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THE IMPACT
OF VENTURE CAPITAL FINANCING ON SMALL AND MEDIUM ENTERPRISES
CHAPTER ONE
INTRODUCTION
1.1
Background
Data from
the International Finance Corp developing world the private economy is almost
entirely comprised of SMEs' and
that „they
are the portunityonlyfor realisticmillionsofpoorpeople employ throughout the
world'
4
9%
3
21%
1
55%
2
15%
Figure 1:
Fiscal Year 2004
Approvals in USD
Source: 2004
Annual Review Small Business Activities
International
Finance Corporation (IFC) $ 820 million
Multilateral
Investment Guarantee Agency (MIGA) $ 219 million
International
Bank for Reconstruction and Development (IBRD) $ 317 million
International
Development Association (IDA) $ 141 million
Small and
medium-sized enterprises (SMEs) are the backbone of all economies and are a key
source of economic growth, dynamism and flexibility in emerging and
1
developing
economies. In Nigeria, the total economic output of SMEs is about 50 per cent
of gross domestic product (GDP), and this sector employs in excess of 60 per
cent of the total labour force (ISSER, 1999). Thus, SMEs form a large
proportion of the firm tissue in Nigeria. One of the most important problems
confronting SMEs concerns the issue of financing.
Financing is
necessary to help SMEs set up and expand their operations, develop new
products, and invest in new staff or production facilities. Many small
businesses start out as an idea from one or two people, who invest their own
money and probably turn to family and friends for financial help in return for
a share in the business. But if they are successful, there comes a time when
they need further funds to expand or innovate further. Some SMEs often run into
problems, because they find it much harder to obtain financing from banks,
capital markets or other suppliers of credit.
Almost every
company we know of began as an SME. Vodafone as we know it today was once a
little spin-off from Racal; Hewlett-Packard started in a little wood shack;
Google was begun by a couple of young kids who thought they had a good idea;
even Volkswagen at one point was just a little car maker in Germany (as opposed
to being a giant small car maker globally) (Lukacs, 2005)
Microsoft
may be a software giant today, but it started off in typical SME fashion, as a
dream developed by a young student with the help of family and friends. Only
when Bill Gates and his colleagues had a saleable product were they able to
take it to the marketplace and look for investment from more traditional
sources (Amissah, 2009).
2
The growth of
SMEs has been hampered by the lack of adequate knowledge and a well structured
financial market for the mobilization of capital. The role of finance has been
viewed as a critical element for the development of SMEs (Cook and Nixson,
2000).
Recently,
various funds have been setup to benefit SMEs but statistics provided by fund
managers show that a disproportionate number of applicants have not been
successful at accessing funding (Boateng, 2010).The need to explore alternative
means of raising capital for business growth cannot be over emphasized. One of
the innovative ways to raise funds for the growth of SMEs is venture capital.
Venture
capital is an investment in a start-up or growing SME that is perceived to have
excellent growth prospects. Venture capitalists raise and manage funds which
are a pool of money raised from both public and private investors. Venture
capitalists identify entrepreneurs with promising new ideas and assist with
funding and professional management.
Venture
capital investments provide the needed cash in form of equity for companies to
develop technologies and products which, in turn, generate jobs and taxes that
keep Nigeria competitive. The objective is to generate sufficient long-term
capital gains from the investors and the venture capitalists. Venture capital
assists investors to access equity capital to finance expansion of business
while maintaining control. The expertise and extensive relationships of the
venture capitalist through its network add value to the company and increase
credibility with customers, and finally, the company gain access to the venture
capitalist knowledge in accounting, budgeting, computer systems, and
back-office operations. (Amissah, 2009)
3
In venture
capital financing agreement the venture capital firm will provide financing to
enable a business to undertake a project and in return the venture capital
company gets an ownership stake in the business (Boateng, 2010)
Limited data
exist on venture capital as an alternative source for funds for SMEs.
Therefore a
research was made to gather inform the SME sector to know about the impact of
venture capital in the growth of its
business.
1.2
Statement of the Problem
The SME
sector constitutes in excess of 90% of the economy of the country. The need to
provide affordable credit over a reasonable period for this sector cannot be
over emphasized. SMEs, if properly structured and capitalized have the
potential to grow and spearhead accelerated growth of this economy into a
middle income status (Venture Capital Nigeria, 2008)
SMEs still
in Nigeria have been faced with liquidity and financing challenges leading to
business failures under production Industrial disputes and sometimes closures
by regulatory authorities.
Just as it
has been a great concern to all and sundry to promote the welfare
of SMEs, it
has also been a great cause of concern to all, the fact that the vital
sub-sector has fallen short of expectation. The situation is more disturbing and
worrying when compared with what other developing and developed countries have
been able to achieve with their SMEs.
4
Their
success is determined by their financing needs and the action of investors. SME
financing needs reflect their operational requirements, while the action of
investors depends on their risk perception and the attractiveness of
alternative investment (which affects their willingness to invest). Government
borrowing, the general economic climate, availability of collateral, quality of
SME record keeping, and SME investor relations skills affect the way in which
this challenge is managed
Additionally
many non-financial constraints inhibit the success of such enterprises. SME
owners are reluctant to be transparent or open up involvement of their
businesses to outsiders. They seem to be unaware of or oblivious to the
obligations and responsibilities they have toward capital providers, and the
need to acquire or seek support for technical services like accounting,
management, marketing, strategy development and establishment of business
linkages. Management and support services are perceived to be cost prohibitive
and non-value adding
Unfortunately
since there is a dearth of long term investment funds for SMEs (as a
consequence of the banks and securities markets shying away from the high risk
investments in these sectors, it has became imperative for the Government to
set up a scheme that will provide long term funding for the high risk
investment needs of the SME sector. This has led to the establishment of
Venture capital fund under the Venture Capital Trust Fund Act, 2004 (Act 680),
to provide capital to Small and Medium Enterprises (SMEs) and to promote
Venture Capital industry in Nigeria.(Venture Capital Nigeria,2008)
Does Elsa
Foods know of venture capital funds? Has it ever applied for funding from
Venture Capital organisations? What motivated the organisation to go for
venture 5
capital
funds? What benefits have choked from sourcing funds from venture capital
managers? This study seeks to provide answers to these questions.
1.3
Aim/Objectives
The main
objective of this research is to examine the impact of Venture Capital
Financing on
SME‟s. The study will be objectives:
To determine
SMEs alternative sources of funding.
To determine
the SMEs Owner Manager‟s perception o funding.
To determine
the impact of Venture Capital Financing in small business activities
Research
Questions
The study
addresses the following research questions:
What are the
alternative sources of funding to SMEs?
What is
the SMEs Owner
Manager‟s perc
What is the
impact of Venture Capital Financing on small business activities?
Significance
of the Study
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