Growth capital: a catalyst for business expansion

Growth capital is a common form of financing for high-growth companies and SMEs looking to scale up. Read on to learn more about this type of business funding, how it can be help your company achieve its growth potential, and what to consider when fundraising.

What is growth capital?

Growth capital is a type of investment — typically equity funding, or a mix of equity and debt — that’s used to expand a business. Also known as growth equity or expansion capital, it’s often raised by entrepreneurs with ambitious growth plans.

Who is growth capital for?

Businesses that are well suited to growth capital often have ambitious growth plans and objectives, but may not be able to achieve these organically (i.e. through existing resources, process improvements, or efficiency gains).

Growth capital is typically raised by profitable businesses that want to accelerate their growth — as opposed to early-stage companies or startups, which might be pre-revenue and better suited to other types of equity funding (such as venture capital or angel investment).

Growth capital investors will usually provide a combination of funding and support, in exchange for a minority equity stake in the business (less than 50%). This enables founders or business owners to achieve their growth objectives, without losing control of the business. For those looking to sell a majority stake (a buyout), private equity investment may be a better fit.

Learn more about the difference between growth capital and other forms of equity investment, including private equity and venture capital, in our equity funding guide.

What is growth capital typically used for?

While it will vary depending on a company’s lifecycle stage and sector, some of the most common reasons why businesses seek growth capital investments include:

• Mergers and acquisitions (M&A)
• Rollouts
• International expansion or entering new markets
• New product development
• Sales and marketing
• Increasing production capacity
• Shareholder liquidity
• Talent development
• Succession planning
• Technology development
• Working capital

When’s the right time to raise growth capital?

Imagine this scenario: you’re an entrepreneur or business owner; you’ve built a successful company, with a good set of clients and a strong team; you’re generating a solid turnover, but you want to grow even more. Let’s say you want to double the size of your business in two years.

On current forecasts, it could take more than a decade for you to achieve this — so you’ll need an ambitious new growth strategy. Perhaps you could expand overseas? Or launch a new product line? Or you might even want to acquire a competing business? If you’d need additional investment to deliver on these plans, it might be time to consider growth capital.

What do growth capital investors look for in a business?

While each investor will have their own criteria, growth capital providers typically seek businesses that demonstrate potential for strong, sustainable growth. Often, they’ll be looking for:

• A track record of growth and profitability
• Proven product-market fit
• Scalability in a large addressable market
• Strong value proposition and high barriers to entry
• An experienced and ambitious management team
• Alignment of values and business objectives
• A clear growth strategy, demonstrating planned use of funds

What to look for in a growth capital investor

When preparing to raise growth capital, identifying the right equity investor for your business is crucial. Some of the key questions to ask yourself include:

• How much funding will you need to achieve your growth objectives?
• How much equity are you prepared to give up?
• Do you want an investor that can provide expertise to support your growth strategy?
• Will you need follow-on funding to pursue future growth opportunities?
• What values are most important to you and your team?

Growth capital from BGF

As the most active equity investor in the UK and Ireland, we’re committed to supporting good growth in entrepreneurial businesses. From London to Lothian, we’re proud to back a large, diverse portfolio of businesses, providing a mix of growth capital and value creation support.

We offer founders and management teams a unique blend of:

• Minority equity investment — to support your growth plans, without taking control
• Flexible funding options — and access to additional capital as you scale
• A patient approach — with the ability to invest throughout economic cycles
• Significant sector knowledge — and experience across a range of growth strategies
• Tailored scaleup support — including access to our expansive business networks

To learn more, hear some of the stories of growth from our portfolio, including:

• Dob Todorov, co-founder of AWS managed services provider HeleCloud
• Vikki Jackson-Smith, founder of family-run firm J&B Recycling
• Clare Roberts, founder of one of the UK’s largest nursery groups, Kids Planet

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.