THE IMPACT OF VENTURE CAPITAL FINANCING ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA (A CASE STUDY OF UYO LOCAL GOVERNMENT AREA)
The study looked at the Impact of Venture Capital Financing on SMEs in the Uyo Local Government area. Efforts by successive Governments to improve the performance and growth of SMEs had led to the enactment of different policies and activities including the Venture Capital Fund to assist SMEs. 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.
In order to achieve the objectives for the study, 50 questionnaires were administered to Manager/SME owners operating within the Uyo Local Government area with a focus on Elsa Foods Ltd using convenience sampling techniques. It was generally observed that
SMEs prefer financing and self occasionally received support from financial institutions. The findings further show that SMEs continue to rely on many financing options both at their conceptual and expansion stage. The majority of the SMEs were however not aware or had little knowledge about Venture Capital Financing as an alternative to financing. Firms that had benefited from Venture Capital Financing stated that they did not only receive capital inflow but were accompanied with monitoring, technical skills, and expertise, access to management, marketing and distribution, and reputation for attracting further finance. The study recommends that SMEs need to recognize the potential advantages of seeking equity finance from venture capital. Venture capital fund managers can do much to encourage venture capital investment from corporate investors. Government and policymakers should play a dual role as both facilitators and educators in encouraging the venture capital process. Following the conclusions and recommendation more detailed research involving SMEs from different industries and states is highly recommended
TABLE OF CONTENTSDETAILS PAGESDECLARATION iiABSTRACT iiiTABLE OF CONTENT ivACKNOWLEDGEMENT viiDEDICATION viiiCHAPTER 11.0 INTRODUCTION1.1 Background of Study 11.2 Statement of the Problem 41.3 Aims/Objectives 61.4 Research Questions 61.5 Significance of study 61.6 Scope of study 71.7 Limitations of study 71.8 Organization of study 8CHAPTER 22.0 LITERATURE REVIEW 2.1 Venture Capital 9 2.2 Venture Capital Trust Fund in Ghana 10 2.2.1 Overview of Venture Capital in Ghana 102.2.2 Venture Capital Trust Fund 18.104.22.168 The Special Purpose Vehicle (SPV) Financing 22.214.171.124 Role of Fund Manager for Venture Capital Financing Company 152.3 Types of Venture Capital Investment in Nigeria 172.4 SMEs in Nigeria 192.4.1 Definition and Contributions of SMEs 192.4.2 Sources of Finance for SMEs 202.4.3 SME Financing in Nigeria 21iv126.96.36.199 Guarantee Facilities 188.8.131.52 Reasons why banks do not lend 25to SME‟184.108.40.206 Factors that banks consider when financing SMEs 262.5 Success of Existing Scheme 282.6 Impact of Venture Capital Financing on SMEs 31CHAPTER 33.0 RESEARCH METHODOLOGY3.1 Introduction 323.2 Scope of Study 343.2.1 History of Elsa Food Limited 343.2.2 Management Structure of Elsa Foods Limited 353.3 Research Methodology 353.3.1 Research Design 353.3.2 Sampling 353.3.3 Survey Instrument 363.3.4 Analysis of Data 36CHAPTER 44.0 RESULTS AND DISCUSSIONS4.1 Introduction 374.2 Findings 374.2.1 The Case of Elsa Foods Limited 374.3 Profile of other Respondents Firms 424.3.1 Ownership Structure of Small and Medium Enterprises 424.3.2 SMEs Sources of Financing 434.3.3 SMEs Awareness of the existence and requirements of Venture CapitalFinancing in Nigeria 474.3.4 Application for Funding for Venture Capital Financing 484.3.5 Motivation and Choice for Venture Capital Financing 494.3.6 Rate of Success in raising Venture Capital Financing 504.3.7 Impact of Venture Capital Financing 51v220.127.116.11 Benefits of Venture Capital Financing to Respondent firms 518.104.22.168 Limitations with Venture Capital Financing to Respondent firms 55CHAPTER 55.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS5.1 Summary of findings 565.2 Conclusions 585.2.1 Practical Implication 585.3 Recommendations 595.3.1 Small and Medium Enterprises 595.3.2 Venture Capital Managers 605.3.3 Government and Policymakers 615.4 Suggestion for further research 62REFERENCES 63ABBREVIATIONS 68APPENDIX: Survey Questionnaire 69
CHAPTER ONEINTRODUCTION1.1 BackgroundData from the International Finance Corp developing world the private economy is almost entirely comprised of SMEs' andthat „they are the opportunity only for realistic millions of poor people employ throughout the world'Image49%321%155%215%Figure 1: Fiscal Year 2004 Approvals in USDSource: 2004 Annual Review Small Business Activities1. International Finance Corporation (IFC) $ 820 million 2. Multilateral Investment Guarantee Agency (MIGA) $ 219 million 3. International Bank for Reconstruction and Development (IBRD) $ 317 million 4. 