Steps to Growth Capital Self-Study GuideOverview

What Is Growth Capital?

There is a vast pool of growth capital in Canada, but to find it you've got to know what you're looking for. The name tells you what investors have in mind. "Growth" capital suggests the upside — the potential for dramatic growth. The growth capital investor wants to tap into that growth by investing in the equity of your business — to earn a return based on the company's future earnings. There is a down side, of course, and that is the risk the investor faces if the company doesn't grow.

How Is Growth Capital Different?

Providers of risk capital are very different from conventional lenders such as banks, mortgage lenders or insurance companies because they:

• assume much more risk;
  
• invest even when the investment isn't backed by regular brick and mortar security or collateral; and
  
• risk losing their entire investment — if your business fails, they lose their money.

In exchange, risk capital providers expect to:

• exchange their investment for part ownership in your business;
  
• earn a return based on the growth potential of your business; and
  
• receive high rates of return — much, much higher than conventional lenders.

Growth capital investors are simply not in the same business that banks are in. Conventional lenders typically earn their returns in the form of interest charges and principal repayments on loans or lines of credit. In contrast, growth capital investors don't extend credit, they invest through:

• private equity (i.e. common shares);
  
• preferred shares; and
  
• subordinated debt.

What Growth Capital Investors Will Do

Investors in growth capital do things differently than banks and traditional lenders. And that's why you've got to approach them differently. Risk capital investors will make considerable efforts to analyse and truly understand the businesses they consider investing in. They will also be very selective, choosing only businesses they feel have exceptional growth potential.

The next section of this overview will help you figure out who are the most likely candidates for risk capital.

If you'd like to jump right in and learn more about types of risk financing and risk finance sources, see Step 2, Know Your Financing Options.

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