Growth capital is a solution for mid-sized businesses seeking to scale-up. It allows businesses to hire more staff, invest in new machinery or equipment, pursue an overseas expansion strategy, enlarge market share through acquisition, develop new products or services, and much more. Depending on the scale of their investment, the capital provider may take a seat on the board and provide advice and contacts as well as keeping an eye on the progress of their investment.
The downside for founders is that they give up a measure of control, as with any equity investment. This is particularly an issue for multi-generational family firms who may be wary of the way in which an outside investor will influence strategy. For this reason, these businesses may prefer to grow more slowly using retained profits.
How do growth capital models differ?
The question of minority versus majority investment is the key difference for entrepreneurs. At BGF we focus on minority investment, where funding is supplied in exchange for a minority stake in the business. A minority investor delivers funding in exchange for a stake of less than half of the business and is by nature a non-controlling partner. That typically means the existing founders or management team keep control of key decisions.
In contrast, a majority investor is usually the controlling shareholder. This means they are ultimately able to overrule the company’s founders or management team if there is a disagreement about what is the best course for the business. Sometimes shares with special voting rights are created to mitigate this, although this is rare.
At BGF, we find that our minority investment approach is attractive because it allows founders to stay in control of their growth journey.
What is patient capital?
Another aspect of growth capital is its long-term nature. The investment philosophy practised by BGF can be described as “patient capital”.
Patient capital has been defined by HM Treasury as “long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”.
The thinking behind patient capital is to provide funding for a period that may stretch over many years. The idea is that the timeframe of investment should be determined based on the growth trajectory of the business, and not, for example, by an arbitrary schedule for exit set by an investor. Investment periods can vary, and some could be as short as 18 months. But in all cases, the appropriate length of investment should be determined with investors and businesses in partnership.
Patient capital is especially important for industries where research and development takes a long time, or in sectors where it takes many years to build up the right set of clients.
What is the difference between venture capital and growth capital?
To summarise, growth capital is an investment approach focused on sustainable growth backed by the right expertise, support and financial resources. It is not about chasing quick returns at all costs, but rather about setting the right foundations to allow businesses to achieve good growth today, tomorrow and for years to come.
About the author
Cate is a Member of BGF’s Executive Committee and runs BGF’s Talent Network and Research & Intelligence teams. She joined BGF in 2012 to set up the Talent Network. This network has grown to be one of the most extensive networks of Board Directors in the UK, with a dedicated team continuously developing it, and matchmaking across the investment cycle.
From originating investment opportunities, to tapping into the network to understand market dynamics; placing over 350 Non-Executive Chairs and Directors in portfolio company boards to date; and, supporting CEOs with the development of their leadership teams.
Cate is also a Non-Executive Director of The ScaleUp Institute, and takes the lead role in BGF for championing more investment into diverse Founders and CEOs. Before BGF Cate was with 3i Group plc, and had an earlier career in Executive Search and Leadership Assessment