Growth Capital vs Venture Capital: Understanding the Difference
October 4, 2021
What are some differences between growth capital and venture capital?
- Maturity of companies involved
- Risk level
- Length of holding period
Growth is an essential part of any business and is almost never absent in businesses’ goals. Each company, at some point in its lifespan, would need assistance from outside investors. That’s where the two types of capital in this article become relevant. Being similar in nature, the discussion of growth capital vs venture capital is common in the field of business.
Growth capital, also known as growth equity or expansion capital, is a type of investment that, as the name suggests, helps a company in its growth. Venture capital has a very similar function. Read on to see what specific differences the two have, and which would apply to your own business!
Maturity of Companies Involved
For the most part, growth is always a good sign for any company. Being able to expand your business would mostly yield positive results, which is why all companies strive to achieve this. But investors would naturally be selective with their investments.
Growth capital is an investment usually meant for mature companies. This includes companies who are mainly in reliable markets and have products with proven profitability and stability. The investment would be used for the expansion or transformation of the said organization.
On the other hand, venture capital is meant for newer, less-experienced companies who have not fully established themselves in the market. The capital should be able to help the company get the funds they need to grow. Oftentimes, startup companies build capital through venture investments. With a good business model and adequate potential for profit, securing venture capital might be the company’s key to success.
Any good investor would know that investing always comes with a risk. But any good investor would also understand when to take that risk or when it is acceptable to do so. Investing in growth and venture capitals have different risk levels, especially considering the companies that the investment would be for.
Risk is determined by a number of different characteristics. A sound market and product analysis will clearly show the risks that come with the investments. But of course, one should not rely on these alone.
Venture capital deals are widely considered high-risk investments. Startups or other early-stage companies don’t generally have concrete proof of profitability. The promise of returns will be based on proposals and plans — all of which the investors will have to deliberate. The good news is, this type of investment could also lead to high rewards.
Meanwhile, growth capital deals are only at moderate risk. The companies that pitch for a growth capital are often mature and their products are already proven to have a competitive place in the market. Although the risk is still present, it wouldn’t be as high as a starting company. However, management and execution of the deals might still have significant risk to it.
Either way, companies and investors alike should be well aware of all the risks with any kind of deal. Make sure your capital is put to good use.
Length of Holding Period
Both expansion capital and venture capital deals revolve around different holding periods. Expanding businesses, be it mature or a startup, takes a lot of time.
Venture capital deals often have longer holding periods than growth capital deals. Since venture capital investments are for starting companies, they need more time to fully achieve their goals. The average for this is around 5-10 years. For the growth capital, being involved with established companies, the holding period does not need to be too long. It usually takes only 3-7 years.
If you’re looking to build either a growth or a venture capital, keep the differences in holding period in mind to ensure that your business plan can comply with the returns it promises.
The nature of the businesses included in each type of deal would also affect where the returns would come from.
Venture capital returns would primarily be taken from the successful introduction of the company’s products or services to the market. On the other hand, growth capital returns come from how well the company was able to do the expansion or transformation. This growth should result in increased revenue and of course, profit.
No matter where the returns come from though, you must always make sure the investment does not end in losses.
In the world of investment, these two types of capital are distinguishable enough despite their similarities. In order to know which side you are on in the growth capital vs venture capital conversation, you should consider their differences in maturity of companies involved, risk level, length of holding period, and returns.
Starting and managing a business is a complicated matter. If you want more advice on growth capital and venture capital, or other business matters, let’s talk. Feel free to contact me anytime here!