Growth equity is a sector of the private equity industry and is also known as growth capital and expansion capital.

It’s considered to be in the middle of venture capital and control buyout. Growth capital is ideal for companies with accelerated growth and who are in already established markets. It’s a low-risk investment as compared to other forms of private equity which makes it easy for mature companies to find investors.

Let’s see what you need to know about growth equity before you consider it for your business:

1. It’s not for companies that are just starting out.

Growth equity investors are looking for businesses that have already established themselves in an industry but which can’t meet the market demand and need some help from outside.

Some characteristics of the companies seeking growth capital include:

  • They are growing businesses;
  • They have proven business models;
  • The goal of the company is to enter a new market, buy expensive equipment, expand or finance a big event related to their business such as an acquisition, launching a new product, or else.

If you’re a small business or just starting out, you can’t attract growth equity investors. Instead, you should try other types of equity financing such as asking friends or family, angel investing, VC, or else.

You can use the help of a professional law firm like Goodwin.

2. Growth equity investing minimizes risk.

The investments are usually minor and your company is already generating revenue. With a business that’s on the grow and in a promising market, you can find investors for your venture more easily knowing it’s not a big risk for them either.

In addition, growth equity is connected to a different type of risk and it’s important to understand that and do your research before approaching an investor.

Any form of investment involves risk that needs to be calculated. The risk growth capital investors undertake is different from that of venture capitalists or leverage buyout investors.

The difference is mainly that with growth equity, you take execution and management risk.

The former means that the business plan of the company might not succeed once put into action. This can be taken care of with execution risk analysis, where you can define the possible causes of business failure and avoid activities that can lead to potential losses.

As for management risk, these are the possible negative outcomes associated with ineffective management. However, investors usually look for a company that’s already doing well and just needs a little help to get to the next level. In this case, the managers can control what happens next and take smart decisions.

3. Growth equity is not venture capital.

5 Reasons You Need Indemnity Insurance

Growth capital has indeed similarities with venture capital, but they aren’t the same thing.

For a start, venture capitalists target early-stage companies, businesses with no revenue or a negative cash flow, or those on the brink of failure.

There is market risk involved in the venture capital investment process as opposed to growth equity that targets companies in emerging markets. Because of that, VCs prefer to invest in more traditional industries such as manufacturing or distribution.

Add to that product risk and a high chance of capital loss (which is moderate with growth equity).

4. Some sectors are more appealing to growth equity investors.

If you have a growing company in the tech or healthcare industries or represent a startup, you’re more likely to attract growth equity investment. That’s because such companies are driven by innovation and these markets provide room for accelerated growth.

5. Know what rights the investor receives.

A growth equity deal might give the investor some operational control, registration rights, the ability to initiate a liquidity event, redemption rights, and more.

An investor might handle debt transactions, play a role in the approval of the annual business plan, make changes in tax policies, get involved when things in the company aren’t as expected, and even force an exit.

Potential issues can occur due to not being clear about all possible outcomes, a misunderstanding between investors, transferring shares, or else. 

Growth equity can allow a founder to reach the next level and dominate a profitable market. For that to happen, a business model must already be solid and all details related to expansion capital must be understood and discussed with potential investors.