Effect of venture capital financing on the growth of small and medium-sized enterprises in Kenya

Abstract

The aim of the study is to investigate the effect of venture capital financing on the growth of SMEs in Kenya. This study is expected to be of great value to the small and medium enterprises in Kenya as the study will highlight the effect that venture capital financing and to the financial institutions financing these enterprises, they would benefit greatly as they would understand the needs of SMEs and how best venture capital can enhance their growth. The study adopted descriptive cross sectional research design. The target population for this study was the Top 100 Mid-sized companies (2012) in Kenya. Stratified sampling was adopted where a 30% sample was chosen to give a sample size of 30 SMEs. The SMEs were chosen though purposive sampling whereby the firm was chosen based on the basis that they had received venture capital financing. The study collected secondary data which included the financial statements: the profit and loss account and the balance sheets for a period of five years starting from 2008 to 2012. The data was analyzed through inferential statistics by employing a regression model to establish the form of relationship between the dependent and the independent variables. The analyzed data was presented in frequency distributions tables. The study found out that there was a positive and significant relationship between growth in SMEs and venture capital financing. The study concluded that the effect of venture capital on growth of SME is real and practical, and 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. 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 reduce risk to the business. The study recommends that 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. Both the government and the venture capital fund managers also can do more to encourage venture capital investment. The government should provide credit and equity financing to eligible venture capital finance companies to support SMEs.