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Growth Equity vs. Venture Capital: Understanding Key Differences

Key Takeaways:

  • Growth equity investors prioritize scaling existing business models with proven customer traction, while venture capital investors focus on disruptive models and high growth potential with limited customer traction.
  • Growth equity investors emphasize profitability and sustainable revenue growth, while venture capital investors prioritize market share acquisition and rapid growth, even if unit economics are negative.
  • Growth equity investments carry risks related to scalability and execution, while venture capital investments entail risks associated with unproven business models and market adoption.
  • Growth equity investments involve larger investment sizes, longer holding periods (3-7 years), and minority ownership stakes with preferred equity shares. Venture capital investments have smaller investment sizes, shorter holding periods (3-5 years), and similar deal structures to growth equity investments.
  • Understanding these key differences is crucial for investors and business owners to align their objectives and navigate the risks associated with each investment approach, leading to successful partnerships and value creation.

In the world of private company financing, two prominent avenues for investors are growth equity investing and venture capital investments. While these investment approaches share commonalities such as targeting private companies, involving minority ownership stakes, and utilizing preferred equity shares, they exhibit fundamental differences. 

This article aims to delve into the contrasts between growth equity and venture capital, exploring key aspects such as customer traction, positive unit economics, primary investment risks, investment size, holding periods, and deal structures. Additionally, we will examine these differences from the perspectives of both investors and business owners, while also considering the inherent risks faced by the latter.

Customer Traction: Scaling vs. Disruption

When it comes to growth equity, investors prioritize companies with proven customer traction, seeking to scale existing business models. They focus on enterprises that have already established themselves in the market. Meanwhile business owners opt to demonstrate strong customer traction that attracts growth equity investors, as it serves as evidence of a successful business model and market acceptance. These investors provide capital to facilitate expansion and further growth.

On the other hand, venture capital investors are willing to invest in early-stage companies with limited customer traction. They seek disruptive business models and high growth potential. Venture capital investments aim to fuel rapid market expansion. For business owners, venture capital investments offer an opportunity for early-stage companies to access funding and support for innovative ideas. While customer traction may be limited, these investments provide capital and expertise to propel growth and establish market presence.

Investment Size, Holding Periods, and Deal Structures

In a chat with Volition, industry expert and StepStone partner John Avirett shares that “when thinking about raising money for the first time, whether you’re a seed stage company or you’re a bootstrapped entrepreneur that’s gotten the business to some scale, you’re ultimately going to be giving up a chunk of ownership in venture and growth, largely a minority.” He even notes that “the average time to liquidity in venture growth companies is actually longer than the average marriage.” Keeping this in mind, let’s explore our two avenues.

Growth equity investments typically involve larger investment sizes compared to venture capital. These investments are geared towards more mature companies and have longer holding periods, typically ranging from three to seven years. The deal structures involve minority ownership stakes, with common utilization of preferred equity shares.

Meanwhile, venture capital investments involve smaller investment sizes to accommodate early-stage companies. These investments focus on funding growth and expansion, often with shorter holding periods ranging from three to five years. The deal structures mirror growth equity investments, featuring minority ownership stakes and preferred equity shares.

Positive Unit Economics: Profitability vs. Market Share

Growth equity investors prefer companies that demonstrate positive unit economics, placing a strong emphasis on profitability and sustainable revenue growth. They seek to invest in enterprises that have established a solid financial foundation. For business owners, showcasing positive unit economics is critical to attract growth equity investors. Demonstrating profitability and sustainable growth potential instills confidence in investors regarding the company’s financial viability and value creation.

On this same topic, venture capital investors are open to investing in companies with negative or uncertain unit economics as they prioritize market share acquisition over immediate profitability, focusing on rapid growth and capturing market opportunities. These venture capital investments are attractive to business owners seeking funding for early-stage ventures. These investments provide capital to achieve market expansion, even at the cost of near-term profitability. The emphasis is on establishing a dominant position in the market.

Primary Investment Risks: Scalability and Market Adoption

Growth equity investments carry risks associated with scalability and execution. Investors carefully assess the company’s ability to scale operations, manage growth effectively, and overcome market saturation and competition challenges. Business owners partnering with growth equity investors face risks related to executing expansion plans successfully. They must address market saturation and competition to ensure sustained growth and profitability.

It’s important to note here that venture capital investments entail high risks due to unproven business models and early-stage operations. Market adoption and timing risks are prevalent, as success often hinges on how well the company’s disruptive ideas resonate with the target market. Those business owners considering venture capital investments must be prepared for the challenges associated with unproven business models and the inherent risks of market adoption and timing and must be able to navigate uncertainties while establishing a foothold in the market, which can prove to be quite the challenge—though obviously not impossible. 

What’s Next? 

Understanding the disparities between growth equity investing and venture capital investments is crucial for both investors and business owners. While they share commonalities in targeting private companies, minority ownership stakes, and preferred equity shares, the divergences in customer traction, positive unit economics, primary investment risks, investment size, holding periods, and deal structures significantly influence investment strategies and business owners’ perspectives. Recognizing these distinctions allows investors and business owners to align their objectives and navigate the risks inherent in each approach, ultimately fostering successful partnerships and value creation. The next step is determining which avenue is right for your investment journey. If you land on growth equity, our team at Volition would love to chat with you.

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