Funding is a core part of building a business — regardless of your target market or industry. You need money to build, grow, and scale. This funding can come in different forms and at different stages, and an important type is growth capital.
Growth capital is a form of funding that helps founders take their businesses to the next level. It provides the necessary financial resources to expand operations, enter new markets, develop new products, and hire talented individuals.
Whether you’re a startup or a small business, growth capital can be instrumental in achieving sustainable growth and reaching your business goals. In this article, we will explore how growth capital works, the types of growth capital available, and why it may be the right choice for your business.
How does growth capital work?
Growth capital is typically provided by investors who believe in your business’s potential and are willing to support its expansion. Unlike traditional bank loans, growth capital is often in the form of equity or quasi-equity investments. This means that investors provide funds in exchange for a share of the company’s ownership or future revenue.
When you secure growth capital, the investors become your business partners and share the risks and rewards of your growth journey. They provide not just financial resources, but also strategic guidance, industry connections, and expertise to help your business flourish.
Furthermore, securing growth capital can be a lengthy process that involves thorough due diligence by potential investors. After all, these parties aren’t providing loans — not in the traditional sense — so they have strong vested interests in your operations.
They will scrutinise your business model, financial projections, market positioning, and management team to assess the viability and growth potential of your company.
This rigorous evaluation is crucial for investors to make informed decisions and mitigate risks associated with investing in growing businesses.
Moreover, the terms of growth capital investments can vary widely depending on the investor’s preferences and the company’s needs. Some investors may opt for convertible loans, which can later be converted into equity, while others may prefer preferred equity with specific rights and preferences in the event of a liquidation or sale of the company.
What are the types of growth capital?
There are several types of growth capital available for African founders.
The following are the types of growth capital:
- Convertible debt. Convertible debt is a loan that can be converted into equity at a later stage. It provides a way for businesses to raise capital without immediately determining the company’s valuation. This type of growth capital appeals to investors who believe in the business but are unsure of its long-term prospects.
- Equity financing. Equity financing involves selling a percentage of your company’s ownership in exchange for funds. This type of growth capital allows investors to share in the future success of your business.
- Mezzanine financing. Mezzanine financing is a hybrid between debt and equity. It provides a loan that can be converted into equity if certain conditions are met. Mezzanine financing is often used when businesses need substantial capital but don’t want to dilute their ownership significantly.
The type of growth capital that is right for your business depends on various factors, including your growth plans, financial situation, and risk tolerance. It’s essential to evaluate each option carefully and choose the one that aligns with your business objectives.
Furthermore, when considering growth capital options, it is crucial for African founders to also take into account the current economic climate and market trends. Understanding the macroeconomic factors at play can help in making informed decisions about the type of financing that best suits the business’s needs.
Another important aspect to consider when seeking growth capital is the potential impact on the company’s governance structure. Equity financing, for example, may involve giving up a certain level of control to external investors, which could influence decision-making processes within the business.
How does growth capital differ from other types of funding?
Growth capital differs from other types of funding — such as seed funding or venture capital — in terms of the stage of the business and the purpose of the funds.
Seed funding is typically raised during the early stages of a business and is used to validate the concept, develop a minimum viable product, and attract initial customers. Venture capital, on the other hand, is often provided to high-potential startups to achieve rapid growth and a high return on investment.
Growth capital, however, is geared towards established businesses that have already achieved some level of success. It helps these businesses scale their operations, expand into new markets, and solidify their position in the industry.
When it comes to securing growth capital, businesses often turn to private equity firms, institutional investors, or even high-net-worth individuals. These investors are looking for companies with a proven track record of revenue generation and profitability, as they seek to support businesses that have the potential for further expansion and increased market share.
Why might a business need growth capital for expansion?
Small businesses need growth capital for many reasons. These reasons affect how much exactly they need and what kind of growth capital they’re willing to receive.
Here are some reasons a business might need growth capital for expansion:
- Market expansion. Growth capital can provide the necessary funds to enter new markets and reach a wider customer base.
