Encore – This article was originally posted on the former Monarch Bay Securities website:
With every phone call or email exchange, I’m more convinced that one of the most rapidly growing segments of the capital market is, appropriately labelled, growth capital.
This is a relatively newer segment of the private capital market that sits between the two well-established segments, venture capital and private equity.
By many indications, venture capital is also growing. But, from my experience, the statistics may be skewed. I sense that the “unicorns”, the companies with a valuation over $1 billion valuation, are getting investment dollars and in big amounts. Companies outside the fabled unicorn segment, aren’t finding investment nearly as obtainable. The large amounts of capital gathered by the “unicorns” are distorting the figures.
CB Insights, the investor database company, and Credit Suisse, the investment bank, provide a chart tracking the unicorn trend.
I doubt that anyone considers the traditional private equity sector to be growing. To be sure, over the last couple decades, private equity funds have had a great run. The private equity firms’ portfolio companies have enjoyed the tailwind of a growing global economy and a declining interest rate environment which has made substantial financial leverage helpful.
Now, the scarcity of the perfect private equity deal is intense and competition among firms has driven up the multiples that private equity firms need to pay to win. (Click for article on recent stats). The tailwinds previously enjoyed by private equity may have become headwinds.
No Revenue, No Thanks
That takes us back to the growth capital segment. While there’s no universal definition, in general, growth capital investors look for private companies that have some revenues, say $3 million or more. While the revenue threshold varies, what seems to be universal is the requirement that the commercial markets have signaled acceptance of the company’s product or service.
Some growth capital providers require at least a breakeven profit level. In my experience, most accept losses at least initially.
Growth capital firms look for companies into which the firms can provide capital and, perhaps, guidance. The capital and guidance are expected to enable the companies to accelerate growth, “to step on the gas” so to speak.
More Funds and More Money
Brand new growth capital fund announcements are highly visible. I get them in my emailbox regularly.
What’s less visible but clearly discernable from the daily phone conversations is the shift of capital allocated to growth capital from venture capital or private equity. Sometimes, a fund manager simply shifts emphasis in an already established VC or private equity fund and sometimes, the shift coincides with a new fund.
The combination of more funds and more money looking for growth capital situations makes the sector a “red hot” source of capital.
If your company fits the growth capital sector, this may be the time to raise capital. We’re very active in the sector and welcome the opportunity to discuss your capital needs.