Definitions and names for Growth Investing
I was wondering if there has been a “clean” way to name / describe the term growth equity?
I find some late-stage venture or growth venture type investors (Series B+ to D and beyond) will sometimes call themselves growth investors - think ICONIQ, Meritech, Sapphire, Greenoaks. But then there are more traditional growth equity players (TA, Summit…).
Directionally, it appears that the former are backing firms that have higher topline growth (maybe still growing revenues 50-100% yoy) and may not be EBITDA profitable yet but getting there, and are still more focused on growth (though ideally capital efficient growth). While the latter could be looking at companies with lower topline growth, but are probably already EBITDA positive / cash flow breakeven.
Is there any quick, clean way to describe the two categories of “growth investing”? I feel like the term growth equity isn’t cleanly defined, and I always have to describe the above to make the distinction between the two. I will sometimes say “growth stage” investing - which if I’m talking to fellow VCs then people will get it. But where it can get confusing or require more explanation is if I talk to PE folks or people looking at say an Insight Partners who may muddy the waters in the definitions.
It's not perfect since no one fits in one single bucket but here's how I thought about it.
Late Stage VC -- Focused on efficient, high growth companies Series B and later that have asymmetric upside but could still burn $ and fizzle out. Examples: BOND, Meritech, IVP, etc.
Growth Equity -- Focused on growing, EBITDA positive/breakeven businesses that can compound quickly and are lower risk but lower upside. Examples: GA, Summit, TA, etc.
I always thought about it as Venture Capital, Late-Stage Venture (Series B+, minority deals), Growth Buyout (like Summit), Buyout.
Historically, there were two very different styles of growth investing: focusing on profitable, high margin services-like businesses with lower upside but far less downside (Summit, TA), and venture-style growth which is essentially late stage VC (investing in hot startups that are growing fast like Stripe, Ramp, OpenAI, etc). The former is closer to middle market PE. You scour for family owned businesses in middle America that no one's heard of, unsexy, slow growth, but a straightforward double in terms of returns. The latter is like VC: trying to jam $$ into hot startups, always overpriced, some of which will do better because they're growing so fast, some of which will fail spectacularly.
How you invest, what you focus on, and how you're trained to think, are very different.
Any insight into the feasibility and path to late stage VC from sell-side research? Have IPO'd companies on the sell-side but obvi limited deal exp otherwise
Know @Determined has written on this quite a bit (any thoughts from this angle??) so wanted another POV
Not impossible but difficult. Slightly easier if you cover venture backed software/tech companies so you can at least talk through relevant trends, business models, etc. The difficulty stems from the fact that ER isn't seen as particularly prestigious, so growth VCs are much more keen to hire from traditional TMT banking groups or PE firms.
+1 to @vc_since13 said, it's definitely a difficult path and one that requires you to network a ton and be in the right place at the right time.
I only know a handful of people besides myself that moved from ER to late-stage VC and all of them made the transition nearly a decade ago before the strategy got super crowded and they were more experienced (7-10+ years of experience).
Yeah seems like any attempt would be herculean from my current seat. Not in the right geo (non SF) or the right role, not even the right coverage (non-TMT).
Would think Bill Gurley and Mary Meeker would have helped the ER cause a bit
Ah, yeah if you're not even in TMT it's going to be a stretch. Every single person I know was covering the sector they invested in. Bill and Mary were from a different era and very long-tail outliers that survived multiple cycles.
Bill went to Benchmark where they don't have juniors, just the temporary Principle role, so he never hired anyone with an ER background.
When Mary went to KP she brought an associate, but I don't think they made any hires from ER after that.
DST Global hired a few people from ER 7+ years ago but that's the last time I've heard of anyone joining a brand name firm with that background.
Bill Gurley and Mary Meeker were from a different era. Back then ER was considered quite prestigious in tech because 1) sell side research heavily influenced how tech stocks traded and markets were perceived, 2) star researchers could sway whether banks got a mandate from a company. As a result ER was as nearly as prestigious and high paying as banking was in the 90s. That all changed as regulation changed and it became much more of a back office function
To demonstrate the differences in risk, profitability, and stage, compare venture-style growth and PE-style growth.
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