Emerging Growth Companies (EGCs) have long been a topic of interest in investor circles and have historically been strong financial performers. However, over time, the true meaning of the term EGC has changed, and possibly even become diluted. So, let’s start at the beginning - what exactly is an Emerging Growth Company and what are the financing mechanisms that support them?
Under the Jumpstart Our Business Startups Act (the JOBS Act) a company qualifies as an emerging growth company (EGC) if at the time of its initial public offering (IPO) total annual gross revenues were less than $1 billion during its most recently completed fiscal year. This technical definition only scratches the surface of what an Emerging Growth Company really is. And, most believe that any Company with a $1 billion in revenue is not ‘Emerging’, even if it still is ‘Growth’...
We define Emerging Growth as companies valued between $50 million and $350 million. On average, they will have attracted $20 million of historical invested capital and will require $20 to $70 million of additional financing over 12 to 24 months in order to achieve an exit which will generate 4x to 6x MOIC over a 4 to 6 year period. These characteristics make Emerging Growth distinctly unique from any other investment category.
For example, Emerging Growth is sometimes compared to the Middle Market, particularly in target valuations. But, EGCs deviate from similarly sized Middle Market companies in a number of ways. The two biggest points of differentiation between Middle Market and Emerging Growth Companies as follows:
EGCs grow faster and (as a result) have a greater appetite for capital.
While Middle Market companies certainly require capital, the need is often varied. Middle Market companies are predominantly profitable, whereas their Emerging Growth counterparts may not be. Middle Market companies attract debt financing. Emerging Growth companies gravitate to equity. Middle Market companies have predictable, moderate growth, whereas an Emerging Growth Company should be growing 25-100% year-over-year.
Access to capital for Middle Market companies also serves a different purpose. While Middle Market companies may be pursuing new capital avenues to reducing costs, to restructure a balance sheet or to build more strength in reserves, EGCs just have to grow.
Emerging Growth generates superior returns to the Middle Market. But, EGC’s are more risky. While in the Emerging Growth category comprises 63% of total capital raised, a dollar first invested at a valuation between $50 million and $350 million will generate 73% of total investment returns.
In short, the deployment of capital into an EGC is generally more critical to the company’s overall success and provides both investors and founders with more ‘bang for your buck’ than capital deployed into similarly sized Middle Market Companies.
Scaling EGCs requires access to a global, more robust set of financing tools as compared to Middle Market companies.
EGCs often struggle to identify the correct resources (bankers, advisors etc.) because they can be perceived as being too ‘in between’.
Consider this - Your EGC is growing and you know you will need a number of capital solutions. You are thinking long term about IPO but have pressing needs today that need to be addressed. Naturally, you would want to contact an upmarket service provider - an investment banking group that can help you with the big goal - the IPO. Surely they can help you take the needed intermediary steps in between then and now…
Herein lies the rub. Most “bulge-bracket” investment banks (JPMorgan, Goldman Sachs etc.) will prioritize on the $500 million deal, as arithmetic on their cost structures dictates higher minimum fees. In short, they can't afford to serve the EGC market consistently, even if your company is on track to grow into an ideal client long term.
Parallel this to the Middle Market bankers (Jeffries, William Blair etc.) who are generally focused on $350 million-plus transactions and quickly you realize that EGCs are distinctly underserved in areas that are vital to their success.
Addressing the needs of EGCs on an accomplished and consistent basis requires global scale and expertise that is unique to EGCs. Access diverse capital sources, worldwide including: Angels, High Net Worth Individuals, Multi-Family Offices, Corporate Partners, Venture Capitalists, Sovereign Wealth, Foreign institutions, Structured Debt providers, pre-IPO investors, leveraged lending, asset managers and strategic buyers.
While the market may struggle to understand how to meet the unique needs of Emerging Growth Companies, we have spent our whole careers in this market. We have developed a global service model specific to companies that have historically been underserved in the marketplace.