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Bringing Growth Equity Back Home (and Across the US)



By Mia Hegazy

Last fall, I was honored to accept an invitation to speak with the Pittsburgh Venture Capital Association (“PVCA”). The president of the PVCA, Kelly Szejko, invited me to discuss Catalyst’s growth equity mandate with the group and the invite was personally rewarding given Pittsburgh is my beloved hometown. But it’s not just my love of the Steelers or Eat’n’Park Smiley Cookies (background for the uninitiated) driving my enthusiasm for finding investment opportunities in Pittsburgh.

I have been tracking the innovation activity in the Steel City for quite some time, updating the Catalyst team on recent venture deals, new tech giants opening offices and the community of investors I meet when I’m in town. Catalyst considers Pittsburgh to be one of the “lesser ventured regions” across the US that has caught our attention, and we have seen some of the most exciting companies spring up in areas outside of the traditional tech hotbeds.

So why is a Pittsburgh (or an Indianapolis, a Salt Lake City, a Denver, a Portland, etc.) the perfect place to search for growth equity opportunities? And if you’re an entrepreneur in one of these regions, why should you call us? Read on!

Defining Growth Equity

It may be helpful to start with how we think about growth equity at Catalyst. About five times per day, I give the Catalyst introduction (“we’re a growth equity firm based in New York”), and everyone has a different idea of what “growth equity” means. Maybe it’s late stage venture capital? Maybe it’s mid-market buyout?

VC Continuum

My colleague Brian Rich is the Chairman of the Growth Equity Group of the National Venture Capital Association (“NVCA”). He and I work closely with the committee to advance the asset class through education, policy and community engagement. Part of our education efforts included determining the NVCA’s definition of growth equity. As the chart above shows, the growth equity community views itself as an asset class within venture capital. The NVCA went through an exercise to define key features of growth equity investing. There are certain attributes specific to the company, use of proceeds, and investment profile, but at a high level we think of growth equity as the tail-end of the venture capital ecosystem that provides small businesses with the capital and IMPORTANTLY, the guidance they need to grow into successful world-class companies. Growth equity often fills a gap in the private funding continuum by addressing the needs of a business that is too mature for venture capital but not yet profitable enough for buyout mandates.

For reference, this is the NVCA definition of growth equity:

Company Profile

  • Proven business model (established product and/or technology and existing customers)
  • Revenue is growing rapidly
  • Often cash flow positive, profitable or approaching profitability
  • Often founder-owned and/or managed

Use of Proceeds

  • Capital is used for company needs or shareholder liquidity
  • Additional financing rounds are not usually expected until exit

Investment Profile

  • Investor is agnostic about control and purchases minority ownership positions more often than not
  • Industry investment mix is similar to that of earlier stage Venture Capital investors
  • Investments are often unlevered or use light leverage at purchase
  • Investment returns are primarily a function of growth, not leverage, with a lower expected loss ratio than Venture Capital portfolios

Value Creation in Growth Equity

One of the interesting aspects of investing at the growth stage is that it is late enough that your investment decision can be predicated on historical results but early enough that you can still have an impact on the growth trajectory / ultimate outcome.

Growth investors are very different from early stage investors who often do a lot of the operational heavy lifting. The early stage investors get involved with everything from PR to recruiting to design sprints and finding office space. They are assembling the car, we fill it with gas and maybe even touch up the paint a little.

There is also a flood of money being invested in late stage companies, with passive investors like hedge funds and mutual funds writing checks and then waiting for the company to go public. We operate somewhere in between early-stage and pre-IPO investors.

We are professional board members, and we work in partnership with entrepreneurs to ensure that they have the full array of strategic, tactical, and financial tools to excel in fast-moving, competitive industries. We call our collaborative process the Catalyst Way, which involves providing strategic guidance, establishing best of breed governance, and driving performance excellence. If you are a growth stage company seeking additional capital and guidance, this is when you email me (mia at catalyst dot com) and I’ll explain exactly what the Catalyst Way looks like in practice!

Expanding Value Creation to Pittsburgh (and Other Regions!)

 


Quick tangent: The Steelers have the best away game representation in the NFL because many native Pittsburghers left the city when steel jobs disappeared, right after the 1970s Steel Curtain dynasty, and their loyalty to the team lived on long after the diaspora!

When the steel jobs and employees left Pittsburgh, the city was able to transition into a post-industrial economy because of an urban planning movement known as the Pittsburgh Renaissance. Local organizations worked together with public and private leadership to improve the economy and quality of life. This reinvention led to present-day Pittsburgh, which boasts a diversified economy, a low cost of living, and a rich infrastructure for education and culture. The city is continually recognized by the Economist and others as one of the World’s Most Livable Cities, and tech behemoths such as Apple, Google, Uber, and Intel have joined the 1,600 technology firms choosing to operate out of Pittsburgh.

Other cities across the US are experiencing similar reinvention, and they are fostering the growth of exciting early and growth stage companies. At Catalyst Investors, we are intrigued by the businesses that are springing up across the country and driving job creation in regions that were never expected to be on the cutting edge of technology. The biggest barrier to these companies being the next Uber or Airbnb or Facebook is access to capital, and our team has a regional strategy to connect with the founders and management of these businesses and provide not only growth stage capital but also introductions to earlier stage investors and guidance. As investors, we are in the relationship business, and we want to get to know you, your business and your vision for growth well before (as one of my partners says), we “get married.”

So let’s get to know each other! We will be Tweeting about our upcoming regional trips and expect to see more on our blog on the topic. But if you’re a growth stage business and think we are due for a trip to your city, let us know!

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