Ambitious business owners and entrepreneurs always have one eye on the future. But whether they want to strengthen the team, ramp up sales and marketing, build out capabilities or expand operations, one of the most pressing cashflow issues is deciding how to finance this growth – specifically, when to borrow (debt funding) or when to raise (equity funding).
While debt funding plays an important role in certain circumstances, businesses often require a mix of both sources at some point to grow sustainably. And for some, debt isn’t an option either by choice or because debt levels are already at capacity.
That’s why it’s important to understand the different equity funding options available.
How does growth capital compare to other types of funding?
Growth capital is a less well known form of equity funding than venture capital (VC) or buyout funds but fills a vital gap in the market between them.
Growth capital is designed to support businesses with a demonstrated track record of commercial success in furthering their growth aspirations. Like other forms of equity-based funding, investors provide growth capital in exchange for an equity stake in the business.
Growth capital and venture capital
The VC market has grown steadily in Australia over the last decade. Both VC and growth capital focus on backing high-potential entrepreneurs and businesses for periods of up to ten years, and only take a minority stake in the business – enabling the existing shareholders to retain control. But there are a few key differences.
First, growth capital is typically provided to established companies with a proven business model and positive cashflow who want to scale-up. By comparison, VC firms support start-up or early stage ‘hockey stick’ growth potential where the business may be pre-revenue and not yet have a commercially viable version of their product.
Another point of difference is the “cheque size”. VC investments tend to be smaller than growth capital investments - often less than $5 million for early rounds compared to $5-$15 million for growth capital.
Business funding may also come in the form of a buyout from a private equity fund. This capital is distinct from growth funding as it is typically used to buy out existing shareholders and take a controlling stake in the company. With minority investment growth capital, founders use the incoming capital to grow the value of their business while maintaining control.
Another difference is buyout funds typically seek larger investments – anywhere from the tens of millions to more than $1 billion for larger funds – with an expectation of a shorter investment horizon of between 3 to 5 years.
Is your business ready for growth capital?
If your business has a stable financial position with revenue between $2 to $100 million, a track record of growth, a unique value proposition and a solid plan for the future, then growth capital is a viable option to consider. However, timing is also an important factor.
The best time to reach out for investment is well before it is strictly ‘necessary’ to raise funds. Growth capital investors don’t offer ‘rescue capital’ and are unlikely to invest in a business experiencing cash flow distress. Business owners who think proactively about their capital needs will have the time and headspace to make considered decisions in the best interests of their business.
The Australian Business Growth Fund is purpose-built for small-medium businesses. It was established by the Australian Government in partnership with six leading banks to be an active provider of minority and patient growth capital, with the ultimate vision to drive economic growth for Australia and create more jobs for Australians.
Find out more
To learn more about growth capital and to review case studies of businesses accessing growth capital from across a number of sectors, go to www.abgf.com.au or sign up to receive regular growth insights at www.abgf.com.au/direct-subscribe.