NEW INVESTMENT: Grove announced a $10 million investment from Volition Capital (“Volition”), a leading growth equity firm that notably was a large investor in Chewy.  Read More

NEW INVESTMENT: Volition Capital Invests $25M in hackajob  Read More

VOLITION NEWS: Volition Capital Named Top 25 Growth Equity Firm  Read More

ANALYSIS: Rule of 40 Index: Year in Review  Read More

VOLITION UPDATE: Volition Capital Announces Closing of Volition Capital Fund V, L.P. with $675M in Capital Commitments  Read More

NEW INVESTMENT: Zenarate AI Coach Transforming How Agents Learn and Perform through AI Simulation Training  Read More

WHY WE INVESTED IN ZENARATE: Why Volition Invested in Zenarate  Read More

7 MIN READ

What is Growth Equity?

Key Takeaways:

  • Growth equity is a type of investing where people—often from a firm—buy a portion of a fast-growing, privately-owned company that has a proven track record of success.
  • Growth equity firms are typically made of investors who are connected in various industries and have a lot to offer a successful company to continue its success.
  • Investors play a role in facilitating deals by sourcing and evaluating investment opportunities, structuring investments, providing strategic and operational support, creating value, and ultimately planning and executing exits to generate returns.
  • The exit process is facilitated by various options such as taking the company public through an initial public offering (IPO), repurchasing shares from investors, or selling the company to another private equity firm. 

What is growth equity?

In the world of finance, investors and investments have distinct differences. The tactics and strategies of the investor are slightly different in every case. So, what is growth equity in the grand scheme of things? 

Growth equity is a type of investing where fund managers and investors—often from a firm—buy a portion of a fast-growing, privately-owned company. Growth equity investing consists of buying a substantial minority stake (less than 50%) in a privately-held company that is growing quickly and has a proven business model. The company must have a good business plan and be doing well. Most of the time, the money they invest is used to help the company grow even more. 

Growth equity is often bucketed in the same category as venture capital or private equity, which does involve investing in up-and-coming companies. However, private equity investments typically have a different strategy and involve a company that is either struggling or requires more hands-on help or restructuring to successfully grow. 

In the overall landscape, growth equity-worthy companies are high-performing, capital efficient, and have an extremely high return on investment for the duration of the holding period. As McKinsey puts it, the attitude of investors in this arena is to chart a course for optimal growth, versus the growth-at-all-costs approach. The challenge is finding these needle-in-a-haystack companies and gaining a competitive advantage over other interested investors. 

What is a growth equity firm?

Growth equity firms are organizations of people who do exactly what is mentioned above–make grueling efforts to find and identify the rare company that fits the bill. The firms are typically made of individuals who are connected in various industries and have a lot to offer a successful company to continue its success. 

Normally provisions are in place that give the company founders or owners control over the operation, while the growth equity role plays a supportive role, like a partner, offering a wealth of knowledge and expertise to drive further growth. But the engagement is designed to be short-lived—a handful of years at most. For investors at growth equity firms to make money, it’s all about the exit

Growth equity managers assist in the exit process by facilitating various options such as taking the company public through an initial public offering (IPO), repurchasing shares from investors, or selling the company to another private equity firm. 

Growth equity investment criteria

Every firm is different, but most have a set of core values and investment criteria that steers their strategy. Boston-based firm Volition Capital has investment criteria that fall in line with industry standards. Criteria include: 

  • Founder ownership (20%) to show that they’re invested in the company’s success and willing to work for it
  • Solid revenue base of $5-$50+ million that’s resultant of a proven business model, successful product, and loyal customer base
  • Revenue growth trajectory of 25-50% that growth funds will help support and propel 
  • Proven record of success since day one, demonstrating the company has always had a propensity to grow and succeed rapidly
  • Substantial market opportunity and likely positioned to be a leader  

Growth equity firms play an integral role in facilitating deals by sourcing and evaluating investment opportunities, structuring investments, providing strategic and operational support, creating value, and ultimately planning and executing exits to generate returns. With a stronger focus on the founders being steadfast in their leadership and the organization’s overall growth plans, Volition Capital seeks to be partners with founders, not just investors, and leveraged for their expertise.

What is a growth stage company?

Not only do growth stage companies need to fit the criteria to become an interesting target for investors, a growth stage company demonstrates the potential for significant and sustainable revenue growth. This is done by achieving product-market fit, establishing a customer base, and having a clear strategy for continued growth and profitability. 

