What Is Growth Equity? A Growth Investor's Framework for Software, Valuations, and AI
Written By: Ryan Morrison
Based on a Navigating Wealth conversation with Emila Damjanovic and Evan Skorpen of Lead Edge Capital.
Recorded early June 2026. Market specifics reflect that moment; the frameworks are the durable part.
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Growth equity is the least-discussed of the major private-market strategies, which is odd given how much capital runs through it. It sits between venture capital and leveraged buyouts, and the companies it backs are the ones most investors would recognize: established software and internet businesses that are past the risk of failure but not yet mature. Emila Damjanovic and Evan Scorpin of Lead Edge Capital spend their days on opposite sides of that world, Damjanovic on the fund and investor-relations side, Scorpin running the public-software book, and together they offer an unusually complete picture of what growth equity is, how the current software repricing happened, and how they separate the AI winners from the businesses genuinely at risk.
Growth equity is a private-market investment strategy that sits between venture capital and buyout private equity. It backs established companies, typically with at least $10 million in revenue and proven product-market fit, that need capital to scale rather than to prove they work. Compared with venture capital, it accepts lower upside in exchange for a much lower chance of loss; compared with leveraged buyouts, it relies on company growth rather than debt to generate returns.
Key Takeaways
Growth equity occupies the middle of the private-market risk spectrum: lower loss rates than venture capital, and returns driven by growth rather than the leverage that buyout private equity depends on.
It typically enters around the Series C stage, when a company has proven product-market fit and roughly $10 million or more in revenue, and it underwrites 2x to 4x outcomes rather than the 10x-or-zero profile of venture.
Limited partners increasingly judge managers on DPI, the cash returned to investors, not just paper IRR. That shift rewards firms that are disciplined sellers, not only skilled buyers.
Public software valuations have repriced sharply, from roughly 6x revenue over a ten-year norm to around 3.5x to 4x, even as growth stayed durable and cash margins roughly tripled.
A useful lens for AI disruption: separate a software product's "engine" from its "user interface." Interface-only advantages are fragile in an AI era; deep, hard-to-replicate engines are far more durable.
Table of Contents
What Is Growth Equity?
Growth equity is a private-market strategy that provides capital to established, growing companies that have proven product-market fit but are not yet mature enough or large enough to exit. It generally enters when a company has at least $10 million in revenue, and it aims to fund the next stage of revenue growth on a path toward eventual liquidity.
Lead Edge focuses on later-stage growth investing in software, internet, and tech-enabled services, primarily across North America, the EU, and the UK, with selective exposure elsewhere. Damjanovic describes the entry point as the moment a company has a well-established product and clear market fit, usually around that $10 million revenue threshold. At that stage the central question for the business is no longer whether the product works, but how fast and how efficiently it can scale, and growth capital exists to fund that scaling.
If you had to map it onto the familiar financing rounds, growth equity sits roughly at the Series C stage, after the early A and B rounds and before the late pre-IPO rounds. Damjanovic is careful to note that Lead Edge does not define its investing by stage labels, because the rounds themselves have become blurry, especially for the largest AI companies, where the same firms keep backing a company through round after round. The cleaner way to think about it is by the company's maturity: a real product, real revenue, real customers, and a need for capital to grow rather than to survive.
The strategy is not limited to software in principle, but software is where most of it happens, because software businesses grow quickly, do not consume enormous amounts of cash, and are not especially cyclical. Those same traits, predictable recurring revenue and capital efficiency, are what make growth equity a distinct discipline rather than simply a larger version of venture or a smaller version of buyout.
Watch the Full Conversation
This article draws on a Navigating Wealth conversation with Emila Damjanovic and Evan Scorpin of Lead Edge Capital, where we discuss what growth equity is, how public software valuations repriced, how they distinguish durable software businesses from those at risk in an AI era, and what their LP network is seeing inside real companies. Watch the full episode for the complete discussion, including the live audience questions.
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Emila Damjanovic leads investor relations at Lead Edge Capital and has been with the firm since its inception. Evan Scorpin is a partner on the investments team and built out the firm's public-markets arm beginning in 2018. Lead Edge is a growth-equity firm founded by Mitchell Green, known for a distinctive limited-partner base of senior operators and executives that the firm draws on for diligence and company-building. Long Angle is an investor in Lead Edge through its GP Stakes program. Nothing in this article is investment advice.
Growth Equity vs. Venture Capital vs. Private Equity
Growth equity is best understood by contrast. Venture capital underwrites 10x outcomes with a real chance of total loss; buyout private equity buys mature companies and uses debt to boost returns; growth equity aims for 2x to 4x outcomes with a much lower chance of loss and little or no leverage.
