Do you know what growth capital is? It’s a fundamental concept in continental economics, as companies that already exist might be hitting boundaries or ceilings to their potential success.
If you’d like to learn more about what this is, why it matters, and the details revolving around it, then keep reading into the following paragraphs for a quick overview on the subject.
Growth capital goes by other names. One is growth equity. Another is expansion capital. No matter what it’s called, it’s a kind of private equity investment. This is typically a minority investment. These investments are usually put into relatively mature businesses, ones looking for the capital necessary to accomplish one or more of three distinct goals. The first is the restructuring or expansion of operations. The second is entering new markets. The third would be financing a substantial acquisition. In all three cases, the business wants to accomplish these goals without there being any changes in the control of their company.
Businesses that start looking for growth capital typically do so they can finance some kind of transformation event within their broader life cycle. Such businesses tend to be far more established and mature than the ones funded by venture capital. More often than not, they can generate revenue and even profits. However, they might not be making enough money to have the resources necessary for investments like acquisitions or big expansions. Given their restrictions and lack of scale, companies like these don’t find many alternate paths to getting growth capital. As such, access to expansion capital or growth equity becomes crucial if they’re going to expand their facilities, launch new marketing or sales initiatives, buy equipment, or even conduct new product development.
Growth equity might also be put into play in order to help a business restructure their balance sheet. This can be especially crucial in reducing how much debt or leverage the business might have on its balance sheet.
Expansion capital is quite frequently structured as a form of preferred equity. However, there are some investors who use a variety of hybrid securities which might include things like interest payments or other contractual returns on top of getting ownership interest in the business. There are many cases where businesses interested in getting growth capital investments aren’t in an ideal position for borrowing more debt. This can be due to their current debt levels or the very stability of their earnings.
Investors who are willing to fund growth equity investments typically look for specific criteria before agreeing to investment contracts and releasing the agreed-upon funds. First of all, the revenues of the business will ideally be rapidly growing. Secondly, the business should have a cash flow that is positive and profitable, or at least approaching a point of profitability. Third, the investors might look for companies that are still owned by their founders and have no history of previous institutional investment.
Now that you’ve read this article, you should not only know what growth capital is, but also the other names for it, what kind of companies look for it, and why they do it.