When we talk about investment in private companies, we usually differentiate between two large universes: Venture Capital, which finances companies in the earliest stages, and traditional Private Equity or buyout, which is the acquisition of a company, usually with a majority stake, to increase its valuation and sell it later at a higher price. In this case, it invests in consolidated companies with a positive ebitda (financial indicator that measures the earnings of a business without deducting interest, taxes, depreciation or amortization). However, between the two there is a strategy with its own identity: Growth.
Growth is the strategy that invests in companies that have already overcome the most uncertain phase. This means that they have already proven that their product or service is in demand, that they generate revenue on a recurring basis, and that they have a validated business model. At this point, the main challenge for funds investing in these companies is to accelerate their growth.
For this reason, the capital provided by Growth funds is usually used to access new markets, develop new products, expand teams, make strategic acquisitions or drive international expansion. It is not a question of rescuing companies in difficulty, but of accompanying businesses with high potential that need resources to take the next big step.
This type of investment is usually made with a more limited use of debt than in traditional buyout operations. In addition, Growth funds often take minority stakes, so the founders and management teams continue to have a significant role in running the company. In terms of risk, Growth usually has a lower risk than Venture Capital, since companies in the “Growth phase” are more consolidated in several ways and, therefore, financially more solid. The positive point is that apart from offering more moderate risk, they offer significant growth potential, which provides an attractive balance between risk and return.
As in Venture Capital and Private Equity, most Growth funds do not only provide capital to invested companies, but also put their expertise in strategy, corporate governance, talent acquisition, internationalization or financing to the service of the companies. With all this, they provide the company with high growth potential, competitiveness and, ultimately, the ability to become reference companies in their respective sectors.
As companies mature and evolve positively in all respects (especially in terms of financial consolidation), these companies begin to be candidates to be invested by traditional Private Equity funds. At this stage, funds seek to generate value through operational improvement, professionalization of processes, organic growth or acquisitions. Subsequently, the investment can materialize through the sale to another fund, to an industrial company or, in certain cases, through the IPO.
