Subject: As Exit Runways Grow, So Does Growth Equity
From: "Neil Callahan \(Rosemont Seneca\)" <[email-masked]>
To: "'John DeLoche'" <[email-masked]>, <[email-masked]>, <[email-masked]>, "'Hunter Biden'" <[email-masked]>, "'Rob Walker'" <[email-masked]>
Date: Wed, 6 Mar 2013 13:21:07 -0500

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by Bruce Evans

As Exit Runways Grow, So Does Growth Equity

Posted on: March 05, 2013

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.

 

Neil Callahan

Rosemont Seneca Partners

401 Greenwich Street, Suite 300

New York, New York 10013

917-945-9516 (m)

866-749-8879 (f)

 <http://www.rosemontsenecatech.com/> www.rosemontsenecatech.com

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