As Exit Runways Grow, So Does Growth Equity

As anyone in our industry can attest, explaining venture capital to the uninitiated can be a challenge. Delve deeply into intricacies such as investment stage, and even the eyes of seasoned financial pros may soften.

Yet, every part of the venture story merits telling. That’s because the investors at each stage bring unique yet equally essential skill sets to bear in helping their portfolio companies grow.

Some stages, however, have been more readily defined than others. Take growth equity, a burgeoning subset of the venture community. As the investment time horizon for venture-backed companies has grown in the last decade, so too has the need for continued financing and guidance of these emerging growth companies in the longer run-up to their exits. Growth equity focuses on this final part of the venture investment life cycle, representing a critically important private alternative for the capital needs of emerging growth companies.

Growth equity should not be confused with private equity or leveraged buyouts. Growth equity firms focus on founder-owned companies with positive cash flow and rapidly growing revenues. Investors typically purchase minority positions in their portfolio companies, as opposed to controlling interest. Growth equity backed companies generally use the funding to continue developing technology, expanding market share or global reach, and hiring new employees, rather than recapitalizations or right sizing. Additional financing rounds are not usually expected until the final exit. Finally, growth equity investments are unlevered or only lightly levered at purchase, and returns are primarily driven by growth.

Like all of venture, growth equity firms seek out companies with the potential to change the way we live and work. The industry investment mix includes tech companies typical for pure venture investors, with perhaps more openness to traditional products and services companies. Growth equity firms also tend to be more evenly distributed geographically than their venture brethren, funding companies outside venture hubs and around the globe as well.

Recognizing growth equity’s unique and growing role in the venture process, the National Venture Capital Association in January launched the NVCA Growth Equity Group to better meet the needs of its members. The group aims to bring growth equity investors more closely together in meeting the challenges relating to public policy, advocacy and education that later-stage companies share. The goal is to harness the value that is generated when like-minded investors come together and share information, tools and best practices.

The new group’s key priorities will include public policy initiatives regarding taxes and regulations. For example, many growth equity firms must register as investment advisors, despite the exemption that the NVCA helped earn for most venture firms.

The Growth Equity Group will likely explore best practices for registered advisors within the industry, per the law. There is also an opportunity to educate members of the U.S. Congress as to the role that growth equity plays in the venture life cycle.

At the industry level, the emphasis will be on education, as the group will engage in benchmarking and the collection of other growth equity related data. Finally, the Growth Equity Group will facilitate networking among growth equity firms and the larger NVCA membership, as well as help retain and recruit new NVCA member firms. All of these objectives align with NVCA’s larger mission of supporting the entire venture capital community and telling its story.

That’s why I am excited to serve as the group’s first Chair, and work with distinguished colleagues, such as David Lincoln (Element Partners), Adam Grosser (Silver Lake Kraftwerk), Brian Rich (Catalyst Investors) and John Drew (Technology Crossover Ventures) in pursuing the inaugural agenda.

More than anything, that agenda addresses helping emerging growth companies realize their potential and get to market. These companies serve as the true growth engines for jobs, revenue and U.S. global economic leadership. As they grow, so does the venture capital industry’s opportunity to support them.

This column previously appeared in the March 2013 issue of VCJ. Bruce Evans is a managing director at Summit Partners and a member of the NVCA Board of Directors.

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