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What is growth capital? (And why your company might need it)
Startups don’t stay small forever. After raising initial seed funding to build a product and test market demand, ambitious companies need a new kind of financing to scale: growth capital.
Growth capital (also called growth financing, equity, or expansion capital) is the fuel that helps businesses move from early traction to significant scale. It typically comes into play once a company has found product-market fit, built a core team, and proven demand.
Now it’s time to expand: hire aggressively, enter new markets, accelerate sales and marketing, and outpace competitors. This phase is capital-intensive. That’s where growth capital comes in.
In this guide, we’ll break down:
- What growth capital is (and isn’t)
- When to raise it, and how
- The difference between growth capital and venture capital
- Real use cases from startups and established firms
- Pros and cons to weigh before raising
What is growth capital? (Definition)
Growth capital is a financing instrument used by companies to grow their business. It encompasses internal and external measures of corporate finance, such as:
- Expansion into new markets
- Development and introduction of new products and services
- Expansion of marketing and sales activities
- Scaling of the business model
- Hiring of new employees
- Execution of strategic acquisitions (M&A)
The use of growth capital can be planned for the long or short term. Long-term strategies may involve expanding into new markets, while short-term strategies may entail expanding targeted marketing campaigns.
TL;DR
When do companies need growth capital?
There are different startup funding stages – from pre-seed to seed to Series A, B, C etc. First, startups receive pre-seed or seed funding to establish their business. After they've found Product Market Fit, it's time for growth and further expansion.
This is where growth funding comes into play. Unlike other forms of funding, it is not intended to cover ongoing operating expenses but rather to boost revenue and to be used as funding for the growth stage.
To increase revenue, companies must invest. Depending on the phase, business model, and industry, they may refinance investments using either equity or debt funding.
Growth capital comes into play for projects with high-risk profiles and less predictable returns on investment (ROI), such as product development. For investments with more predictable ROI – like M&A – companies can use debt capital.
What can you use growth funding for?
Growth capital is typically not the first funding a company receives. However, there can be overlaps between seed and growth capital.
Access to growth capital can offer diverse opportunities for firms. It is typically provided by investors who believe in a business's potential and are willing to support its expansion.
Here's how growth capital works:
- Expansion into new markets: companies can expand into new geographical markets and broaden their customer base.
- Product development: growth capital can support companies in developing new products and services, improving existing offerings, and driving innovation.
- Scaling business operations: to grow rapidly, companies often need additional resources for personnel, technology, and operating expenses. Growth capital can enable this scaling by providing financial flexibility to invest in growth.
- M&A: with growth capital, companies can make acquisitions to expand their product offerings, integrate new technologies, or enhance their market position.
- New employees: companies can hire new employees to increase their capacities.
Fuel your growth – without giving up equity
Get up to €5M in non-dilutive funding with re:cap. Calculate your funding terms and see how much growth capital you could get.
Calculate funding termsWhat are types of growth capital?
Financing with growth capital can take various forms. It depends on the needs and goals of the company. Common types include:
- Venture Capital: VC funds invest in startups with high growth potential, typically in the early stages. Financing amounts can range up to several hundred million euros. In return, companies sell shares to investors.
- Private Equity: private equity firms invest in established companies to accelerate their growth, increase efficiency, or make strategic changes. PE investments can occur at various stages of the business lifecycle and often involve active management participation.
- Business Angels: angel investors provide growth capital, expertise, and networks for startups and high-growth companies.
- Venture Debt: venture debt lenders provide growth loans (and thus debt capital) to companies. Venture debt follows venture capital.
- Alternative Financing: This involves tailored debt capital solutions for companies and startups with regular revenues, allowing them to invest in further growth initiatives.
Pros and cons of growth capital
Growth capital for startups vs. growth capital for established companies
It’s as simple as it sounds: growth capital is relevant for companies aiming to expand and grow their business. This applies to both young and established firms.
Growth capital for startups
Startups in the early phase
Startup funding consists of multiple stages. First, they need access to capital.
That’s why the early phase is primarily determined by access to funding, which can come from their own pockets, internal funds, or external sources.
Typically, venture capital, business angels, or government-backed startup loans are available at this stage.
