, which require repayment with interest, growth capital can take many forms, including equity investments, strategic partnerships, and convertible debt.

How can businesses access growth capital?

Businesses can access growth capital from a variety of sources, including venture capitalists, private equity firms, angel investors, and strategic investors. The process typically involves pitching the business plan to potential investors and securing the necessary funding to support growth and expansion.

Conclusion

Growth capital can be a game-changer for businesses looking to scale and expand their operations. With access to additional funding, businesses can invest in research and development, hire top talent, and upgrade infrastructure and technology, all of which are crucial to growth. Growth capital can also help businesses explore new markets, expand their product or service offerings, and pursue strategic acquisitions or partnerships.

By having access to growth capital, businesses can increase their competitiveness, improve their market position, and ultimately drive greater revenue and profits. Furthermore, growth capital can provide the cushion that businesses need to weather market fluctuations and unexpected challenges, allowing them to maintain long-term sustainability and success.