Definition
Growth equity, in finance, refers to investment in companies that are scaling rapidly and are generating revenues, though they may not yet be profitable. These investments often take the form of minority equity stakes and Leverage Buy Outs (LBOs). The aim of growth equity is to boost an enterprise to its next phase of development through expansion, acquisitions, or by providing working capital for operational improvements.
Key Takeaways
- Growth Equity refers to several types of equity investments at different stages of a business’s evolution, mainly in businesses that are looking to scale and evolve. It generally falls between venture capital and traditional private equity in the risk/return spectrum.
- Growth Equity investors often seek companies with proven business models that are looking to scale up their operations, rather than startups at their early stages. The focus is more on the growth potential and scalability of the business, rather than immediate profitability.
- The goal for a Growth Equity investment is generally a higher return on investment through an eventual liquidity event such as a sale of the company or an IPO. They typically take a minority stake in the company, relatives to venture capitalists, who may take a controlling interest.
Importance
Growth Equity is a significant finance term as it relates to the funding of companies anticipating rapid growth.
It is a form of private equity investment, usually made by financial institutions or private equity firms in companies that are believed to have significant growth prospects.
What makes it particularly important is its focus on established companies that seek to expand or restructure operations, enter new markets, or finance a significant acquisition without a change of control of the business.
Unlike other investment strategies, growth equity investors often do not purchase a complete ownership in the companies they invest in, but they do get a share of the company profits, usually through eventual company sale or through public market transactions.
This provides mutual benefits for both firms and investors – assisting businesses with their expansion efforts while presenting lucrative potential returns for investment entities.
Explanation
Growth Equity encompasses investments in companies that are aiming to expand and grow their operations or enter new markets. The purpose of growth equity is to provide medium to long-term capital to companies that have demonstrated market potential, impressive performance, and a solid business model.
This form of equity investment is especially useful for companies that wish to expand their products, services, or geographic reach, improve their technology and infrastructure, or implement other growth strategies, but that don’t have the necessary capital to do so. In terms of its application, investors who contribute growth equity typically receive an ownership stake in the company.
Unlike venture capital, which primarily funds startups and developing companies, growth equity focuses on more mature companies ready for expansion stages. Still, these companies might not yet be prepared or keen to embark on an initial public offering (IPO) or leverage significant amounts of debt.
Hence, growth equity fills this gap, serving as a critical stepping stone in a company’s lifecycle to realize long-term growth aspirations.
Examples of Growth Equity
Warby Parker – This eyewear company began with a seed funding round in 2010, which allowed for initial growth and helped prove their business model. Over the years they have gone through multiple rounds of growth equity funding from various investors such as General Catalyst, Tiger Global Management and T. Rowe Price. This continuous stream of growth equity has allowed Warby Parker to expand its offerings, its physical retail footprint, and its overall business significantly.
Uber – Uber is another perfect example of growth equity in application. From its seed funding in 2009, the ride-hailing giant has received many rounds of growth equity from different investors. This equity was used at different stages in Uber’s development strategy, from initial expansion beyond San Francisco to global adaptation and the development of new services like UberEats and Uber Business.
Airbnb – Home-rental platform Airbnb also represents a real-world example of growth equity. Airbnb’s service was unique and its demand grew rapidly since its inception. Venture capitalists were interested in this strong growth, and thus the platform received significant amounts of growth equity. The series of funding rounds helped Airbnb expand its platform globally and diversify its offerings, factors that eventually led to its successful IPO in
Growth Equity FAQs
What is Growth Equity?
Growth Equity, sometimes referred to as growth capital, is a type of private equity investment that is primarily focused on providing capital to companies that are expected to grow at an above-average pace compared to other companies in the market.
How does Growth Equity work?
In a growth equity investment, the investor purchases a part of the company’s stock and becomes a partial owner. The investor stands to make a significant profit if the company grows as expected. If the company does not do well, the risk to the growth equity investor may be considerable.
What is the difference between Venture Capital and Growth Equity?
The primary difference is the stage of company investment. Venture Capital typically invests in companies at a very early stage, sometimes even before the company has started its operations. On the other hand, Growth Equity is generally provided to somewhat established companies that are looking to expand or grow at a faster pace.
How can a company benefit from Growth Equity?
Growth equity can help a company expand its operations, enter new markets, or fund major capital expenditures. It can also provide the resources needed for acquisitions. These can lead to an increase in the company’s market share and profitability, which in turn would increase the company’s overall value.
What are the risks associated with Growth Equity?
Risks associated with growth equity include the possibility that the company doesn’t grow as anticipated, or even experience a decline in value. There could also be industry-wide factors that negatively affect the company’s growth. The investor’s entire investment can potentially be lost if the company fails.
Related Entrepreneurship Terms
- Capital Gain
- Private Equity
- Venture Capital
- Buyout Funds
- Investment Strategy
Sources for More Information
- Investopedia: An online platform offering a comprehensive dictionary of financial terms, articles on investment themes, and guidance for investors of all types.
- Financial Times: A British daily newspaper published in broadsheet format, presenting a great deal of information related to global finance, business news, market data and analysis.
- Forbes: An American business magazine well-respected for its ranking lists and original articles on finance, industry, investing, and marketing topics.
- Bloomberg: A leading source of global business and finance news, providing data, analysis, video, and much more to the world’s financial markets.
