Definition
Growth capital, also known as expansion capital, refers to the funds provided to a company to foster and accelerate its growth, often without a change of control. This type of capital supports the company in areas such as market expansion, product development, hiring more staff, or acquisitions. It is usually provided by private equity funds or venture capitalists.
Key Takeaways
- Growth capital, also known as growth equity, refers to the capital invested in a mature company that is looking for ways to accelerate or restart its growth, generally without changing control of the company.
- It is generally a form of private equity investment, typically a minority investment, in a mature company that is looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition.
- Unlike venture capital, growth capital investments are made in companies that are already profitable and often used to fund expansion projects, rather than to cover operational costs or to rescue a company in financial distress.
Importance
Growth Capital is critical in the realm of finance because it refers to the funds provided to firms for their expansion or reshaping of operations which holds potential for generating significantly higher revenues.
It has a vital role in allowing companies, especially start-ups and emerging businesses, to scale up, grow their operations, enhance their market presence, initiate breakthrough projects or innovations, as well as attracting potential investors.
Growth Capital can help firms to achieve financial stability, increase their competitive edge, and effectively manage risks.
Therefore, its importance lies in bolstering the growth prospects and long-term viability of companies.
Explanation
Growth capital, also known as expansion capital, is a form of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets, or finance a significant acquisition without necessarily changing control of the business. These kinds of investments are typically made when a company is on the brink of stepping up their operations in a big way, and could benefit from a hefty cash infusion to take them to the next level.
Companies seeking growth capital are likely to be more mature than those seeking venture capital investment, and they are able to generate revenue and profits but cannot generate sufficient cash to fund major expansions, acquisitions or other investments. The purpose of growth capital is to accelerate the company’s growth, often by making strategic investments in operating infrastructure, product development, sales and marketing, or acquisitions.
It is a critical source of funding for companies, particularly those that are cash flow positive, profitable, and have a viable plan for growth, but do not offer sufficient security to obtain bank loans or other conventional sources of capital, and do not wish to give up control of their company, which would likely occur with an IPO. By accepting growth capital, these companies enjoy the advantages of additional funding without some of the drawbacks associated with more traditional financing methods.
Examples of Growth Capital
Uber: Uber has received several rounds of growth capital from venture capitalist firms. The company used this capital to expand its business from just a simple taxi service to food delivery, driverless cars, and even a potential flying taxi service. With the growth capital, Uber was able to expand its operations into new markets around the world and diversify its services to increase its revenue streams.
Airbnb: In its initial stages, Airbnb received growth capital from venture capital companies like Sequoia Capital and Greylock Partners. The funds were used to continue its aggressive expansion around the world, develop new property categories and experiences, and invest significantly in marketing and technology enhancements.
Facebook: Before going public, Facebook raised growth capital to expand its operations and build a profitable model. The social media giant received significant investment from venture capital firms that helped it grow and expand its user base to where it is today. The funds were used to develop new tools, introduce new features, and for acquisitions of firms like Instagram and WhatsApp.
FAQs on Growth Capital
1. What is Growth Capital?
Growth capital is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.
2. How is growth capital different from venture capital?
Growth capital is depth-oriented; it builds on what has already been established. On the other hand, venture capital is breath-oriented; it tries to build a lot of new things in hopes that one will succeed. Furthermore, venture capital focuses on new businesses while growth capital is for mature companies.
3. What role does growth capital play in a company’s maturity?
Growth capital is a strategy most often used by established companies that are capable of scaling. It is deployed in businesses that are beyond the startup phase, have a good track record, and are looking to expand their operations or markets. In this way, growth capital helps companies move from a steady-state to an accelerated growth phase.
4. How is growth capital deployed?
Growth capital can be deployed in several ways, depending upon the strategy of the firm. The most common method is through equity, in which the capital provider makes an investment in return for an ownership stake in the business. Another approach is through subordinated debt or mezzanine financing.
5. What are the risks associated with growth capital?
Like any investment, growth capital comes with risks. Potential hazards include overexpansion, mismanagement of resources, or issues in the broader market. It is crucial to carefully manage the deployment of growth capital to minimize these risks.
Related Entrepreneurship Terms
- Equity Financing
- Return on Investment (ROI)
- Venture Capital
- Capital Gain
- Private Equity
Sources for More Information
- Investopedia: A leading online source of financial information and investing advice.
- Entrepreneur: An online magazine and website that provides information about small businesses and growth capital.
- Bloomberg: A globally recognized provider of financial news and information.
- Forbes: A finance and business magazine which provides information on various finance and business topics including growth capital.
