Growth capital is a way to finance a company’s expansion plans, such as opening new facilities, launching new products or services, or hiring new personnel. This type of funding can also be used to help a company restructure its business model or operations. In some cases, growth capital may also be used to finance a company’s acquisition of another business.

There are three different types of funding for any company that’s looking to scale:

• Private equity (PE) growth capital for established companies. This is the traditional definition of growth capital.
• Early-to-mid stage capital, such as venture capital. 
• Seed capital, such as angel investments

‍All these funding types have a lot in common – in all cases, you give up some of the shares in your company in exchange for funding and expertise. We’ll look at all three different types of growth investment that entrepreneurs and SMEs can use to finance their business.

So, what is growth capital?

Growth capital, also called growth equity, is a type of financing which gives companies the funding they need to grow their business. Growth capital could be used to:

• grow customer acquisition
• launch into new markets
• invest in growing your team or in upskilling your existing team with new skills such as management or team leader training
• investing in new technology
• fund acquisitions
• offer liquidity to shareholders

‍It’s usually taken on by more mature companies that have already established themselves in their market, demonstrated profitability (or a clear route to profitability), and have spotted that there’s an even bigger opportunity for them out there.

Who is growth capital best suited for?

Late-stage businesses might need an injection of capital to enter a new market or take on a larger, better-resourced competitor. That’s where growth capital comes in.

‍Growth capital funds usually offer between £5-50m of capital to be spent on major projects to drive growth such as product development, customer acquisition or to acquire competitors. Once a business has met its growth targets, that’s when growth equity funds look for their exit. The two most popular forms of exit are an IPO or via sale to another business.‍

‍How growth capital works

Businesses that take on growth equity are usually already profitable, but struggle to build up the cash that they need in order to fund expansion, invest in technology, develop new products or buy other companies. They could take on debt to do this but the cost of repayments would put too much pressure on their cash flow. Instead, these entrepreneurs sacrifice shareholding in their company to a growth equity fund in exchange for funding.

‍Entrepreneurs approach organisations like Private Equity firms, mezzanine funds, hedge funds, sovereign wealth funds, start-up advisors and family offices, among others for this capital. With most growth capital deals, investors will want to take a majority shareholding in the business and play a big part in strategy. Investors will probably want one or more seats on the board to help the company quickly grow revenue, profitability, and market share with the goal of floating on the stock market or selling the company in 5 years.‍

Growth capital vs venture capital

While Private Equity growth capital is for latter-stage companies, venture capital investors target younger businesses with high growth potential. Unlike private equity firms, venture capitalists take a minority shareholding in your business even though they’re taking a much bigger risk.

‍It’s riskier for them because, although they see the potential of your idea to generate revenue, there’s less certainty that there’s enough market demand or whether demand within the market will last.

Venture capitalists will be impressed by your team and they think there’s a huge amount of potential in your young organization. They’ll give you the advice you need to help you deliver your product to a wider market and achieve high growth.

‍So what’s in it for the VCs making these capital investments? Big risks can bring big rewards. When it goes right, VC’s stand to make a large return on their investment.

‍Growth capital vs angel investments

Many of today’s biggest online businesses got their initial funding from an angel investor. Angels come in handy when your product is little more than an idea or an early prototype.

‍You may not have many customers and your revenue is likely to be sporadic in these early stages of growth. Although angels are taking a risk by investing in your business, this risk is often offset by government tax rebates.‍ Angel investors add a lot of value in the early days because:

• they can introduce you to their more valuable connections, including potential customers or suppliers
• their involvement can help attract a team to develop your product or service quickly
• they are often successful entrepreneurs in their own right with plenty of great advice up their sleeve
• they hold you and other senior people in business to account for achieving or missing targets

‍Advantages and disadvantages of growth capital

Advantages

With angel investments, venture capital investments, and private equity investments, you receive the money you need to make key investments you probably wouldn’t be able to otherwise. You’ll be able to better absorb risks, so you can push out to new markets, develop new products or acquire businesses.

Growth capital investors will also lend you their expertise and introduce you to their professional network. Suddenly you’ll be plugged in to experts who can help you grow. It’s no wonder that growth is in the name.

Disadvantages

At mature companies, PE investors will want to install their own people onto the board. That means you will have less control on decisions around hiring, budgets, business plans, M&A activity, equity and debt transactions. Of course, when these investors bring useful advice, their role on the board will be a very good thing.

Most deals can be costly and finding investors can take months, sometimes years. Plus, you’ll need to prepare a huge amount of documentation before investors will consider investing in your company, particularly for venture capital and PE investments.

Legal fees and closing fees are just part of the agreement, and depending on the deal type, you’ll often pay out for warrants when your company is listed or is bought by another. And, at the private equity stage, your investors can sell the company whenever they want – whether you feel the price is fair or not – if they insist on majority ownership and ‘drag-along rights’.

‍‍Should you take growth capital?

There have never been so many options open to entrepreneurs who want to fund their business. But as with all deals, what works for others might not work for you. You should carefully consider whether your business is at the right stage to take on growth capital, or whether you need capital at all.

To make the right decision, you’ll want to consider:

• The level of control you want over your business now and in the future
• The cost to your organization and potentially to you personally
• Whether you’ll be able to afford the payments growth capital investments come with
• Whether you need the capital right now
• Whether you’re looking for capital with advice or just the capital

‍Summary

For certain businesses, growth capital is the ideal type of funding to take them to the next level. Here at Pegasus Funding, we’ve been working with a wide range of businesses for many years, planning and raising the right funds for their business expansion. Talk to us today and let us help you drive your business forward.