What is Growth Funding & its types
May 29, 2023
Growth funding i.e. Series A onwards round of funding, is a form of financing used by companies to expand their footprints by investing in products, investing in R&D, entering new markets, hiring new talent, acquiring assets, and making strategic acquisitions. The growth funding is segregated among various series of funding ranges from Series A to Series D (can further be extended). The amount of funding startups raise at the growth stage ranges between ~₹25 cr to ₹100+ cr.
Series A is generally raised by firms that have already obtained traction in their respective markets but still need additional capital to reach further expansion goals. This Series A ranges between ~₹25cr to ₹50cr. The fund generally lasts for 12 to 18 months. If a company still needs funds after this period to dominate its market, it can go through Series B funding. By the point a startup gets Series B funding, it’s already successful and the success could be in terms of successful deployment of product, penetrating into difficult markets, etc apart from positive net profit. Series B funding is mostly used for scale — not development.
Post Series B, the company moves towards Series C, where the funding will be provided only to those companies which are profitable. These funds are often used to expand market reach or M&A activities. While it’s possible to undertake later rounds of funding, they’re typically used to help organizations push toward Mezzanine Financing, Pre-IPO, and IPO. Series C round of funding expands the horizon of investors and extends to hedge funds, private equity firms, etc. At this stage, usually, the firms have a huge customer base, stable revenue flow, good margins growth, well-established R&D facility, etc.
Some factors to consider when determining how much growth funding to raise:
Growth plans: Consider the company's growth plans and expansion strategies. The funding amount should align with the growth objectives and plans of the company.
Internal Due diligence: Review the company's financial projections and business plan to determine the funding needed to support those projections. Consider factors such as projected revenue, expenses, and cash flow requirements to arrive at a funding amount that provides an adequate runway for growth.
Valuation and equity dilution: Consider the company's valuation and equity dilution implications when raising growth funding. Higher funding amounts may result in higher equity dilution.
Types of Growth Funding
There are different types of growth funding available to businesses, including:
Venture Capital: Venture capitalists are investors who provide funding to high-growth businesses in exchange for equity. They typically invest in startups or early-stage companies that have the potential for high returns.
Private Equity: Private equity firms invest in established companies that are looking to expand or restructure their operations. They typically provide funding in exchange for a controlling stake in the company.
Angel Investment: Angel investors are individuals who invest their own money in early-stage companies in exchange for equity. They typically invest smaller amounts than venture capitalists or private equity firms.
Mezzanine Financing: Mezzanine financing is a hybrid of debt and equity financing that provides companies with capital to grow their operations. It's typically used by companies that have already raised some capital but need additional funding to achieve their growth goals.
Strategic Investments: This type of funding involves partnerships with other companies that provide capital in exchange for a stake in the company. Strategic investments are often made by companies that are looking to gain access to new technologies or markets.
Pros of Growth Funding
One of the benefits of growth funding is that it allows startups to scale quickly and reach their full potential.
Growth capital often comes from experienced investors who can provide strategic guidance, industry connections, and expertise to startups.
Growth funding can provide startups with a competitive advantage over their competitors by enabling them to invest in key areas of their business and build a strong foundation for long-term success.
Cons of Growth Funding
Growth funding often comes in exchange for equity, which can dilute the ownership of the founders.
With the dilution of equity, the involvement of multiple stakeholders could delay the execution of key decisions.
Key Insights of Growth Funding
Source: Bain & Company research report
Since Q4-2022, the growth-stage startups have experienced a slowdown in funding as they have to prove their profitability and have significantly higher capital requirements. The uncertain macroeconomic conditions, Russia Ukraine war, layoffs of multiple MNC’s, fear of upcoming recession has added to the gloominess of the funding environment across the globe.
Challenged by this, companies took to different cost-cutting measures to conserve capital and prolong the exhaustion of funds. The focus largely shifted from rapid growth to revenue generation and profitability.
According to the PWC report of FY22- Startup perspectives, funding winter mostly impacts the growth stage of startup funding. The funding in growth and late-stage deals continued to decline, with deals comprise around 79% of the total funding. As per Inc42, The growth stage funding has declined by ~11% in terms of deal volume and 4% in terms of deal value by $7.8bn in 2022 as compared to $7.8 in 2021.
Source: Inc42
The Indian startup ecosystem is expected to witness a significant increase in growth-stage deals in 2023, with investments reaching to $7.4 billion.
In 2022, growth-stage funding witnessed a remarkable surge of 273% compared to the $2 billion invested in 2020.
Industry experts predict that in 2023, startups with a valuation exceeding $500 million and a focus on profitability will attract more funding.
When it comes to industry sectors, technology startups continue to dominate the growth funding landscape, receiving the majority of venture capital investment. The top five sectors for venture capital investment in 2021 were SaaS, Healthcare, Fintech, E-commerce, and Transportation.
Conclusion
Growth funding is a crucial stage for startups as it is raised to help a company expand its operations, and invest in many different markets to explore expansion opportunities. It's important for startups to have a solid business plan, a clear growth strategy, and a strong team in place to successfully secure growth funding.