What’s the Difference Between Seed Venture and Patient Capital
When growing or expanding your business, it’s possible that you’ll have to secure private business funding. Once you start your research, it won’t take long to realize that there are many different types of capital available throughout the business lifecycle. Although three of the most common types – seed, venture, and growth capital – are used to fund ambitious businesses looking to grow, they feature some notable differences. Below, we unravel them.
Just like it sounds, seed capital describes funding sourced at the beginning of a startup’s journey. Private investors provide this type of funding, such as family members, friends, banks, or angel investors. Also known as seed money or seed financing, seed capital is crucial in developing an idea for a business or a new product.
Often, seed capital investors take on significant risks without proof of revenue from the business owner. Entrepreneurs using seed capital receive smaller investments – typically from tens of thousands to hundreds of thousands of dollars.
Seed capital is often needed and used to support foundational business needs – such as a business plan, initial operating expenses, and research/development costs. Acquiring seed capital is typically the first of four funding stages to become an established business. Its primary goal is to attract more financing, usually from venture capitalists or banks.
Once a business has launched and is beginning to gain traction, it often will require venture capital, which is a broad term to describe funding at the early or start up stage of a company’s lifecycle.
Angel investors and VC firms are two primary sources of venture capital. These private investors or funds offer their capital to finance a business and typically request equity in exchange.
Unlike seed capital, venture capital investments often provide entrepreneurs with larger raises (above $1 million). Most entrepreneurs seeking venture capital have begun generating revenue, and are working hard to prove out their business model.
To receive this type of capital, a startup business typically exchanges shares or an active role in the company. Obtaining venture capital is often the second phase of investment as a startup progresses beyond the early stages.
Growth capital (sometimes known as expansion equity and growth equity) is a form of private equity that, in most cases, is a minority investment in established firms seeking funding to expand or restructure operations, enter new markets, or finance a major acquisition.
A transformational event in a company’s lifecycle, such as an acquisition or expansion, might necessitate the use of growth capital, but it may also be used for working capital purposes or to continue growing and adding members of the team to sustain continued growth of the business.
These firms are more likely to be bigger (over ~50 employees) and more established than venture capital-funded businesses, capable of generating steady recurring revenue but unable to finance significant expansions, acquisitions, or other investments towards the business’s growth. Access to growth equity is often critical in helping these businesses continue to scale, pursue essential facility expansion, sales and marketing efforts, equipment purchases, and new product development.
Growth capital may also be partially used to restructure a company’s balance sheet, particularly to lower its leverage (or debt) ratio to enable the company to continue to scale.
Canadian Business Growth Fund (CBGF): Another Source of Business Funding
Canadian Business Growth Fund (CBGF) fits in the growth capital funding category, aimed at helping entrepreneurs grow their business – while leaving them in control. To learn more about this unique offering, contact us today.