IMPACT OF THE VENTURE CAPITAL AS A MEANS OF FINANCING SMALL AND MEDIUM SCALE BUSINESS IN NIGERIA

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ABSTRACT

This project work examine the impact of the venture capital as a means of financing small and medium scale business in Nigeria. The specific objectives are to determine whether SMEs that use venture capital as a means of financing experience growth and are profitable  in ojo local government, to Identify and analyze factors which influence SME accessibility to venture capital financing and whether it contribute to employment opportunity in ojo local government and to examine the challenges faced by SME in Raising venture capital finance and whether such capital was being utilized as an alternative finance strategy  in ojo local government Area. Statistical tools such as correlation, regression and analysis of variance will be employ for this study using statistical package for social scientist (SPSS) while Frequency distribution table will be used in the analysis and presentation of socio-demographic data of the respondents. The study found that there is no relationship between SMEs that use ventures capital with a value r = 0.592 which signifies that change in SMEs that use ventures capital as a means of financing experience growth and profitable SMEs that identify and analyze accessibility  venture capital financing 47.6% of the variation recorded in and it contribution in employment opportunity. Based on the finding it was recommended that Small  businesses  are  often disadvantaged  when  it comes  to  accessing  finance  or lobbing  the  government  to  incorporate their  views  with  regard  to  taxation.   SMEs  using  venture  capital  should  be  given   tax concession to  attract other SMEs to use venture capital. It was concluded that venture  capital  on  financial  performance  of  SMEs  is  real  and  practical  as established  by  this  study.  The  SMEs  under  study  experienced  growth,  improvement  in financial  management  and  use  of better management  approach.  Venture  capital's  investment in  SMEs has  facilitated wealth creation  in ways that peoples’  lives have been improved. 

 

 

 

TABLE OF CONTENTS

 

TITLE                                                                                                                       PAGES

TITLE PAGE                                                                                                 I

CERTIFICATION                                                                                                     II

DECLARATION                                                                                                       III

DEDICATION                                                                                                           IV

ACKNOWLEDGEMENT                                                                                        V

ABSTRACT                                                                                                               VI

TABLE OF CONTENT                                                                                            vii

 

CHAPTER ONE: INTRODUCTION

1.1       BACKGROUND TO THE STUDY                                                 1

1.2       STATEMENT OF THE PROBLEM                                                            3

1.3       OBJECTIVE OF THE STUDY                                                                    4

1.4       RESEARCH QUESTIONS                                                                           4

1.5       RESEARCH HYPOTHESES                                                                       5

1.6       SIGNIFICANCE OF THE STUDY                                                  5

1.7       SCOPE OF THE STUDY                                                                             6

1.8       LIMITATIONS OF THE STUDY                                                                6

 

CHAPTER TWO:  LITERATURE REVIEW

2.1       CONCEPTUAL FRAMEWORK                                                                 7

2.1.1   VENTURE CAPITAL FINANCING                                                           7

2.1.2   VENTURE CAPITAL IN NIGERIA                                                            8

2.1.3   THE INFLUENCE OF VC FINANCING ON INNOVATIVE

START-UPS                                                                                      11

2.1.4   THE ADDED VALUE OF VENTURE CAPITALIST

 FINANCING                                                                                                 12

2.1.5   VENTURE CAPITAL FINANCING PROCESS                            14

2.2       VENTURE CAPITAL FINANCING IN DEVELOPED AND

DEVELOPING COUNTRIES                                                                      17

2.3       VENTURE CAPITAL AND ITS IMPACT ON THE PERFOR-

MANCE OF SMALL AND MEDIUM SCALE ENTERPRISE    20

2.3.1   CHALLENGES AND PROSPECTS OF THE DEVELOPMENT

OF THE SMES IN NIGERIA THROUGH THE NIGERIAN

CAPITAL MARKET                                                                                    21

2.3.2   VENTURE CAPITALISTS’ VALUE OF OPTIONS                                 26

2.4       SMALL AND MEDIUM SCALE ENTERPRISES                                    27

2.5       SOURCES OF FINANCE FOR SMALL AND MEDIUM

ENTERPRISES                                                                                              28

2.6       THE NIGERIAN INDUSTRIAL DEVELOPMENT BANK

(NIDB) LTD                                                                                      28

2.6.1   WORLD BANK SME I LOAN SCHEME                                      29

2.6.2   WORLD BANK SME II LOAN SCHEME                                     29

2.7       SME FINANCING AS A DEVELOPMENT STRATEGY                        30

2.8       GOVERNMENT INTERVENTION IN SME FINANCING                      31

2.9       SMALL AND MEDIUM ENTERPRISES EQUITY

INVESTMENT SCHEME (SMEEIS)                                                          32

2.9.1   SMALL AND MEDIUM ENTERPRISES (SME) CREDIT

GUARANTEE SCHEME (SMECGS)                                                         32

2.10    IMPLICATIONS OF SME FINANCING TO DEVELOPMENT  32

2.11    INFORMAL VENTURE CAPITAL AND BUSINESS ANGELS 33

2.12    THEORETICAL FRAMEWORK                                                                35

2.13    EMPIRICAL STUDIES ON THE VENTURE CAPITAL

FINANCING ON SMES.                                                                              39

 