Another key attribute that mustn’t be overlooked is the competitive advantage. Usually that’s in the form of proprietary technology, strong intellectual property, unique market positioning, or a differentiated product or service offering that provides a barrier to entry for competitors. This is the secret sauce and sets the stage for all future growth plans. All these boxes, when checked, imply operational excellence, however the landscape is shifting a bit to reveal evolving investor preferences around how companies operate—from people to process and technology. 

In addition to criteria, these are additional preferences that might illustrate how companies navigate industry disruptions, align with sustainability and impact goals, promote diversity and inclusion, and embrace digital transformation. For example, growth equity firms may seek out portfolio companies that demonstrate a commitment to sustainable practices, ethical business conduct, and positive societal impact. These factors influence investment decision-making and contribute to the evolving nature of the growth equity ecosystem.

Growth equity examples

Growth equity use cases illustrate the relationship between founder/company and investor.

Chewy

Chewy created a no-brainer value proposition highlighting the fact that they had the best selection of products and consistently offered the lowest prices. In addition, they established their own fulfillment center, enabling them to match or exceed Amazon’s shipping speed. Their customer service surpassed that of any other pet food retailer, with pet lovers available to assist 24/7/365. The overall Chewy experience stood out as superior for pet owners due to the company’s strong commitment to its customers.

The significance of Chewy’s approach was evident in the substantial volume of repeat business they received. The company’s excellence in customer service led to customer acquisition and, more importantly, customer loyalty for life. The deep loyalty shared between Chewy and its customers formed the bedrock of the entire business, creating a mutually beneficial relationship. 

The growth equity firm provided strategic counsel around in-sourcing fulfillment, private label expansion, M&A discussion, brand marketing—including introducing key advisors in these areas. They also assisted in substantial expansion of the senior management team to support the founders including CFO, SVP of Business Development. 

As a result, the path to exit was a private equity move. In 2017, PetSmart acquired Chewy.com for $3.35 billion in the largest e-commerce acquisition at its time. As of September 2019, Chewy is worth ~$11 billion, and PetSmart is shaping up to be one of the most successful private-equity turnarounds in history, according to the Wall Street Journal.

GlobalTranz 

GlobalTranz is a transportation management company specializing in LTL, FTL, Supply Chain Logistics and Warehousing. Leveraging its extensive independent agent network, GlobalTranz has emerged as a fast-growing market leader with a customer base of over 1 million product users and 25,000 shippers.

At the time of the growth equity investment, GlobalTranz was the only company in the market to try to solve these pain points by combining a leading Internet-based technology platform with a predominantly agent-based sales model. While the technology platform drives retention, the agent model drives extensive reach into the small business market which is not easily accessible for carriers or traditional freight brokers. 

The partnership with Volition Capital helped support the financial infrastructure with robust budgeting and reporting processes. The partnership also facilitated the establishment of a world-class Board of Directors, recruiting three independent directors. Additionally, the growth equity firm assisted in identifying and recruiting top-tier executives, including a CEO, CFO, President/COO, and VP-level hires. Moreover, the firm played a crucial role in designing a framework for a significant inside sales expansion, resulting in the hiring of over 50 employees dedicated to inside sales, enhancing sales capabilities and expanding customer reach. 

In 2019, Transport Topics named GlobalTranz #8 on their list of top 10 largest freight brokerage firms in the U.S. and the resulting path to exit was an acquisition by The Jordan Company.

Growth equity versus other investment types

In conclusion, growth equity plays a unique and vital role in the financial ecosystem. It serves as a bridge between venture capital and traditional private equity, focusing on privately-held companies that have already demonstrated rapid growth and traction with a viable business model. 

Unlike venture capital, growth equity investments target companies in later stages, allowing them to scale and expand further. Growth equity firms bring not only financial capital, but also strategic guidance, operational expertise, and industry networks to help these companies reach their full potential. 

By providing the necessary resources and support, growth equity fuels innovation, job creation, and economic growth. Its ability to identify and nurture promising companies during critical growth stages makes growth equity an essential component of the financial ecosystem, facilitating the success of businesses and driving value creation.

Want to stay up to date on everything Volition? Make sure to subscribe to our newsletter using the button below!

ALL ARTICLES
BACK TO TOP

Consent(Required)

Consent(Required)

Consent(Required)

Consent(Required)