Follow the Yellow Brick Road: Growth Equity and the Path to Repeatable, Scalable Growth

Posted on: March 30th, 2017

Growth equity, most often used to fill the gap on the capital journey is often likened to the ‘reliable yellow brick road’. With patient terms and expanded runway, it is a sure and safe path for companies pursuing repeatable and scalable growth.

Unlike venture capital or debt financing, used when cash flow is established, growth equity fills the funding gap needed by to fuel accelerated growth. Most candidates for growth equity are already experiencing organic growth rates of 50+% per annum.

These companies have the potential to grow at even faster rates over the next in four or five years.

Benefits of Working with a Growth Equity Investor

For such companies, growth equity provides the funds needed for efficient acceleration of their processes. Growth equity investment also contributes to scalable and repeatable growth in the following ways, through offering the following:

Elevation of internal systems and processes, so that ERP is de-bottlenecked and that operational capacity is optimized.
Elevation of human capital expertise, wherein missing key personnel, such as a CEO, CFO or technical head, can be identified and filled in. Additionally, fast scaling requires massive investment in human resource processes to bring on the right type of new employees.
Elevation of Financial expertise and implementation of structured management reporting and financial reporting. Fast scaling requires clear dash boards of KPI’s that allow management to read and react quickly. When the market demand is extreme, the organization must be prepared to execute reliably against that demand, in order to win customer loyalty.

Growth equity increases business valuation from multiple expansion

Growth equity investors increase business valuations by not only by growing revenue and improving margins but also by benefiting from valuation multiple expansion. Typically, this multiple expansion is caused a first mover advantage or a position as a trailblazer in a new field.

These advantages are more easily captured through a collaboration with a growth equity investor.

Growth equity provides an interesting array of exit options

Growth equity leads to fast growing companies that enables various exit options including strategic buyers, financial buyers or IPO. Fast growing companies are attractive targets for both strategic company acquirers and large private equity firms.

Such firms usually have created a new industry with a next generation product, that a larger corporate can leverage through greater distribution reach.

With fast growing companies in new industries, the size of the addressable market is large and the potential for valuation gains is enormous in the public market.

Opting for growth equity is the best option for the middle stage of a company’s life cycle when revenue is established and growing. Go for the ‘yellow brick road’ as it leads to the path of repeatable, scalable growth.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.