How to Finance Emerging Growth

Emerging Growth Companies (EGCs) are unique business animals. At times EGCs are viewed as ‘in-between’ more common business categories like start-ups, privately held mature, or established public companies. One common thread that nearly all EGCs have is an aggressive appetite for capital - but what type of capital best suits an Emerging Growth Company? There is no one right answer, but understanding the landscape of financing options available to EGCs should enable you to make an informed decision.  


While start-ups often rely on Angels and Venture Capital investors and mature modest growth companies typically look to banking and Private Equity relationships, EGC’s have the unique need and ability to combine many more financing options to meet their diverse growth capital needs.  


Let’s take a look at the broad financing landscape for EGCs below:


Founders - Almost always the first capital in, founder capital is typically valued most highly.  Generally speaking, maintain as much control in your company as possible is very attractive.  That said, many founders look to internally meet as much of the company’s financing needs as possible, but as is the case with most rapidly growing businesses, most founders will hit resource limits early on.

Angels and High Net Worth Individuals - Think of Angels and High Net Worth Individual investors as micro or early Venture Capitalists. These investors often invest as part of a larger diversified portfolio either as individuals or in small syndicates. Investment sizes vary but can start as early as seed stage with some tens of thousands of dollars and can scale up to many hundreds of thousands if not millions of dollars at early or early growth stage.


These investors tend to invest in line with the broader Venture model and look for high returns from a few hyper-performing investments in their broader portfolio to help offset losses and underperformance from the majority of these high-risk investments. Angel Investors tend to have more flexibility on term and time horizon than institutional investors.


Family Offices - Family offices do more than represent a High Net Worth Individual. To understand Family Office investment let’s compare Family Office to Venture investing.  Venture Capitalists have one job - to deploy capital. Family Offices, on the other hand, have a very different charter - to preserve asset value long term. As such, it is no surprise that many Family Offices invest in verticals they have direct experience in and are also historically big investors in conservative, long-term categories like real estate.


Venture Capital - Most conventional Venture Capital firms look to deploy capital at early growth phases of a company’s lifecycle investing many hundreds of thousands to many millions of dollars. Venture firms most often buy equity in portfolio companies but many also have some sort of debt offering.


Venture firms look for hyper-growth companies that can scale rapidly and often participate in additional financing rounds as needed to secure growth. The network access and visibility that often come with a Venture investor can often greatly impact the business far beyond the value of the capital sourced. Venture firms also tend to play a more active role in business management through board seats or formal advisory positions.


Growth Equity - Growth equity represents the intersection of Venture and Private Equity investments.  Most growth equity providers are investing in more mature businesses that require significant additional capital to capture new growth. Many Private Equity firms have growth equity arms as do some Venture Capital firms.


Valuations and return expectations are often slightly more modest than that of a true early stage investment due to established track records, profitability etc. Where traditional Private Equity investors look for significant non-control or full control positions, growth equity tends to come by way of smaller minority equity positions.


Partnerships - Funding growth does not always require an infusion of capital. Strategic partnerships can provide a powerful alternative to raising money. Key partnerships can give EGCs access to production capacity, sales channels, and industry expertise. Strategic partnerships can also be a great prelude to an M&A transaction with partners down the road.  


IPO - The big daddy of capital sources is the public equities market. IPO funding is very flexible and can allow the company to repay debts, fund R&D and make acquisitions with little restriction. While raising capital through IPO is very attractive, it does come with a slew of requirements including tax, accounting, and compliance considerations. While some of the above capital sources can be managed by internal staff, an IPO absolutely requires an expert team of bankers to ensure the offering's success.


M&A - Many EGCs make attractive candidates for acquisition allowing a buyer to purchase market share and IP that may cost significantly more to innovate in-house.  Similarly, merging with adjacent competitors or industry participants can allow companies to become worth more than simply the sum of their parts.


Keep in mind, the full spectrum of financing options for EGCs reaches beyond this list. With so many options available it is paramount that your advisory team fully understands the unique nature of Emerging Growth Companies and has a fully developed skill set to lever the diverse option pool available to them. We have developed a global service model specific to EGCs that is best is class.


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