Oct 3, 2023

Growth Capital

Arc Team

Go-To-Market

Growth capital refers to investment provided to established companies to support their expansion and growth. It differs from traditional venture capital, which is usually invested in startups at an earlier stage of their development. Growth capital investors focus on companies with a proven business model, positive unit economics, and significant market potential.

What Is Growth Capital?

Growth capital, as the name suggests is used to fuel a startup's next phase of growth. Typically it’s deployed directly into the go-to-market function, more specifically into direct outbound ad campaigns, events, or field marketing and the hiring of sales staff. Growth capital comes from various sources, including private equity firms, investment banks, institutional investors, and later IPOs if the startup goes public.

In recent years, the demand for growth capital has increased as more and more startups have sought funding for their continued growth and expansion.

How Does Growth Capital Work?

Growth capital investors focus on companies with a proven business model, positive unit economics, and significant market potential. Essentially, these investors want to pour metaphorical gasoline onto the fire. These investors want to understand for every dollar invested, what the dollars of growth back out will be.

What Do Startups Use Growth Capital For?

Startups often use growth capital to scale their operations and expand their reach. One of the common uses for startups to use growth capital is to hire staff. This includes adding key leadership, sales teams, and technical staff to support the company's expansion. Another common use is for research and development. By investing in new product development, technology, and innovation, startups stay ahead of the competition and drive continued growth. That said, the most common use for growth capital is deploying directly into outbound marketing campaigns that drive top-of-the-funnel interest in the offerings of the startup.

How Long Does It Take To Get Growth Capital?

The time it takes to secure growth capital depends on several factors, including the size of the investment, the stage of the startup, and market competition. On average, securing growth capital takes six months, from initial discussions with potential investors to the final closing of the investment.

Startup founders seeking growth capital typically need to prepare and present a comprehensive business plan and financial projections to potential investors, which take time to develop and refine. Additionally, the due diligence process, where investors review the startup's financials and operations, can take several months. In some cases, securing growth capital takes longer, especially if there are complex negotiations or regulatory hurdles.

What Are The Qualifications For Growth Capital?

Companies seeking growth capital should have a well-established business model with demonstrated stability and growth potential. This typically includes a track record of consistent revenue and profit growth. They should have a clear market opportunity, a large and growing target customer base, and a competitive advantage in their industry. It is essential to have a stable revenue base with consistent year-over-year growth. Their management teams should be strong and experienced, with the skills and expertise to execute the growth plans they have outlined.

What Are The Common Types Of Growth Capital?

There are several common types of growth capital:

Debt financing is a loan that must be repaid with interest. Companies seeking growth capital may choose debt financing to preserve equity and avoid diluting ownership. One common form of debt financing is venture debt.
Equity financing involves selling an ownership stake in the startup to investors in exchange for capital. This type of financing is more common for startups, as it allows them to raise money without incurring debt.
Mezzanine financing is a kind of debt financing typically structured as a hybrid of debt and equity. Companies with a proven track record and looking to raise significant growth capital often use this method.

What Are The Pros And Cons Of Growth Capital?

The pros and cons of growth capital include the following:
Pros

It gives startups significant funds to support their expansion and growth.
Growth capital investors often bring valuable expertise and experience to the table, which helps companies achieve their growth goals.
With growth capital, startups can focus on driving growth and expanding their operations without worrying as much about short-term profitability.

Cons

Startups that raise growth capital by selling equity may lose some control over their operations, as investors will expect a say in important decisions.
By selling equity, companies may dilute their ownership, reducing their control over the startup and lowering the value of their existing stake.
Startups that take on debt as part of their growth capital financing must repay the loan with interest – a significant burden on their operations and finances.

What Does Growth Capital Cost?

The cost of growth capital varies depending on several factors, including the type of capital raised (equity vs debt financing).

For equity financing, the cost of growth capital is typically the equity stake that the startup sells to investors. Depending on the specific investment and the startup's needs, this can range from a few percent to a majority stake.
For debt financing, the cost of growth capital includes the principal amount of the loan, the interest that must be repaid over time and any upfront origination fees. The interest rate for debt financing depends on the startup's creditworthiness, the loan terms, and the specific lender.

Seed Capital Vs. Growth Capital

Seed capital and growth capital have some key differences:

Seed capital is typically used to fund the initial stages of a startup's development, including product development, market validation, and early customer acquisition. Growth capital finances later-stage growth and expansion.
Seed capital investments are generally smaller than growth capital investments, with seed capital rounds ranging from $50,000 to $2 million. Growth capital investments can be much larger, ranging from a few million to hundreds of millions of dollars.
With seed capital, investors may receive a relatively large ownership stake in the startup in exchange for their investment. With growth capital, investors receive a smaller ownership stake, as the startup has already proven its viability and has a stronger valuation.
Seed capital investors may focus on the potential for future returns and be willing to take on a higher level of risk. Growth capital investors have more stringent financial expectations and may not wish to take on risk in exchange for a higher potential return.

What Are Some Alternatives To Growth Capital?

There are several alternatives to growth capital, including

Bootstrapping refers to funding a business with personal savings and revenue from operations rather than relying on outside investment.
Crowdfunding involves raising small amounts of money from many individuals, usually through an online platform.
Government grants, such as research and development or commercialization.

Who Are The Top Providers Of Growth Capital?

Some of the leading providers of growth capital include:

Private equity firms specialize in investing in growing businesses (these companies become their portfolio companies) and often have significant resources to provide growth capital. Some of the largest firms are KKR, Blackstone, and Carlyle.
Late-stage venture capitalists like Deutsche Bank and Meritech Capital Partners.
Investment banks such as New York-based Goldman Sachs and Morgan Stanley have divisions dedicated to providing growth capital to growing businesses.
Hedge funds like Citadel and Bridgewater provide growth capital to growing businesses. These funds often focus on high-growth industries.
Family offices are private wealth management firms owned and operated by a single family. They often provide growth capital to growing businesses to diversify their investment portfolio.
Corporate venture capital firms are venture capital arms of large corporations that invest in growing startups and small businesses. Summit Partners, for example, have provided financing to several Saas (software as a service) companies. Healthcare is another popular sector for venture capitalists.