Why the Rise of Growth Equity Is Good for Business

According to many investors, bankers, and entrepreneurs I talk with, it seems as though there are two financing trends that have taken root over the past decade. First, more and more entrepreneurs are finding ways to bootstrap or self-fund their startups. Second, more and more entrepreneurs are seeking liquidity through a secondary sale of stock.

The first is rather self-explanatory. The startup cost for many digital businesses is far lower than it used to be. Software products can be easily launched from a bedroom (or the infamous garage) by using open source technology, a cloud infrastructure, and a dedicated entrepreneur willing to risk big to win big. During the recession of 2008, this reality, combined with the relative lack of capital, caused an influx of self-funded startups. Their relative success led to a new trend.

The second trend seems counterintuitive. If equity-conscious entrepreneurs are on the rise, why is it that more and more are looking to take “chips off the table”? Are entrepreneurs risking more up front and looking to realize their gains earlier in the lifecycle of their companies? Have they put more eggs into their startup basket and now need to diversify?

Regardless, the reality exists, and more and more growth equity funds, pure secondary funds, and even new platforms like SecondMarket are providing liquidity to founders.

Both of these trends are making growth equity funds more and more important. The once deprived funding stage is now seeing unprecedented growth and innovation. (Just this month, OfferBoard was just launched and announced at TechCrunch Disrupt).

Too many businesses are too mature for the high-risk, high-reward dollars of Venture Capitalists. Entrepreneurs and angel investors who have taken the risks themselves are simply unwilling to accept the VC’s onerous terms or small check size. They are likewise uninterested in the traditional buyout or majority investment that comes with private equity and their big checks.

But growth equity capital is providing acceleration to successful startups in two ways.

First, it is strengthening the balance sheet of businesses that have a proven business model and require new investment to succeed. Fresh capital, injected into a healthily frugal business, can provide entrepreneurs the ability to be more strategic, and more timely, in their decision making.

Second, it is allowing entrepreneurs to de-risk and free their minds to make the right decisions for the growth of their business instead of hedging their bets so as not to lose everything. While no investor wants an entrepreneur to lose their edge, paying off the mortgage and diversifying a little bit can allow the entrepreneur to transition into a professional manager.

There is a growing need for growth equity and it’s good for business.

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