Government is looking to attract alternative financing for early stage ventures if the new draft law relating to investment promotion and facilitation is passed by the cabinet.
Under the bill which was tabled to the Parliament last week, the Government is looking to offer angel investment incentives for local individual investors investing in startups.
Angel investors typically offer capital to startups and small entrepreneurs in exchange of ownership equity. They are mostly family members, friends and other net-worth individuals.
“There is a clear gap currently in terms of the right financing options for early stage firms,” Louise Kanyonga, the Chief Strategy and Compliance Officer at Rwanda Development Board (RDB), told The New Times.
The push to provide incentives to angel investors is based on the fact that conventional sources of financing for startups such as commercial banks are not working currently.
This is because commercial banks have very uncompetitive interest rates, and demand complicated requirements for collateral when startups try to acquire financing from them.
Kanyonga highlighted that there was previously no mechanism to know the role of angel investors in Rwanda, and that the Government did not give them any special treatment.
“Yet, we have seen in other countries where innovation has taken off, usually this type of early stage startups are supported by family, friends, and networks,” she noted.
Under the draft, angel investors investing a maximum of $500,000 in a start-up will be eligible for exemption from capital gains tax upon the sale of shares, provided the shares were initially purchased as a primary equity issuance by the start-up.
The new draft law also proposes that angel investors will also be eligible for exemption from withholding tax applicable to dividends paid for five dividend issuances by the start-up.
According to Alex Ntale, a technology entrepreneur, angel investors are still very few in Rwanda primarily because it’s a new approach to fundraising both investment seekers and investors.
“Investors still need to be trained or equipped with the tools and skills to understand risk and opportunities in early stage investment,” Ntale, who’s also the head of Rwanda ICT Chamber, weighed in.
The Government’s push to provide angel investment incentives is part of the bigger plan to support innovation and diversification of local firms.
Emery Rubagenga, a local businessman said it might take a little while before the angel investment ecosystem takes-off again, but he thinks Rwanda’s decision to set up a financial centre would attract more financing options.
The Government is currently spearheading the efforts to turn the country into an international financial centre. Rwanda Finance Ltd was set up to take on that role.
“I strongly believe the newly established Rwanda Finance will play a significant role in bringing on board new innovative (financing) solutions,” he noted on Monday.
The bill also seeks to offer medium-sized investors with a 150 per cent tax deduction for qualifying expenses on market expansion and internationalization activities.
To support innovation, the Government is also proposing a tax deduction for research and development.
A new research and development funding window, the Rwanda Seed Innovation Program, which will provide grants through a competitive process to small businesses is also expected to be established.