THE IMPACT OF VENTURE CAPITAL FINANCING ON SMALL AND MEDIUM ENTERPRISES

1.1 Introduction

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 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 (Boateng, 2010).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

1.2 Background of Study

Small and medium scale enterprises (SMEs) in developing countries have been seen as engines through which the growth objectives can be achieved (kayanula and Quartey, 2000). These enterprises have been identified as the means through which the rapid industrialization and other developmental goals of these countries can be realized. Within the context of this research undertaking, small and medium scale enterprises are generally identified with the following variables; capital investment, annual turnover, gross output and employment (Osuala, 2000). He stated that the classification of enterprises as ‘medium’ and ‘small’ varies from one economy to another and from one period to another in the same economy.

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 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 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). In 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.

The Central Bank of Nigeria (CBN) defined small and medium scale enterprise (SME) as any enterprise with a maximum asset base of N200 million, excluding land and working capital, with number of staff employed by the enterprise of not less than 10 and notmore than 300 (Osuala, 2004). This definition is considered most appropriate because it highlights certain salient elements considered essential for this study. Such elements include asset base, and the number of employees.

Osuala (2004) emphasized that the number of employees is the most frequently used criterion. Small and medium scale enterprise in Akwa Ibom State are classified under the following sectors: mining and agriculture, manufacturing, wholesaling, retailing, service industries, finance and insurance, construction, transportation, communication and utilities. Each classification is made up of different types of small and medium scale business activities in Akwa Ibom state.

Therefore, in Elsa Foods Limited where the research was carried out, the activities that was conducted is to know the Impact of Venture Capital Financing on Small and Medium Enterprises.

1.3 Statement of Problems

Investigation revealed that 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 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.

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.

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)

1.4 Aim and Objectives of Study

The aim of the study is to examine the Impact of Venture Capital Financing on Small and Medium Enterprises in the Uyo Metropolis using Elsa Foods Limited as a case study. In achieving this aim, the following specific objectives were laid out as follows:

1. To determine the SMEs Owner Manager’s perception of funding;
2. To determine SMEs alternative sources of funding; and
3. To determine the impact of Venture Capital Financing in small business activities.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• What is the SMEs Owner Manager's perception of funding?
• What are the alternative sources of funding to SMEs?
• What is the impact of Venture Capital Financing on small business activities?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: There are no significant factors affecting of Venture Capital Financing on small business activities
• H1: There are significant factors affecting of Venture Capital Financing on small business activities

1.7 Significance of 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 SMEs 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

• Comprehend financing problems and different ways of sourcing funds, and
• 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 government to expand the operations of the venture capital funding to drive SMEs 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.

1.8 Scope of Study

The scope of the research is focused on the Impact of Venture Capital Financing on Small and Medium Enterprises in the Uyo Metropolis using Elsa Foods Limited as a case study.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Research material: availability of research material is a major setback to the scope of the study.
4. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
5. Financial Constraint: 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 (internet, questionnaire and interview).

1.10 Definition of Terms

Venture Capital: It is an investment in a start-up or growing SME that is perceived to have excellent growth prospects.