Venture Capital Financing And Performance Of Small And Medium Enterprises
The study venture capital financing and performance of small and medium enterprises in Akwa Ibom aimed at finding the relationship between venture capital financing and performance of small and medium enterprises in Akwa Ibom State other objectives of the study includes; to evaluate the benefit of venture capital to SMEs performance, to evaluate the level of venture capital accruing to SMEs in akwa ibom state, to evaluate the performance of SMEs in the year 2001- 2015, to determine the relationship between venture capital and SMEs performance, the study made use of the data obtained from the CBN statistical bulletin 2016. Ordinary least square regression was used to test the hypothesis.
The study found out that there is significant relationship between venture capital financing and performance of small and medium enterprises in Akwa Ibom State. The performance of SMEs was the same for the year 1999 and 2014. SMEs experienced the highest performance in the 2012 with a performance rate of 98.9. The study then concluded that there is a statistically significantly strong positive relationship between venture capital financing and the performance of small and medium scale enterprises in Uyo, Akwa Ibom state. Proper recommendation were made to enhance the interest of researchers for further study of venture capital financing and the performance of small and medium scale enterprises in Uyo, Akwa Ibom State.
1.1 Background to the Study
Governments throughout the world are nowadays turning their attention to small-scale enterprises. This is because attempts to promote economic progress by establishing large industries have usually failed to improve the lives of the majority of the populations concerned (White Paper on International Development, 2000). Therefore, Small and Medium Enterprises (SMEs) are now viewed as important in even and equitable economic development.
RoK (2005) clearly show that the sector is not only a provider of goods and services but also a driver in promoting competition, innovation and enhancing the enterprise culture which is necessary for private sector development and industrialization. The sector should effectively respond to challenges of creating productive and sustainable employment opportunities, promoting economic growth and poverty eradication in the country.
SMEs will play a significant role in contributing to the national goal of wealth creation and making Nigeria an industrialized country ( Liedholm 1998). Lack of access to credit is a major constraint inhibiting the growth of SMEs sector. The issues and problems limiting SMEs acquisition of financial services include lack of tangible security coupled with inappropriate legal and regulatory framework that does not recognize innovative strategies for lending to SMEs. Limited access to formal finance due to poor and insufficient capacity to deliver financial services to SMEs continues to be a constraint in the growth and expansion of the sector. Formal financial institutions perceive SMEs as high risk and commercially unviable As a result only a few SMEs access credit from formal financial institutions in the country. Various types of assistance have been provided to SMEs to boost their growth and development by making them more profitable (Institute of Economic Affairs & Society for Economic Development (IEA/SED, 2001). Several Organizations including business associations, voluntary organizations and other nongovernmental organizations have set up programs to enhance the factors that influence development of SME especially as it relates to enterprise growth and development.
The types of assistance offered by these organizations vary with some giving financial assistance, others training and extension services, pre-constructed commercial shades or assisting in marketing of products (Admati, & Pfleiderer (1994). Despite the large number of assistance programs, the growth and development of SME has not been satisfactory. Ventures have collapsed as soon as assisting organizations pull out of the project, and remaining ones have remained small. According to the study undertaken by Hallberg (1998) and Mead and Liedholm (1998), access to finance is an important ingredient to development. Financial constraints are likely to affect business creation and improvement.
Venture Capital is one source of non-bank financing, which is quite prevalent in developed financial markets for small or start up firms (Keuschnigg 1998). Venture Capitalists are organized providers of financing for winning but risky business proposals by small and medium enterprises that have a promising but as yet unproven idea. If the Venture Capitalists are convinced that a business idea is promising, they will take an ownership stake in the business. It is expected that country’s small businesses whose growth has been constrained by shortage of capital or increased cost of borrowing will have another source of finance.
There is empirical evidence of the effects of venture capital financing in the industrialization of developed countries. In the United States of America, the role of Venture Capital financing has been instrumental throughout its industrialization; however it became institutionalized after the 2nd World War. Before World War II, venture investment was a monopoly led by wealthy individuals, investment banking syndicates and few family organizations with a professional manager (Hisrich and Peters, 2002). For example, over the years, the Rockefeller family has made the initial capital contribution to a number of successful businesses.
1.2 Statement of the Problem
Small and medium, enterprises in Nigeria have difficulties in growth due to lack of finance. They hardly grow beyond start-up stage. Others go out of business at a very early stage. The study undertaken by Hallberg (1998), and Mead & Liedholm (1998) reveals that access to finance is an important ingredient to development of SME. They have few alternatives of accessing finance other than relying on their retained earnings to finance their investments. Notwithstanding the financial difficulties faced by SME presently in Nigeria, alternative sources of funds have to be sought to sustain this important sector.
Venture capital financing, which is quite prevalent in developed countries, has played a big role in enhancing growth of SMEs by providing equity capital. In countries where venture capital financing has been practice, it has brought tremendous improvement to the small and medium enterprises. The researcher feels that it is important to examine the relationship between venture capital financing and performance of small and medium enterprises in Nigeria considering the poor level of development experienced in the sector in the country.
1.3 Objectives of the Study
The following are the objectives of this study:
- To evaluate the benefit of venture capital to SMEs performance
- To evaluate the level of venture capital accruing to SMEs in akwa ibom state.
- To evaluate the performance of SMEs in the year 2001- 2015
- To determine the relationship between venture capital and SMEs performance
1.4 Research Questions
- What are the benefits of venture capital to SMEs performance?
- To what level is venture capital accruing to SMEs in akwa ibom state?
- What is the level of performance of SMEs in the year 2001- 2015?