Startups develop their product, invest in new hires, and build their business. Growth capital and financing plays a relatively minor role during this time.
Startups in the growth phase
This changes during the growth phase. The startup has already established its basic structures. It has won its first customers and build a stable revenue stream.
Typically, it now aims to further expand – entering the growth phase. The focus shifts to scaling up and driving growth.
This phase is often very capital-intensive. For the first time, growth capital plays a significant role.
At this point, growth capital can be funded through equity or debt capital.
Growth funding with equity
For growth financing with equity or venture capital, startups must demonstrate appropriate growth rates now – and even better ones for the future. Venture capital funds bet that their investment will pay off in the future due those high growth rates.
Growth financing with debt
Besides the traditional route with VCs, debt can also for the first time play a major role at this stage.
Especially companies with stable revenues are able to incorporate debt into their capital stack. By entering the world of debt funding, startups have a variety of alternative financing options at their disposal, and this is much needed.
Because especially for startups in the growth phase, there is a lack of capital in Europe.
According to a recent study by the German Private Equity and Venture Capital Association, American companies raised an average of €13.7m in venture capital during the growth phase, while European companies received only around €5.8m.
Although VC financing constitutes the majority of startup financing, young companies still need to explore alternatives.
Growth capital for established companies
For established companies, the situation is different. They have already penetrated their market and built a broad and stable customer base. For them, growth capital means investing in new markets, expanding their product range, or their market power.
Established companies have different options for growth capital.
This is mainly because they are already established in the market, have a robust and proven business model, record stable and regular revenues, and there is generally more trust from external capital providers in their business model.
More freedom in choosing between equity and debt
All these factors affect access to capital. While startups face more restrictions in choosing between equity and debt, established companies have more flexibility.
They have a variety of equity and debt options with which they can diversify their capital structure.
Whether a young or established company, both should show growth potential if they seek growth financing.
For investors, this is relevant due to the prospect of attractive returns. The risk profile and objectives determine which type of capital can be used for growth financing and which capital providers are suitable.
Growth capital and venture capital: what are the differences?
The main differences between growth capital and venture capital lie in the stage of company development, risk profile, investment size, and return expectations. Here are the key distinctions:
Growth capital to expand business
Revenue growth is one of the most important goals for companies. Whether to use debt or equity capital for growth financing depends on the investment project.
It also raises the question of access to capital, which depends on the phase of the company. As with any funding, companies should also consider the cost of capital and the expected ROI (as far as it can be planned).
For established companies, there is usually a greater range of financial instruments available for growth financing. In contrast, startups are often limited to venture capital or business angel investments.
Summary: Growth capital
Growth capital, or expansion capital, helps companies accelerate growth, enter new markets, develop products, and scale operations.
It follows seed funding and typically comes from venture capital, private equity, business angels, or venture debt.
Startups use it during the scaling phase, while established companies leverage it to expand or strengthen their market position.
Unlike venture capital, growth capital targets mature companies with proven business models, involving larger investments and moderate returns within a shorter period.
While it provides financial stability and strategic support, it can lead to equity dilution and governance challenges.
Q&A: Growth capital
What is the meaning of growth capital?
Growth capital, or expansion capital, is funding provided to mature companies to accelerate growth, expand into new markets, develop products, or make acquisitions.
What is an example of growth capital?
An established tech company raising funds from private equity to launch a new product line or enter a new geographical market.
What is the difference between venture capital and growth capital?
Venture capital targets early-stage startups with high growth potential, while growth capital is for established companies looking to scale.
Is growth capital the same as growth equity?
Yes, growth capital and growth equity are often used interchangeably, both referring to minority investments in expanding companies.
How dies growth capital differ from LBO?
Growth capital involves minority investments to fund expansion, while a leveraged buyout (LBO) involves acquiring a company, often using significant debt.
How do you raise growth capital?
Raising growth capital involves a structured process designed to fund business expansion. Here’s how it typically works, step by step: define a growth plan, identify the right type of growth capital, prepare your financial data, build a pitch, approach investors, navigate the due diligence, negotiate terms, and close the deal.
Fuel your growth – without giving up equity
Get up to €5M in non-dilutive funding with re:cap. Calculate your funding terms and see how much growth capital you could get.
Calculate funding terms
