Venture capital is a type of private equity capital, typically provided by outside investors, for financing new or growing businesses. Growth equity and venture capital can often overlap for businesses that have high levels or risk, but high levels of reward as well. Venture capital investments are generally high-risk investments but offer the potential for above-average returns and/or a percentage of ownership of the company.
When a venture capitalist (VC) makes such an investment, the start-up money is referred to as “seed money” and entails the greatest risk of the deal. If the project gets off the ground, there may be additional financing required at additional “rounds” before the project becomes a company that is finally brought to the market and the venture capitalist can enjoy the handsome rewards.
Growth equity is a private equity investment at the intersection of venture capital and control buyouts. The purpose of growth equity is to help a company accelerate future growth. This type of investing requires an investor to be involved in the decision-making process of the company by bringing expertise, important relationships, and capital that will be used for the expansion of the business. Growth equity is beneficial to technology companies that can grow at a 10x rate over the next 5 years. These companies are also strong candidates for venture capital. Businesses seek growth capital investments when banking financing is unavailable either due to previously unpaid debt or when they are deemed unprofitable. Venture capitalists endow deeply into these deals because of their high risk-reward ratio.
All capital seekers must understand the capital-raising ecosystem. There are many different kinds of investors, which range from friends and family, to angel investors and venture capitalists, to private equity investors, banks, and lenders. Each of these has vastly different business criteria and return requirements. It is important that you determine the best route for your growth equity, whether it be venture capital or one of the others listed.