How Growth Capital Works
Every new business needs money, especially when it is trying to expand, and become successful. There are a number of options open to businesses looking to grow, from loans, to reinvesting profit. But if a business is trying to grow quickly, then the best way of getting the funds required to quickly expand is by gaining growth capital financing.
With growth capital funding, a business can quickly get large amounts of funding, much more than they would ever get from other sources of funding.
How Does Growth Capital Work?
The Growth Capital Firm Seeks Investors. When your business decides to seek growth capital it is beginning on a journey unlike any other in terms of funding.
Generally speaking the growth capital firm will open a fund where it collects money that will then be invested in various firms via growth capital funding. This money comes from a variety of sources, including wealthy investors, and companies, but also from pension investments by regular people. The firm will generally set a financing goal for the pot, and when the pot has reached its goal it is closed, and prepared for investment in firms looking for capital raising.
The Growth Capital Firm Invests In Companies That Have The Potential For Growth
Different growth capital firms invest in different industries, be it the tech industry, manufacturing industry, or any other industry.
The growth capital firm will then begin to look at promising companies, that have the potential for massive growth, to invest in.
From a $50 million pot it may pick 10 companies to invest $5 million each, but the amounts can vary significantly.
Most times, the lender doing the growth capital funding will be looking for a return within 3-7 years. They generally are looking for firms that can go public, and thus make the initial investment back several times over, or companies that could be bought out by another company.
Once the growth capital financing lender has decided which company to invest in, the negotiations begin. The investment firm will seek as much return from the investment as they can get, whereas the company itself will want to get as much investment as possible at the lowest return.
Once terms have been agreed, the investment money will be given to the company. The growth capital investor now owns a certain amount of the company.
If all has gone according to plan, the company will have grown by double, or hopefully even more over the course of a few years. It may be about to go public, and be floated on the stock exchange, or it might be about to be bought by another company.
At this point the growth capital funding company will get their return. They will be looking for a minimum of a doubling of their initial investment, and if they successfully invested in the right company they may even make more than that.
When the company is sold, or floated on the stock market, their share is sold or floated too, and that is how they get their return on the investment.
Growth capital funding is a fantastic way for a company that has the potential for huge growth to get an investment the likes of which it wouldn’t be able to get through conventional channels. It can turn a successful company into something even bigger.