Scorpin lays out the spectrum cleanly. In venture capital, you underwrite the possibility of a 10x outcome in any single company, but because the companies are so young, there is a genuine chance you get nothing back at all. The upside is higher and the frequency of zeros is higher. At the other end, the public markets over a long horizon deliver something like an 8% return with a very low chance of any given large company going to zero. Buyout private equity resembles the public markets in that the companies are mature and rarely fail, but because mature companies grow slowly, buyout firms typically use leverage, borrowed money, to amplify the returns.
Growth equity sits in the middle, and Scorpin frames it as a deliberate balancing act. Growth investors underwrite more modest outcomes, in the range of two to four times their money, and only occasionally hit a true home run. In exchange, they aim for a much lower chance of losing money than venture, and they try to reach that return without loading companies with debt the way buyout firms do. The appeal, in his framing, is a return profile that is attractive without depending on either a small number of miraculous winners or on financial engineering.
He offers a timely illustration. Asked where a company like Anthropic sits, Scorpin argues it looks more like growth equity today than venture: there is little debt on the balance sheet, and the odds of it going to zero are far lower than a typical early-stage startup, even though its rounds are not labeled as growth rounds. The label matters less than the risk profile underneath it. For investors weighing how this fits alongside other private strategies, our overview of how to invest in private credit covers an adjacent part of the same allocation question, and the parallels the guests draw to credit markets later in this piece are worth keeping in mind.
Why LPs Now Care More About DPI Than IRR
Limited partners have shifted the metric they judge fund managers by. A decade ago the focus was IRR, the internal rate of return on paper. After years of limited liquidity in private markets, the focus has moved to DPI, distributions to paid-in capital, which measures the cash a fund has returned to its investors.
Damjanovic has lived this shift across multiple fundraising cycles. Ten years ago, she says, LPs concentrated on where a manager's IRR ranked against its peers. Over the past five or six years, as distributions across private markets slowed and capital stayed locked up longer than investors expected, the conversation moved to DPI. The concept is simple: if you paid $100 into a fund and the manager has returned $120 to you, your DPI is 1.2x. It measures realized cash in hand, not the estimated value of positions still held.
The practical consequence is that being a great investor and being a great fund manager are two different skills, and the DPI era rewards the second one more heavily than the first. Identifying excellent companies to back is only half the job. Returning capital to investors on a reasonable timeline is the other half, and it depends on the discipline to sell, not just the judgment to buy. Managers who happened to build that selling discipline before the liquidity crunch have looked far better through it.
DPI is harder to define crisply for a general audience than IRR, but it is the more honest number, because it cannot be inflated by optimistic marks on illiquid positions. For high-net-worth investors evaluating any private fund, asking how a manager has performed on DPI across full cycles, not just what their IRR looks like on paper, is one of the more useful questions available, and it is a theme our conversation on selling to private equity picks up from the company side.
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The Discipline of Selling
The hardest part of growth investing is often not choosing what to buy but deciding when to sell. Lead Edge uses a dedicated disposition committee, separate from the individual investing partners, specifically to counteract the natural tendency to hold winners too long.
Scorpin is candid about the psychology. When an individual partner finds a rocket ship, a company that keeps growing and working, the instinct is to hold it forever, because finding the next one is hard and uncertain. There is also a social dynamic inside a fund: the partner with a winner gets to showcase it at every quarterly review, quarter after quarter, which makes selling feel like giving up a trophy. Left to individual incentives, partners tend to ride winners well past the point where the math justifies it.
To counter this, Lead Edge separates the buy decision from the sell decision. A disposition committee that sits apart from the deal partners looks at valuation and asks whether the price the market is currently offering already pays the firm for years of future growth. The rule of thumb one partner uses: how many years of growth until the current price is paid down to roughly six times revenue? If a buyer is willing to pay today for ten years of future growth, Scorpin says, Lead Edge is a seller of almost anything, because no one can credibly know what a business will look like in ten years.
The underlying insight is that value creation in their ecosystem is rarely linear. It tends to happen in concentrated bursts rather than smooth 20%-a-year compounding. Scorpin points to Anthropic: two years ago few had heard of it, and now it is discussed as a trillion-dollar company. The return over that specific window will not repeat, because much of the value was captured in a short, explosive period. Recognizing when a burst has already happened, and selling into the enthusiasm it creates, is exactly what the disposition committee exists to enforce.
