In the corporate finance world, the lines between venture capital (VC) and private equity (PE) have always been more fluid than rigid. Traditionally, these two investor categories pursued distinct opportunities, with PE funds prioritizing historical profitability and VC funds focusing on the potential for future value. However, recent years have witnessed a fascinating evolution with the emergence of a new player – the Growth Capital investor.
The Traditional Divide
PE funds historically sought proven profitability, often steering clear of businesses with earnings before interest, taxes, depreciation, and amortization (EBITDA) below $2 million. Furthermore, many Private Equity funds exclusively engaged in deals where they could secure controlling or majority positions, while some were open to co-investing alongside founders or management with minority equity stakes.
On the other side of the spectrum, VC funds were all about chasing the dream of exponential growth, aiming for returns exceeding 10 times the initial investment. This high-risk game meant that success stories needed to be monumental to offset the failures along the way.
A Limited Landscape for In-Betweeners
Companies that found themselves between these two extremes – growth ambitions not captivating enough for VC attention and not sufficiently profitable for PE investment – historically faced limited options. Their choices were essentially confined to persistently striving to stay afloat, hoping not to be overshadowed by better-capitalized competitors, or considering a sale.
Enter Growth Capital
In recent years, a game-changing development has taken place with the emergence of Growth Capital as a distinct category of investor. Growth Capital investors are uniquely positioned to partner with founders, fostering business growth alongside existing management teams.
Today, equity investors and non-bank debt providers actively seek businesses that have established a defensible market position and boast revenues of $10 million or more. What sets Growth Capital apart is its focus on supporting founders who have built their businesses organically. Crucially, these investors are not fixated on immediate profitability or the expectation of astronomical returns.
The Unique Appetite
Growth Capital investors bring a refreshing perspective, actively seeking out businesses that have already carved out a defensible market niche. Unlike traditional PE funds, they are not demanding immediate profitability or a clear pathway to a 10X return. Instead, these investors are keen to back founders who possess the ambition and energy to continue growing their businesses.
Within this category, a diverse array of investors is making their mark. Family offices are increasingly looking to make direct investments in the $5 million to $10 million range, while Growth Capital investors are prepared to write checks in the $20 million to $50 million range.
Through our research and investor outreach program within the Australian market, Eaton Square is aware of several funds focussing on the Growth Capital strategy who are currently looking for new investments in sectors including technology, business services and industrials.
With a growing number of baby-boomers founders thinking about succession and retirement, we anticipated growth capital style transactions investments becoming more common providing founders more flexibility than choosing to sell now, or putting off a decision and hoping circumstances will improve in another few years.
Let’s Discuss Your Growth Potential
If you find your business operating in the category of established revenues and growth, but not yet delivering the profitability that would deliver a satisfactory sale transaction – we’d love to connect. Let’s explore how Growth Capital could be the catalyst for your next phase of expansion and provide you a path to exit. Together, we can evaluate your options and consider whether a Growth Capital transaction offers you a better alternative to an immediate sale or deferring for a future transaction. Book a call with me today.