Learn the distinction between private equity and growth capital when determining next-step investments for your company.
The difference between private equity and growth capital is determined by differences in business strategy – cash flow primacy versus growth first approach, the long-term potential to achieve sustainable growth, and the nature of the relationship between management and employees and the investor. This distinction is paramount when examining which investment opportunities are the right fit at the right time for your company. No matter your goals, Scaling X, a new podcast series produced by the growth capital investment firm Sumeru, delves into the topics we care about most as founders and entrepreneurs. Recently, Host Mark Healy, vice president of content at Ceros, and Sumeru Managing Partner Kyle Ryland discussed the meaning of capital for the growth stage of a company. Kyle identified clear distinctions between private equity and growth capital, which sets Sumeru apart from the investment pack. Let’s lift back the curtain of investing and reveal industry secrets to grow your business successfully.
What Is Private Equity?
Private equity is a model where individual investors or firms fund capital into a company. It remains “private” because the investment is performed outside the stock market and cannot be publicly traded. These participants include a variety of models – private equity, hedge funds, private credit and more – depending on the business need.
According to Kyle, the private equity firm can be viewed as a more traditional leveraged buyout approach: “What we saw were traditional private equity firms that were making investments with more of a cash flow focused mindset, optimizing the balance sheet, cost structure and utilizing financial engineering that can be important in certain types of businesses.”
For the founder, private equity becomes a viable source of immediate capital. By providing capital, it can provide financial and emotional relief. The support gives the company quick access to substantial capital for shareholder liquidity and to a lesser degree the company. Ryland suggests that some trusted private equity firms perform well, but they play a more financially focused role often suited for mature companies with moderate growth prospects. Most private equity investors do not bring a set of tools to help founder entrepreneurs grow and scale their businesses, unlike a growth capital opportunity.
What Is Growth Capital?
Growth capital provides funding to growing companies as well as to their shareholders. It is a type of private equity investing; however, this form of capital is used during a transformative period for the company, usually to support scaling, develop new product offerings, enter new markets or finance acquisitions. It is a growth-first strategy, emphasizing investment in the key areas that drive sustained growth including product, go-to-market, acquisitions and other initiatives that support total available market (TAM) expansion and growth. These opportunities typically require investment capital to support growth as well as provide some liquidity for shareholders.
Private equity investments may supply the capital for shareholders with limited support for growth initiatives, whereas growth capital offers the best of both worlds: “We don’t define what we do actually as private equity. We’re a growth capital firm,” said Ryland. “We’re not a passive minority investor that is going to come to four board meetings a year and cheer from bleacher seats. We want to be engaged. We want to help. We’re going to provide the capital and the tools to support your growth strategy and also offer some liquidity.”
Sumeru: Leader in Technology-Focused Growth Capital
With over 15 years of experience, Sumeru identifies as a “growth-first investor.” They invest in and acquire companies with an average 30%-50% sustained organic growth rate, and as a result, growth capital and a comprehensive set of operational scaling best practices is fundamental to support management’s goals of long-term success through growth initiatives.
Another key differentiator between private equity and growth capital investments is the level of engagement in the relationship. From a capital perspective, both models provide funds and own a stake in the companies. Outside of funding and financial advice, growth capital typically offers a higher level of engagement between investor and company. Growth capital investments are more active partners, according to Ryland. They chose to diversify their portfolio using a flexible investment model. Sumeru participates as either more than a 50% owner or a substantial minority stakeholder and in all cases is fully engaged. “It’s not the passive growth equity playbook that we’re pursuing,” said Ryland. “And it’s certainly not the large-scale control leveraged buyout model with lots of financial engineering that you would see in the private equity world.”
As a growth capital investment firm, Sumeru identified a gap within private equity. Their value proposition is to approach portfolio companies with an entrepreneurial and growth mindset. Ryland indicates they forged a highly-skilled team and implemented a unique strategy. “[We] bring a set of best practices that our team has developed over more than a decade to really help these entrepreneurs grow and scale because capital is a commodity in today’s environment.” Their team provides ongoing support and development, allowing the founder entrepreneurs and companies to flourish.
Similarly, growth capital investors are interested in the longevity and culture of the companies, not just focusing on hypergrowth. This immense value speaks to Sumeru’s tagline, “Operating at the intersection of people and technology.” Their business is intrinsically about people. Capital is a necessary but not sufficient ingredient to be a valued-added investor. You must have a real strategy to engage and offer value that matches the entrepreneur’s needs and ambitions. “This is exactly what we do”.
Do you want to learn more insider tips from industry experts? Listen to the Scaling X podcast: “What Capital can Mean to a Growth-Stage Company With Kyle Ryland.” Ryland explores private equity vs. growth capital, the influence of strong company culture and what Sumeru searches for in a founder. You can also discover more about Ryland’s story from co-founding Silver Lake Sumeru to co-pioneering Sumeru Equity Partners.