- Is there any relationship between venture capital and SMEs performance in akwa ibom state 2001-2015?
The study came up the hypothesis as stated below in order to elicit information on the performance of SMEs and venture capital financing. The specific hypothesis is stated below as follows:
HO; there is no significant relationship between venture capital financing and performance of small and medium enterprises in Akwa Ibom State.
HA; there is significant relationship between venture capital financing and performance of small and medium enterprises in Akwa Ibom State.
1.6 Significance of the Study
The following are the significance of this study:
Findings of this study will be useful for business owners and management of business the benefit accruable from venture capital financing with emphasis on its relationship with a new businesses.
This research will be a contribution to the body of literature in the area of venture capital financing and performance of small and medium enterprises, thereby constituting the empirical literature for future research in the subject area.
1.7 Scope / Limitations of the Study
This study will be limited to small and medium businesses in Akwa Ibom State that has benefitted from venture capital financing.
Limitation of Study
Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection.
The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
Summary, Conclusion and Recommendations
This chapter is a synthesis of the entire report and contains summary of findings, conclusions arrived at, the recommendations and the suggestions for further study.
5.2 Summary of the Findings
In 2008 an Adjusted R value 0.653 was established. This implies that, there was a variation of 65.3% of growth in SMEs with the variables- credit rating, marketing/distribution networks, technical expertise, and management expertise). On the other hand, the study shows that there is a positive relationship between growth of SME and the predictor factors and a significant relationship was established between growth of SMEs and credit rating (p= 0.038 <0.005), marketing/distribution networks (p= 0.041<0.05), and technical expertise (p=0.008<0.005).
In the year 2009, the value of adjusted R2 was 0.528 which shows that credit rating, marketing/distribution networks, technical expertise, and management expertise explained 52.8% of growth in SMEs. There is a positive relationship between the independent variables- credit rating, marketing/distribution networks, technical expertise, and management expertise and growth in SMEs. Moreover, the study further established that there is a significant relationship between growth of SMEs and credit rating (p=0.000<0.005), marketing/distribution networks (p= 0.046<0.05), technical expertise (p=0.041<0.005) and management expertise (p=0.015<0.005).
In 2010, the study established a variation of 66.9% between the variables- credit rating, marketing/distribution networks, technical expertise, and management expertise and growth in SMEs. The study also established a positive relationship between growth of SMEs and the independent variable. There was also a significant relationship between growth of the SMEs and the variables: marketing and distribution networks (p=0.035<0.05), technical expertise (p=0.018<0.05) and management expertise (p=0.003<0.05). However, credit rating had an insignificant relationship (p=0.113>0.05).
In the year 2011, it was found out that credit rating, marketing and distribution networks, technical expertise and management expertise explained 54.5% of growth in SMEs. There is a positive association between the growth in SMEs and credit rating, marketing and distribution networks, technical expertise and management expertise. The study also established a significant relationship between growth in SMEs and marketing and distribution networks (p=0.000<0.005), technical expertise (p=0.005 <0.005) and management expertise (p=0.001 <0.005).
In 2012, the regression analysis established a positive relationship between growth in SMEs and the predictors- credit rating, marketing and distribution networks, technical expertise and management expertise. Moreover, the established that there is a significant relationship between growth in SMEs and marketing and distribution networks (p=000<0.05), technical expertise (p= 0.012<0.05) and management expertise (P=
0.001<0.05). However, credit rating had an insignificant relationship
It can be concluded that the effect of venture capital on growth of SME is real and practical as established by this study. The study has shown a positive and significant relationship between growth in SMEs and venture capital financing. This is to say that increased venture capital financing improves SMEs credit rating, marketing and distribution networks, improves technical expertise and management expertise/skills which in turn enhance growth in these firms.
SMEs have been constrained by lack of skilled human, physical, technological resources as well as capital resources. But with good management expertise and technical expertise, the firms have the ability to strategically use information and resources available to them to present well-crafted business growth strategies that also reduces risk to the business; strong management team can also demonstrate past successes in similar businesses.
SME risk profile combined with the lenders‟ lack of sophisticated risk assessment techniques makes many of them appear undesirable as credit customers for business banking. But with evidence of venture capital financing improving credit rating of SMEs makes these firms have available sources for more capital/finances in the future. It can therefore be concluded that venture capital has demonstrated that it can lay the foundation for an emerging generation of locally owned enterprises.
In view of the findings, the following recommendations were made:
SMEs need to recognize the potential advantages of seeking external equity finance from corporate sources. Corporate investors can therefore become very important assets for SMEs both financially and strategically as they provide tangible and intangible valueadded resources which can play a valuable role in SME growth. Moreover, SMEs should be trained and assisted to set up basic planning and record keeping systems, and to write financing proposals.
Venture capital fund managers can do more to encourage venture capital investment. Non-financial companies can be a very significant alternative source of funds for independent venture capital groups specializing in investing in SMEs at a time when they are experiencing difficulties in raising funds from financial institutions. Venture capital fund managers need to recognize the motivations of the corporate investor and to tailor their funds accordingly. Venture capitalists have a role to play in stimulating direct venture capital investment via co-investments with corporations.
The government and Policy makers should provide credit and equity financing to eligible Venture Capital Finance Companies to support SMEs and also provide money to support other activities and programs for the promotion of Venture Capital Financing. The government should also serve as both facilitators and educators in encouraging the venture capital process and provide tax incentives to companies prepared to make venture capital investments. This would be an important method for initially stimulating interest in an activity that many corporate executives are possibly not currently considering.
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