For a long time, EGCs or emerging growth companies have become a topic of interest in the social circles of investors. On a historic level, emerging growth companies have been the top performers in the stock market.
Starting from the Beginning
What classifies as an emerging growth company and what financing mechanism supports them? Based on the Jumpstart Our Business Startups Act, companies classify as an emerging growth company when its initial public offering (IPO) equals a total annual gross revenue of less than $1 billion in the first fiscal year. However, it’s important to understand that this only touches the tip of the iceberg.
Most people believe EGCs don’t rank as “emerging” if the revenue isn’t $1 billion. However, experts classify emerging growth companies as a company between $50 million to $350 million. Normally, they attract $20 million in historical investments and require $20 million to $70 million of extra capital. This financing takes place over 12 to 24 months.
Distinguished from the Other Investments
An EGC distinguishes itself from most other investments in the Middle Market. Particularly, it differs in the valuation, and EGCs normally deviate from companies of the same size in two separate ways.
First, EGCs grow much faster and have a bigger appetite for capital. While a Middle Market company usually sees stable profits, Emerging Growth doesn’t.
An emerging growth company should have an expected growth of anywhere from 25 percent to 100 percent each year.
Second, EGCs need access to global financing tools compared to its Middle Market counterpart. Many times these companies will fight to identify the right resources, and some people see them as too “in between.” A financial institution may struggle to prioritize financing because EGCs usually entail higher minimum fees.
To address the demands of an EGC on a consistent basis, it usually requires a unique expertise. The market may struggle to understand the needs of an EGC, but people can reach out to businesses that have spent their entire career dealing with this market. Historically, these companies were underserved, but business owners can look for a global service model from the right company that will be to their advantage.