- Product development. Developing new products or enhancing existing ones often requires significant investment. Growth capital can fuel research and development efforts.
- Talent acquisition. Hiring skilled employees is crucial for growth. With growth capital, businesses can attract top talent and build a high-performing team.
- Marketing and sales. Expanding the marketing and sales efforts can help businesses increase their customer base and drive revenue growth. Growth capital can fund marketing campaigns, sales initiatives, and customer acquisition strategies.
In essence, by using growth capital strategically, businesses can overcome the financial barriers that hinder expansion and unlock new growth opportunities.
What are the typical uses of growth capital in a startup?
Growth capital is valuable funding.
Startups can use growth capital to:
- Scale operations. Growth capital provides the resources needed to scale operations, increase production capacity, and meet growing customer demands.
- Expand geographically. Startups can use growth capital to expand into new geographical markets, tapping into new customer segments and revenue streams.
- Invest in technology. Leveraging growth capital, startups can invest in technological advancements that streamline processes, improve efficiency, and enhance the customer experience.
- Build strategic partnerships. Growth capital can help startups form strategic partnerships with other businesses, enabling access to new markets, resources, and expertise.
These are just a few examples of how startups can utilize growth capital to accelerate their growth and gain a competitive edge in the market.
How to know if growth capital is right for your business
Deciding whether growth capital is right for your business requires careful consideration and evaluation. Not every business — startup or not — always requires growth capital.
Here are some signs that growth capital may be a suitable option:
- Strong market demand. If your products or services have strong market demand and there is potential for rapid growth, growth capital can fuel expansion.
- A proven business model. Growth capital is often sought by businesses with a proven business model and a track record of generating revenue and achieving profitability.
- Scalability. If your business model is scalable and can support exponential growth, growth capital can help you scale more quickly.
- Strategic growth opportunities. If there are strategic growth opportunities that require significant capital investment, growth capital can provide the necessary funds to seize those opportunities.
An honest assessment of your business’s growth potential and financial needs can help you determine if growth capital is the right path for expansion.
Tips for securing growth capital for your tech business
Securing growth capital for your tech business requires careful planning and execution. However, there are some steps you can take to increase your chances of success.
Here’s how you can secure growth capital for your tech business:
- Create a compelling business plan. Clearly articulate your business’s growth potential, market opportunity, and competitive advantage in a comprehensive business plan.
- Build a strong network. Networking is crucial in the world of growth capital. Attend industry events, join relevant communities, and build relationships with potential investors.
- Prepare financial projections. Develop detailed financial projections that demonstrate the potential return on investment for growth capital providers.
- Find the right investors. Research and identify investors who have a track record of investing in tech businesses and align with your vision and goals.
- Present a convincing pitch. When pitching to investors, clearly communicate your growth strategy, scalability, and how growth capital will be utilized to achieve your business goals.
- Negotiate a fair deal. Seek expert advice to negotiate investment terms that are fair and aligned with your business objectives.
Remember: while securing growth capital for your tech business may require time, effort, and persistence — the potential rewards are worth it.
How can Ingressive Capital help you secure growth capital?
Ingressive Capital is a leading $50 million venture capital fund that supports tech and tech-enabled African startups in securing growth capital. We specialize in investing in technology-enabled businesses with high growth potential.
With a deep understanding of the African market and a vast network of investors, we can help you connect with the right investors who are interested in supporting your business’s growth journey. By partnering with Ingressive Capital, you can tap into our expertise, enjoy our resources, and be a part of a strong network designed to help you make the most of growth capital and take your business to new heights.
Ready to grow? Apply to our fund!
Summary
Growth capital plays a significant role in the growth and success of African startups. It provides the financial resources needed to expand operations, enter new markets, and achieve sustainable growth.
By understanding how growth capital works, exploring the different types available, and following the strategies mentioned in this article, African founders can navigate the growth capital landscape and secure the funding they need to scale their businesses.
