When exploring funding options for businesses, two key terms frequently appear Growth Equity and Venture Capital. Both are designed for fast-growing companies with high success potential. However, there are important differences between the two that business owners need to understand to make the best choice for their company.
This article will examine the key differences between growth equity vs venture capital and explore how each can benefit different types of businesses. Ready to find the perfect funding fit? Let’s get started!
Stage of Business
One of the main differences between growth equity vs venture capital is the stage of business they target. Here’s the difference:
Growth Equity
Growth equity is for companies that are growing and have a solid base. These companies usually have proven business models and steady income. They might be expanding or entering new markets.
Venture Capital
Venture capital is meant for early-stage startups with high-growth potential. These companies are often just beginning and may not have much revenue yet. Venture capital firms invest in them to help them grow and reach their potential.
Investment Size
Another key difference between growth equity vs venture capital is the amount of business investment provided. Here’s the difference:
Growth Equity
Growth equity investments are usually bigger than venture capital. Companies seeking growth equity are established and successful. They need more money to grow further.
Venture Capital
Venture capital investments are usually smaller than growth equity investments. Early-stage startups need less money to begin and grow. As the company grows and succeeds, it might seek more funds from growth equity firms.
Risk Tolerance
Both growth equity and venture capital involve a level of risk, but the degree of risk tolerance differs between the two. Here’s how:
Growth Equity
Growth equity firms are less risky than venture capital firms. They invest in stable, successful companies. They also do more careful checks before investing.
Venture Capital
Venture capital firms have a higher risk tolerance compared to growth equity firms. This is because they often invest in early-stage startups that may not have a proven track record of success yet. They are willing to take on more risk in hopes of achieving high returns when the company becomes successful.
Control and Ownership
One of the most significant differences between growth equity and venture capital is the level of control and ownership that investors have in the company. Here’s how they differ:
Growth Equity
Growth equity investors typically take a minority stake in a company, meaning they do not have majority control. They also do not typically take an active role in the day-to-day operations of the company. Instead, they provide strategic guidance and support to help the company continue its growth trajectory.
Venture Capital
Venture Capital investors often take a more active role in the companies they invest in. They may have a majority ownership stake and can influence major decisions within the company. This level of control can be beneficial for early-stage startups, as the investors often have valuable expertise and connections to help the company succeed.
Network and Resources
Another key consideration when choosing between growth equity vs venture capital is the network and resources that come with each option. Here’s how they differ:
Growth Equity
Growth equity firms often have a vast network of industry connections, advisors, and resources that can benefit the company in various ways. This can include introductions to potential partners or clients, access to industry expertise and best practices, and support with recruiting top talent.
Venture Capital
Venture capital firms also offer access to a network of resources and connections, but they may be more focused on early-stage startups. This can include mentorship programs, networking events, and access to industry experts who can provide guidance and support as the company grows.
Legal and Tax Considerations
Lastly, it’s essential to consider the legal and tax implications of growth equity vs venture capital. Here’s what you need to know:
Growth Equity
Growth equity investments often involve a minority ownership stake, which means the existing owners maintain control over the company. This can have advantages when it comes to making major decisions and can also offer more flexibility for tax planning. However, it’s essential to consult with a financial advisor or tax specialist for specific guidance.
Venture Capital
Venture capital investments often involve giving up a significant amount of control and ownership in the company. This can have implications on decision-making and how profits are distributed among shareholders. Additionally, there may be specific tax implications for both the investors and the company itself, so it’s crucial to seek expert advice before making any decisions.
Exit Strategy
Both Growth Equity and Venture Capital investments are typically made with an exit strategy in mind. However, there are differences in how these strategies play out:
Growth Equity
Growth Equity investments often have a longer-term time horizon, with investors expecting a return on their investment within 3-7 years. This is because the companies they invest in are already established and have a steady growth trajectory.
Venture Capital
Venture Capital investments often have a shorter time horizon, with investors expecting a return within 5 years or less. This is because early-stage startups can experience rapid growth and may be acquired by larger companies or go public within a shorter time frame.
Growth Equity vs Venture Capital: Which is Right for Your Business?
So, which funding option is the right fit for your business? The answer depends on several factors.
Additionally, since Growth Equity and Venture Capital firms are often based in different locations, it may be a deciding factor in which option you choose for funding.
For example, incorporating in Texas vs Delaware may impact your ability to secure funding from certain firms. It’s essential to do thorough research and consider all factors before making a decision.
Make the Right Decision with this Guide
Growth equity vs venture capital both offer valuable options for businesses seeking funding to support their growth. Understanding the differences between the two can help business owners make an informed decision that aligns with their company’s goals and needs. Ultimately, it may be beneficial for companies to explore a combination of both options.
Is this article helpful? Keep reading our blog for more.