VENTURE CAPITAL FINANCING AND PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES

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Author

Presented To

Department of Entrepreneur

ABSTRACT

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.

CHAPTER ONE

INTRODUCTION

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:

1. To evaluate the benefit of venture capital to SMEs performance
2. To evaluate the level of venture capital accruing to SMEs in akwa ibom state.
3. To evaluate the performance of SMEs in the year 2001- 2015
4. To determine the relationship between venture capital and SMEs performance

1.4   RESEARCH QUESTIONS

1. What are the benefits of venture capital to SMEs performance?
2. To what level is venture capital accruing to SMEs in akwa ibom state?
3. What is the level of performance of SMEs in the year 2001- 2015?
4. Is there any relationship between venture capital and SMEs performance in akwa ibom state 2001-2015?

1.5   HYPOTHESIS

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:

1. 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.
2. 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

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.

Time constraint- 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