CHAPTER THREE:  RESEARCH METHODS

3.0     INTRODUCTION                                                                                         42

3.1     RESEARCH DESIGN                                                                                   42

3.2     STUDY POPULATION                                                                                42

3.3     SAMPLE SIZE AND SAMPLING TECHNIQUES                                    43

3.4     SOURCES OF DATA COLLECTION                                                        43

3.5     INSTRUMENT OF DATA COLLECTION                                                44

3.6     METHOD OF DATA ANALYSIS                                                  44

3.7     VALIDITY AND RELIABILTY OF RESEARCH INSTRUMENT         44

 

CHAPTER FOUR:  DATA ANALYSIS AND INTERPRETATION

4.0       INTRODUCTION                                                                                         45

4.1       DEMOGRAPHIC INFORMATION OF RESPONDENTS                        45

4.2       ANALYSES OF RESPONDENTS’ RESPONSES                         48

4.3       HYPOTHESES TESTING                                                                            56

4.4       DISCUSSION OF FINDINGS                                                                      64

 

CHAPTER FIVE:  SUMMARY, CONCLUSION AND RECOMMENDATION

5.1        INTRODUCTION                                                                                        65

5.2       SUMMARY                                                                                                   65

5.3        CONCLUSION                                                                                             65

5.4        RECOMMENDATIONS                                                                             66

5.5       SUGGESTIONS FOR FURTHER STUDY                                     67

REFERENCES                                                                                              68

QUESTIONNAIRE                                                                                       73

 

 

 

 

CHAPTER ONE

INTRODUCTION

1.1   Background to the study

Small and Medium Enterprises play key roles in transition and developing countries (OECD, 2002). These firms typically account for more than 90% of all firms outside the white-collar jobs sector, constituting a major source of employment and generates significant domestic and export earnings. OECD,(2005) stressed that SME development emerges as a key instrument in poverty reduction efforts, therefore, SME obviously contributes to economic, social development and poverty reduction. World Bank review on small business activities establishes the commitment of the World Bank Group to the development of the SMEs sector as a core element in its strategy to foster economic growth, employment and poverty alleviation (World Bank, 2012). This is because, SMEs constitute the driving force of such industrial growth and development and this is due to their great potentials in ensuring diversification and expansion of industrial production as well as the attainment of the basic objectives of development. Given the great potentials of SMEs to bring about social and economic development, it is of no surprise that the performance and financing SMEs is of huge concern to the government of different countries in the world (Okpara 2000). SMEs in both developing and developed countries play important roles in the process of industrialization and economic growth, by significantly contributing to employment generation, income generation and catalyzing development in urban and rural areas Hallberg, (2000); Olutunla, (2001); OECD, (2004); Williams, (2006). For instance, statistics shows that Africa and Asia has the majority of their population living in rural areas where SMEs delivers about 20%-45% of full-time employment and 30% -50% of rural household income (Haggblade and Liedholm 1991). However, financing SMEs is a major catalyst and a key success factor for the development, growth and sustenance of any economy. Most government and business circles have come to recognize the importance of financing SMEs and have consequently agreed that their growth constitutes one of the corner stone’s of economic development (Olutunla,2001; OECD, 2004). Despite the numerous factors that challenge the survival and growth of SMEs in both developing and developed countries, finance has been identified as one of the most important factor (UNCTAD, 2001; SBA, 2000). Having access to finance gives SMEs the chance to develop their businesses and to acquire better technologies for production, therefore ensuring their competiveness, however, there is a huge challenge for SMEs globally when it comes to sourcing for initial and expansion capital funds from traditional commercial banks. Abereijo and Fayomi (2005) notes that the majority of commercial bank loans offered to SMEs are often also limited to a period far too short to pay off any sizeable investment. In addition, banks in many developing countries prefer to lend to the government rather than private sector borrowers because the risk involved is lesser and higher returns are offered (Levitsky, 1997). Such apathy for the SMES have crowded out most private sector borrowers and increased the cost of capital for them.