The Great Software Repricing
Public software valuations have compressed dramatically. The median software business now trades around 3.5x to 4x revenue, against a ten-year norm closer to 6x (excluding the 2020 to 2021 bubble), even though these companies kept growing and became far more profitable.
Scorpin walks through the numbers, with the caveat that they are approximate. Across the roughly 120 public software-as-a-service businesses, growth has been remarkably durable: the universe is growing at around 14% on average, roughly double the 7% of the average S&P 500 company, and a record number of these businesses are accelerating. This is not a story of growth collapsing. What changed is the multiple investors are willing to pay for that growth, which fell from a long-run average near 6x revenue to roughly 3.5x to 4x today. For context on how these multiples are built and argued over, an overview of SaaS valuation multiples is a useful primer, though the guests are skeptical of any single formula.
What Scorpin thinks the market is missing is what happened to profitability underneath the multiple. Three years ago the average public software business had cash margins around 5%. Today that figure is closer to 19%. Margins nearly quadrupled in three years while growth held steady, and yet the valuation multiple fell. On that combination, he argues, the businesses are cheaper today on almost any profitability-adjusted basis than the headline revenue multiple suggests.
To explain how the sector got here, Scorpin offers a "pendulum" framing that is the most useful idea in the conversation. High-quality software is so predictable that in calm markets investors start valuing it on ever more distant future years: first next year's numbers, then the year after, until a business is being valued on where its revenue might be in 2035. When a shock arrives that disrupts the ability to forecast, AI now, COVID a few years ago, that confidence evaporates, and the pendulum swings violently back toward the present. Prices fall not because the businesses deteriorated, but because the market can no longer justify pricing them a decade out. The quality of the sector is precisely what sets up the overcorrection.
Is SaaS Dead? The Engine vs. Interface Framework
Software is not dead, but AI will not affect every software business equally. Lead Edge's shorthand is to separate each product into two parts: the "engine" that does real work, and the "user interface" through which people interact with it. Interface-based advantages are fragile in an AI era; deep, hard-to-replicate engines remain durable.
Scorpin resists the black-and-white framing the market wants. He notes that "system of record" has become a magic phrase used more in the last three months than ever before, and that the moment you declare system-of-record businesses safe, every software company suddenly claims to be one. Rather than a binary label, he prefers a spectrum. Think of any software business as, on one side, an engine: a piece of code that performs a genuinely difficult, valuable service. On the other side, a user interface: the way people interact with that engine.
If a company's main advantage was a superior interface, that is a precarious position in an AI era, because the way people interact with software is about to change comprehensively. If instead the differentiation lives in the engine, complex, esoteric, built up over years, it is far more defensible. He points to a company handling the intricate, state-by-state logic of tax rules as an example of an engine that would be genuinely hard to replicate, regardless of how the interface evolves. Two further lenses reinforce this: businesses selling to large enterprises enjoy deep switching costs and trust that took decades to build, and mission-critical systems are protected by the simple fact that failure is catastrophic, a payroll system that misses a run exposes the customer to lawsuits, so the small potential savings from switching rarely justify the risk.
The guests are honest about the limits of the framework. Damjanovic adds that even within AI itself, it is not yet clear who the durable winners will be, and that entering a market is different from sustaining a position in it. The point of the engine-versus-interface lens is not to produce a definitive verdict on each company, but to ask the right first question: is this business defended by something hard to rebuild, or by a layer that AI is about to commoditize? Our quarterly software and AI investment landscape guide tracks how this repricing is playing out across the sector over time.
Where do investors pressure-test private-market managers and valuation calls without a sales pitch attached?
Long Angle members evaluate growth-equity, private-credit, and buyout managers together, comparing diligence and DPI track records in a vendor-free setting. No one in the room is raising a fund from you.
Why AI-Native Startups Are Not Attacking Software Yet
The most common fear about software, that AI-native startups will undercut incumbents on price, is not what the guests are seeing. The leading AI-native companies are going after labor budgets, which are vastly larger than software budgets, rather than trying to displace existing software vendors.
Scorpin points out that the top AI-native businesses are not trying to build a cheaper Workday. They are targeting repetitive labor: customer-service startups going after call centers, legal-AI companies going after paralegal work. That is where the enormous prize sits, because labor is a far bigger line item than software. Undercutting an established software vendor by 50% on price, by contrast, still requires building an enterprise sales force, providing customer support, and earning trust, and the reward for all that effort is a slice of a comparatively small budget. Software is only around 2% to 3% of the typical large company's operating expenses, so the savings from replacing it are modest and rarely worth the risk of a botched migration.
