The Growth Equity In Venture Capital
June 15, 2015
This article was first published by TechCrunch.
The technology industry is booming, and contrary to popular belief, it’s not just early-stage venture funding that’s steering the ship. Helping to propel this rapid expansion is actually another group of investors that specializes in growing established companies and taking them to the next level, aptly named “growth equity.”
In the ecosystem of funding options, growth-equity investors tend to strategically focus on companies with proven technologies and established market adoption — many of which are already generating revenues between $5 million and $100 million.
In recent years, growth equity has become its own asset class and is actively followed and monitored by investors. Growth equity enjoys the benefits of investing slightly later down the road in the growth of technology companies, thereby reducing the risk of future financing rounds, while at the same time avoiding the seniority of leverage utilized by private equity firms. The risk-adjusted results of this asset class indicate that better returns can be generated with lower associated risk.
Additionally, growth-equity investors tend to be much more hands-on and often occupy seats on the boards of their portfolio companies. This helps to control and lessen the risk associated with investing at this stage. In some instances, growth-equity investors help provide liquidity to founding partners who might have been working for years with little to no return. They also offer the necessary guidance to structure growth-oriented deals that require more complex maneuvers, such as funding mergers and acquisitions.
As new technologies such as cloud computing and virtual web conferencing continue to improve, early-stage companies will continue to scale faster and more cost-efficiently. Where startups traditionally had to spend significant dollars on capital costs, they can now invest more in product development and marketing, enabling them to reach maturity more quickly with less up-front capital.
As a result, companies are outgrowing their early-stage investors and are now seeking the next level of capital influx, which has led to the emergence of growth equity. This has also caused companies to stay private for longer periods of time.
According to data by Dealogic, tech sector IPOs are off to their slowest start since 2009, totaling just $2.35 billion as compared to last year’s total of 62 IPOs valued at approximately $40.8 billion. Companies are now delaying their initial public offerings because they’re able to rely on private investors, such as those in the growth-equity sector, to help fund their next round of capital. Private funding is now filling their capital needs faster and making companies more profitable by raising the valuations.
In fact, some companies that might have previously gone public in an effort to raise capital are now becoming acquired before ever hitting the public market. We actually see more of our exits in the form of strategic sales than through initial public offerings.
Because technology continues to grow at a rapid rate, we are seeing some attractive growth equity investment opportunities pop up in areas like the Mid-Atlantic region, which we consider to be undercapitalized. With a community of entrepreneurs and opportunity for innovation, the Mid- Atlantic provides a growing technology hub, and growth-equity investors are jumping at the chance to get involved.
It is with this kind of growth equity support that young companies in growth industries such as healthcare, technology and business services, can significantly optimize their performance and become profitable market leaders. It all starts with an opportunity for growth and a company’s belief that it can reach its full potential.