The Nigerian government established Small and Medium Enterprises Equity Investment Scheme (SMEEIS) in 2001though it was approved By the Bankers’ Committee at its 246th meeting held in December 1999 (Central Bank of Nigeria, 2005). Under the scheme, all banks in Nigeria were required to set apart and appropriate 10 percent of their Profit after tax (PAT) for equity investment and also To boost young, small And innovative start -Up companies. To maintain A progressive balance in a real economy, Ollo r& Dagogo (2009) stress that the real sector and financial sector must complement each other, thus any defect in one sector hinders Developments in the other. Nevertheless, in Nigeria, evidence indicates that both sectors are nearly divorced with minimal symbiotic relationship such that the financial sector milk-dries the real sector (Soludo, 2004 and Sanusi, 2003). The rapid development of small and medium-scale enterprises (SMEs) is one of the instruments of tackling poverty in an economy. Both in literature and practice, poverty alleviation has always formed the nucleus of economic development policies in many developing countries-including Nigeria (Lemo, 2002). Most of the poor are found in one SMEs activities or the other, hence the policies focused on the development of these SMEs will not only aid in reducing poverty but will also promote economic growth and development of the economy. This is because economic growth and development is sustainable only if it is accompanied by the economic empowerment and mass participation of the citizens in the economic and social life of a nation. SMEs perform such functions as employment generation, acceleration of rural development, utilization of domestic resources, formation of competitive environment and maintenance of innovative activity. From this type of business, maximum results of economic development can be achieved, and it also has a sensation of a market ( Toktarova, 2004).

Venture capital though a new concept in Nigeria has been existing in developed countries for years now, it has been known to add great value to the economic growth. It enhances the growth of SMEs by providing the needed capital and taking part in the management of the business. Result from European Venture Capital Association (2001), reveals that SMEs that are financed by venture capital added up to 46 jobs to the Nigeria economy. However, in Cross River State, the funding and utilization of venture capital are relatively new and impact greatly unnoticed. This research therefore, is an attempt at investigating whether funding financing improves the development of SMEs in lagos state in particular and Nigeria general.

Venture capital is one of the least understood areas of entrepreneurship. Some think that venture capitalists do the early–stage financing of relatively small, rapidly growing technology companies. It is better to view venture capital broadly as a professionally managed pool of equity capital. Frequently, the equity pool is formed from resources of wealthy partners. Other principal investors in venture-capital companies are pension funds, endowment funds, and other institutional investors. Some known sources of venture capital in Nigeria include CBN/Banker’s Committee Small & Medium Equity Investment Scheme, BTA Foundation for Agriculture, Faith Foundation, Micro-Finance Fund Initiatives and more recently CAP fund from Bank of Industry.. The investments are in early-stage deals as well as second and third-stage.


1.2  Statement of the problem

SMEs, in Nigeria have difficulties in growth due to lack of finance. They hardly grow beyond start-up stage and Others go out of business at a very early stage (Bronwyn,1995). The study undertaken by Hallberg (1998), and Mead & Liedholm (1998) reveals that access to finance is an important ingredient to the 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 make it difficult to achieve growth and sustainable development of business, alternative sources of funds have to be sought to sustain this important sector.

Venture capital, which is quite prevalent in developed countries, has played a big role in enhancing growth of SMEs by providing equity capital. In countries where both forms of venture capital participate in financing SMEs, they are value-adding to investors who bring significant benefits of their business know. The researcher feels that venture capital have been present in Nigeria as early as 1970s their impact on SME has not been significant.

 

1.3 Objective of the Study

The main objective of the study is to assess the impact of the venture capital as a means of financing small and medium scale business in Nigeria. The specific objectives are to:

1.      To determine whether SMEs that use venture capital as a means of financing experience growth and are profitable  in ojo local government

2.      To Identify and analyze factors which influence SME accessibility to venture capital financing and whether it contribute to employment opportunity in ojo local government.

3.      To examine the challenges faced by SME in Raising venture capital finance and whether such capital was being utilized as an alternative finance strategy  in ojo local government Area.

 

1.4 Research Questions

In order to achieve the above objectives, the following research questions will be used

1.      To what extent does SMEs that use venture capital as a means of financing experience growth and are profitable in ojo local government?

2.      To what extent does SMEs identify and analyze factors which influence accessibility to venture capital financing and whether it contributes to employment opportunity in ojo local government?

3.      What are the challenges faced by SMEs in raising venture capital finance and whether such capital was being utilized as an alternative finance strategy in ojo local government?

 

1.5 Research Hypotheses

The following hypotheses will be tested

1.      HO1: There is no significant relationship between SMEs that use ventures capital as a means of financing experience growth and profitable in ojo local government

2.      HO2: There is no significant relationship between SMEs that identify and analyze accessibility  venture capital financing and it contribution in employment opportunity in ojo local government

3.      HO3: there is no significant relationship between SMEs that faced challenges in raising venture capital finance and such capital was being utilized as an alternative finance strategy  in ojo local government

 

1.6 Significance of the Study

Research was conducted in developing countries, especially those from African, on the impact of the venture capital on small and medium performance. However, very scanty evidence exists in Nigeria to demonstrate how venture capital impact to small and medium enterprise in Nigerian. This study, therefore response to the need of sole proprietorship and entrepreneur to know the impact of venture capital performance, using capital invested. The outcome of this study would have significant implication for investors, sole proprietorship, academic literature and consultants in practice and policy makers.

 

1.7 Scope of the Study

This study will cover ten (10) of the small and medium enterprises in ojo local government.

 

1.8 Limitations Of The Study

This research shall be limit by the following factors, which are the Attitude of the respondent in given proper answer, Inadequate of finance to conduct the research, Lack of access to vital information and lastly the time constraint.



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