Are You Ready for Growth Equity?

Since the Great Recession, it is taking longer to build companies to a stage where they can achieve a productive exit. Yes, there are exceptions to the rule where large strategic buyers pay outrageous multiples for technologies or teams that fit well into their strategic product road-maps. These high-profile, high-multiple exits are outliers. Entrepreneurs seeking to create value shouldn’t build their plans around such outcomes. Rather, this is a market in which entrepreneurs must perform the hard blocking and tackling of company building in order to create value.

Unfortunately, in a market where venture firms have generally downsized, private equity firms have gone up-market, and the IPO window is closed for earlier stage businesses, there is a financing gap for growth-stage businesses that can’t (or shouldn’t) yet exit but can’t yet raise debt. The gap is being filled by growth equity firms.

Markers That Say You’re Ready

How is an entrepreneur to know if they are ready for growth equity? Here are some tell-tale markers.

Targeted Use of Proceeds

Companies that are ready for growth equity typically have a highly targeted use of proceeds. A few examples of a specific use of proceeds include:

“We’ve already rolled our service out in 5 geographic markets and we’re looking to expand into an additional five. The capital will be used to fund sales and sales support resources required to establish a presence in these additional markets.”

We have built X (think data center, cloud node, tower, etc.) widgets and would like to build Y more. Each widget costs us $Z to build. In our experience, once each widget is mature it produces $AA of annual revenue. The payback on a widget is 12 months.

General statements like “sales and marketing”, “new product development” and “general corporate purposes” implies earlier stage risk that growth equity investors may not be comfortable financing.
Repeatable and Scaleable Customer Acquisition Process
Companies that are ready for growth equity have a repeatable and scalable customer acquisition process that they wish to accelerate. This is worth parsing apart a bit.
- Repeatable: When I flip a light-switch, it turns on. If I do it again (after turning it off), I get the exact same result. In the context of customer acquisition, repeat-ability means that when I add a unit of input into my customer acquisition effort, I generally know what level of output the unit will achieve. The unit can be anything – dollars invested in SEM, new sales representatives, etc. Input > Process > Output.
- Scalable: An infinitely scalable processes yield the same level of output no matter the level of input. In the context of customer acquisition, growth investors want to know that customer acquisition productivity won’t degrade with additional investment.
- Process: In a growth stage business, new customer acquisition errs more toward science, rather than art. Growth stage businesses view customer acquisition as an investment decision. They track customer acquisition results with metrics, evaluate the productivity of those efforts and constantly refine the process to yield better results.
Growth capital can also fund development of new customer acquisition channels, product enhancements and product line extensions, the hardening of operational and support systems and management team development. However, in a growth stage business these efforts are the result of the desire to scale new customer acquisition, rather than a driving emphasis.
You Don’t Need the Capital
Companies that are ready for growth capital often don’t need it. The choice to take growth capital to fund incremental new customer acquisition is often a discretionary one. Entrepreneurs in this envious position have a return optimization decision to make. Their options include:
- Continue to grow at the current rate, redeploying cash generated by the business along the way; or
- Grow at a faster rate by accessing growth equity/
Entrepreneurs who choose to take growth equity are saying:

I’m confident enough in the business’ ability to create value that I’m willing to accept the dilution, and possible control implications that comes with taking growth equity.

An entrepreneurs desire to take growth capital when they don’t “need to” sends a great signal to growth stage investors. Other factors may influence an entrepreneurs decision to take growth capital, such as the level of competition in the segment, the desire to “land-grab”. However, for growth stage businesses, the choice to raise growth equity is often discretionary.

Growth Equity On the Rise

Growth equity has played a key role in the expansion of a great number of successful companies. Without a marked change in the exit environment, the debt markets or the public equity markets, growth equity will continue to support companies that are post venture, but not yet ready for a leverage buyout.

To learn more about Workhorse Capital investment focus and the criteria by which we evaluate investment opportunities, please refer to our Investment Focus page.

Are You Ready for Growth Equity?

Markers That Say You’re Ready

Targeted Use of Proceeds

Repeatable and Scaleable Customer Acquisition Process

You Don’t Need the Capital

Growth Equity On the Rise

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Workhorse Capital Blog