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 and1developing economies. In Nigeria, the total economic output of SMEs is about 50 percent of gross domestic product (GDP), and this sector employs in excess of 60 percent of the total labor 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, like 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).2The 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 set up 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 the 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 gains access to the venture capitalist knowledge in accounting, budgeting, computer systems, and back-office operations. (Amissah, 2009)3In a 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 research was made to gather information the SME sector know about the impact of venture capital on the growth of itsbusiness.1.2 Statement of the ProblemThe 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 welfareof 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.4Their 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 managedAdditionally, many non-financial constraints inhibit the success of such enterprises. SME owners are reluctant to be transparent or open up the 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 addingUnfortunately, 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 become 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 a 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 the Venture Capital industry in Nigeria. (Venture Capital Nigeria,2008)Do Elsa Foods know of venture capital funds? Has it ever applied for funding from Venture Capital organizations? What motivated the organization to go for venture 5capital funds? What benefits have choked from sourcing funds from venture capital managers? This study seeks to provide answers to these questions.1.3 Aim/ObjectivesThe main objective of this research is to examine the impact of Venture CapitalFinancing on SME‟s. The study will be objectives:1. To determine SME's alternative sources of funding. 2. To determine the SMEs Owner Manager‟s perception o funding. 3. To determine the impact of Venture Capital Financing in small business activities 1.4 Research Questions The study addresses the following research questions:1. What are the alternative sources of funding to SMEs? 2. What is the SMEs Owner Manager‟s perc 3. What is the impact of Venture Capital Financing on small business activities? 1.5 Significance of the Study The study is justified for a number of reasons. Little studies have empirically examined venture capital as a source of finance within the Nigerian context. The study is relevant will also identify venture capital as an emerging funding source for SME development in Nigeria. This study has been motivated by the premise that in order to formulate a coherent strategy vis a vis the SME sector, it is necessary to (a)6comprehend financing problems and different ways of sourcing funds, and (b) be able to identify venture capital as a financing option to SMEs. The findings of this research could offer an opportunity for SMEs to appreciate venture capital funding. The study would further seek to encourage the government to expand the operations of the venture capital funding to drive SMEs to contribute to economic growth, employment, and the nation‟s development.Finally for Government and other stakeholders to always provide another source of funding to replenish the coffers of the scheme.1.6 Scope of the StudyThis highlights funding from financial institutions, other sources of funding, and theSME managers‟ views on the venture capital the impact of venture capital financing on their business operations1.7 Limitations of the StudyThe study will be limited to SMEs due to the increase in the size of the Industry. The study area will also be limited to an SME in Accra because of information sourcing challenges as some SMEs Owner managers are unwilling to give out financial information. The problem of inadequate and proper keeping of information by some SMEs will also place limitations on the research area.Although the framework is grounded in the data, it does not necessarily hold true for all SMEs. The sample is small and not representative of various sectors that SMEs belong to. However, its findings can be used as hypotheses for future studies using large and more representative samples of SMEs from various sectors in the Nigerian economy.71.8 Organization of the studyThe study is organized into five chapters.Chapter 1 provides a brief background to the study, discusses the research problem, reason for the research, and significance of the study.Chapter 2 reviews previous research on Venture Capital Financing and Small and Medium Enterprises, the frame of reference discusses the research area and investigates what has not been attended to or given little attention.Chapter 3 is the methodology and explains the process of the project work. This chapter aims to describe the type of research which was conducted, describe and measurement of variables in the study, study sample, and the instrument for data collection. The detailed sampling method and the sample size was discussedChapter 4 aims to present the findings of the current study. The data was analyzed in this stage using statistical techniques.The final Chapter 5 summarises the findings of the study. The implications of the findings are also discussed here. The study draws a conclusion and provides recommendations to the problems raised..