2.5.8. Seed Funding
Seed funding can be described as grant funding into early-stage, high-risk and potentially high-reward projects to prove their viability, so that they can be further commercialized or scaled by private investors (Unlocking Capital for Development). As shown in the figure below, seed funding is indicative of where a business is in its lifecycle; as the first stage, “seed” is perceived to be the riskiest type of funding for investors. USAID has used basic seed and repayable grants (See: AIDE’s ‘Soft Loan’ Model) to reduce investors’ risk.
- Ability to find borrowers in target sector/region
- Appropriate capital to meet borrower needs
- Burden of banking/finance regulations and supervision
- Transaction costs associated with originating and managing loans to target sector/region
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
Job creation is a key objective of the USAID Kosovo Mission, but many Kosovo–based businesses lacked the ability to obtain the financing needed to grow and create new jobs.
The Kosovo EMPOWER Private Sector Project (2014-2019) addressed the job creation challenge by forming a “Strategic Activities Fund” to invest in interventions that would stimulate new employment. EMPOWER’s grant funds function as a kind of “free equity,” providing the capital often needed at the bottom of a substantially larger financing package to “buy down” risk for senior lenders.
A typical case is a mid-sized furniture producer in Ferizaj, Kosovo, which has concluded a long-term contract with a German importer for children’s beds that will add over $1 million per year to its export sales, and create 40 new jobs. The total cost of the expansion, mostly for production equipment, is about $400,000. A local bank has committed to provide a long-term loan of $325,000, conditioned on the company providing the additional amount in paid-in capital. EMPOWER will provide $75,000 in the form of a grant, making this financing package feasible. The project team anticipates that the $2 million fund will help leverage at least an additional $20 million in private capital financing.