There is also a counterintuitive dynamic where AI makes existing software stickier rather than weaker. Damjanovic gives the example of connecting an AI assistant to Salesforce or Outlook: because these systems of record are notoriously hard to search, an AI layer that can query them in plain language increases how much people use the underlying system, not how little. The firm's leadership, she says, now relies on Salesforce more than ever, precisely because an AI connector made its deep data easier to reach. The system of record becomes more entrenched, not less.
Tad, drawing on his own software background, frames the likely outcome well: companies have always had a long backlog of high-value customizations they lacked the bandwidth to build, and cheaper software development means more of that backlog gets done, deepening the customer's investment in the core system rather than replacing it. Both guests land as optimists on the broader labor question too, noting that computerization automated much of traditional accounting yet the number of accountants grew, because valuable human capacity tends to get redirected rather than eliminated. They acknowledge the transition will be genuinely painful for some repetitive roles, while arguing the aggregate result has historically been expansion rather than contraction.
Frequently Asked Questions
What is growth equity?
Growth equity is a private-market investment strategy that funds established, growing companies, typically with at least $10 million in revenue and proven product-market fit, that need capital to scale toward an eventual exit. It sits between venture capital and buyout private equity, generally entering around the Series C stage. It focuses heavily on software, internet, and tech-enabled services, and aims to fund revenue growth rather than to prove that a business model works.
What is the difference between growth equity and venture capital?
Venture capital invests in young companies, underwriting the possibility of a 10x return while accepting a real chance the company fails and returns nothing. Growth equity invests later, in companies that have already proven product-market fit, underwriting more modest outcomes of roughly 2x to 4x but with a much lower chance of loss. In short, venture accepts higher risk for higher potential upside, while growth equity trades some upside for greater consistency.
What is the difference between growth equity and private equity?
Traditional buyout private equity acquires mature companies and typically uses significant debt, or leverage, to amplify returns, since mature companies grow slowly on their own. Growth equity invests in younger, faster-growing companies and generates returns primarily from that growth rather than from leverage, usually taking minority stakes and using little or no debt. Both are private-market strategies, but their return drivers differ: growth versus financial engineering.
What is DPI in private equity?
DPI stands for distributions to paid-in capital. It measures how much cash a fund has returned to its investors relative to how much they contributed. If an investor paid in $100 and received $120 back, the DPI is 1.2x. Unlike IRR, which can reflect the estimated value of positions a fund still holds, DPI captures only realized cash, which is why investors have focused on it more heavily after a prolonged period of limited liquidity in private markets.
Why have SaaS valuations fallen?
Public software valuation multiples compressed from a ten-year norm near 6x revenue to roughly 3.5x to 4x, even though these companies kept growing and became more profitable. One explanation is a "pendulum" effect: because high-quality software is highly predictable, investors in calm markets begin valuing it on distant future years. When a shock like AI disrupts the ability to forecast, that confidence collapses and multiples swing sharply back toward present-day numbers, often overshooting to the downside.
Is SaaS dead because of AI?
No, but AI will affect software businesses unevenly. A useful framework separates a product's "engine," the code that performs genuinely difficult work, from its "user interface," how people interact with it. Businesses whose main advantage was an interface are vulnerable, because AI is changing how people interact with software. Businesses with deep, hard-to-replicate engines, high enterprise switching costs, or mission-critical roles are far more durable. Notably, AI-native startups are mostly targeting large labor budgets rather than trying to undercut existing software vendors.
Final Thoughts
Growth equity earns its place in a portfolio precisely because it lives in the middle: fewer zeros than venture, less leverage than buyout, and returns driven by the growth of real businesses. The Lead Edge conversation is a reminder that the discipline is as much about selling and returning capital as it is about picking winners, and that the metric that separates good managers from lucky ones, DPI, is the one investors should ask about first.
The software and AI material underneath it is where the frameworks earn their keep. The repricing was not a collapse in the businesses; it was a collapse in how far into the future the market was willing to look. And the question of which software survives AI is not answered by slogans like "system of record," but by asking whether a business is defended by an engine that is hard to rebuild or an interface that AI is about to commoditize. Those distinctions outlast any single quarter's prices, which is what makes them worth carrying.
Deciding how growth equity fits alongside your other private-market positions is easier with peers who have already done the diligence.
Long Angle members compare notes on growth-equity, buyout, and credit managers, and translate those views into real allocation decisions, in a setting with no products being sold. See how members are putting these ideas to work.
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