Seed funding commonly is a type of investment in which an investor invests capital in exchange for an equity stake in an early-stage company. Seed funding from institutional investors is difficult to access, because investors generally want to assess the profitability of an SME before investing in it. Companies that do not have such a track record but are in need of financial support depend on seed funding to pay for preliminary operations such as market research and product development. Usually seed funding is provided by friends and family, based on trust rather than on solid due diligence and business forecasting.

In case of an equity investment, an investor invests capital in your business in exchange for an equity stake. This investment model is appropriate for entrepreneurial investors that aim to stay involved in the business for the long run. Institutional investors, like investment funds, generally have an exit strategy within a number of years and therefore do not favour this type of financial involvement. The advantage of an equity investment for an entrepreneur is that it is easy to understand, risks are evenly shared and your investor’s interest is in line with your own. A disadvantage is that you have to share profits and dividends and that you no longer have the total say in the company. For young companies, valuation of shares can be complicated and often causes the investor to favour other types of investment.

Loans are generally provided by banks. In Rwanda, interest rates are comparatively high, meaning that accessing a loan seriously impacts your cash-flow. Loans are an attractive instrument in situations where you have a clear financing gap before revenues come in. For this period, a loan can cover your running costs until you repay the principal with a certain amount of debt. Banks however do require collateral, which can be a large risk for your company or for you privately. Besides that, the bank’s involvement is usually purely financial: there is no technical support and the bank’s interests are not necessarily in line with the company’s interests.

A lot of institutional investors do quasi-equity deals. Quasi-equity can be done in various forms, but generally involves a mixed model of finance in the form of equity in combination with debt. If negotiated correctly, quasi-equity can provide an entrepreneur with the positive characteristics of both equity and debt. Young companies often lack the collateral to access conventional debt financing from banks and lack the track record to convince investors to take a pure equity stake. In those situations, quasi-equity can be a solution. Collateral requirements generally are not as strict as those of banks, and valuation by investors is less of a problem. Additionally, institutional investors can provide you with the technical assistance that you need and unlike a loan, your costs depend on the financial performance of your company.

Besides friends and family, increasing numbers of international Angel investors start providing seed funding to start-up companies. These investors generally have a business background and get connected to promising entrepreneurs through NGOs or angel investor networks. Working with an angel investor has the advantage that it gives you the opportunity to build a relationship of common interest, where institutional investors can be rather formal. Convincing an angel investor to support your business might be easier than convincing an institution with complicated procedures and strict investment committees. Make sure that if you accept an angel’s investment, you agree on the terms in a contract. This prevents future disagreements and helps you think through all the pro’s and con’s. Angels do not necessarily have to be very experienced in investing, and usually they invest as a side activity. This means that their involvement differs from person to person. Additionally, Angels can help you get started, but can obstruct you from accessing future finance because they might not agree on the valuation of the shares after your company has grown, or refuse to decrease their portion of shares. Follow-up investments of angels are rare, so make sure you assess his or her strategy thoroughly before you go into business with an Angel.