Equity
Equity financing means an investor puts money into a start-up in exchange for a portion of the company’s shares. This means the investor becomes a part owner of the business. Equity investment varies in amount, depending on the entrepreneur’s needs. It includes everything from relatively small (less than RWF 47m or $50k injections of capital from family members or angel investors, to large deals financed by private equity firms that can amount to millions of dollars. Prior to making an investment, equity investors go through a detailed screening process, commonly referred to as due diligence. At this stage, they look at the potential of a start-up to grow into a highly profitable business.
Most equity investors understand that the majority of start-ups fail; therefore, they look for growth potential rather than steady cash flows. Equity investors like to back tech start-ups because of their ability to scale with relatively low capital requirements compared to traditional brick and mortar businesses. In order to receive equity investment, entrepreneurs will typically need to have an extensive business plan, with strong financial models showing growth projections, competitor analysis, proposed approach to marketing, and more. Equity is the riskiest type of financing for investors, as the funders stand to lose their entire investment should a company fail.
-
No interest payments to pay back
-
Investors have incentive to be as helpful as possible: mentorship, advice, connections
-
Sometimes misaligned time horizons: start-ups building for the long term, while investors want to exit quickly
-
Control mechanisms can mean entrepreneurs are less in charge of their business