How Growth Equity Works, and When It Makes Sense to Raise

You can raise $500 million for your company and still walk away with nothing. Melanie Nabar, a Principal at Volition Capital, explained why. Every dollar of investment usually comes in as preferred equity, and preferred holders get paid back before the founders see a cent. Raise $500 million, sell for $400 million, and your common shares can be worth zero. Raising money is a tool, and the goal is a business worth far more than the capital you take in.

In this episode, I talked with Melanie Nabar, a Principal at Volition Capital, a top-tier growth equity firm that's been around about 15 years. Melanie spent three years in investment banking before moving into growth equity, where she's now worked for about seven years. Growth equity sits between two things most people have heard of. On one end is seed capital, where investors bet on an idea and most companies fail. On the other end is a buyout, where someone buys the whole company. Growth equity is the middle path. You take money onto the balance sheet to grow faster, and you keep running the business.

That middle path matters because of what happens when you sell outright. In a buyout, the new owner often uses debt for leverage, cashes out the existing investors and founders, brings in their own people, and runs their own playbook. That's why the culture changes so fast after an acquisition. Growth equity is a minority investment, so the founders stay in control. Melanie's firm looks for companies where things are already working and adds fuel to the fire. Sometimes they'll let a founder sell a few shares, what she calls chips off the table, to take some pressure off without giving up the business.

She cleared up a paradox that confuses a lot of people. A founder can own a company worth a hundred million dollars and still stress about the mortgage. It happens because smart founders take small salaries, sometimes below six figures, since every dollar they don't pay themselves is a dollar building the product or hiring the sales rep that could double the company. It's the marshmallow test on steroids. Selling a few shares lets that founder think clearly instead of emotionally, because their family's security isn't riding on one bumpy, unpredictable outcome.

The part every business owner can use is how she separates founders who use capital well from those who burn it. It comes down to two habits: measurement and being methodical. If you're not measuring, you can't control where the money goes. Being methodical means you test before you scale. Start with five sales reps instead of fifty. See if that's the right profile and whether your go-to-market actually works, then double down on what does. On the sales and marketing side, every dollar in should produce more than a dollar out, and you only know that if you're tracking it.

We spent time on what a board is actually for, since most people only know the villain version from movies. A good board optimizes the outcome for everyone who holds equity, including employees with stock options, and it forces you to step back every quarter instead of drowning in the day-to-day. It also watches something founders tend to miss. The value of your company is your growth and profit, and it's also the multiple a buyer will pay. I compared it to fixing up a house before you sell. Some upgrades raise the price and some just cost you money. Melanie's example was a one-product company where adding a second product customers adopt can matter more than pushing growth from 40% to 50%, because it can move you from a 7x multiple to a 10x one.

So when should you raise? Melanie's firm starts looking at companies around four million in revenue, but the timing is personal. If you don't know what you'd do with the money, hold off on the dilution and wait until you're larger. For a founder who wants to run the business for profit and pass it to the kids, institutional capital isn't the right fit, because those funds come from pension and endowment money that eventually needs to be paid back. The time it makes sense is when you can see it clearly: your unit economics are strong, you're cash-constrained, and hiring three more sales reps now gets you to $15 million instead of $10 million by year end. At the end of the day, capital is worth taking when it helps you get somewhere you can already see, faster.