By Ben White on April 17, 2012
Venture capital, which is quite prevalent in developed countries, has played a big role in enhancing the growth of SMEs. On one hand they provide equity capital, and on the other, they are value-adding investors who bring significant benefits with their business know how. In this study, Venture Capital (VC): Its Impact on Growth of Small and Medium Enterprises in Kenya, researchers Memba S. F., Gakure W. R. and Karanja K., determine whether SMEs that use venture capital experience growth in their business.
This study used 200 SMEs that have been financed by venture capitalists. The SMEs were drawn from various major urban centers in the country. On ascertaining the SME was financed by venture capitalists, the firms were stratified according to their locality and a random sampling was carried out by assigning numbers to subjects of each stratum. A sample of 100 firms was picked at random from which the data was collected.
In this study the variables that were used to measure growth included: sales per annum, net assets, profit per annum and number of workers among others. These variables were analyzed on a before and after venture capital basis. Here are some of the key findings:
– The report showed that the increase in profitability is significant in business growth. The minimum profit before use of venture capital was Ksh 34, 866. Upon use of venture capital, the minimum profit increased to Ksh 600, 000. This shows an increase in minimum profit of 94%. The maximum profit respondents reported before use of venture capital was Ksh 38, 567,951 which increased to Ksh 62, 864,152 an increase of 63%. The average profit also increased by 69% (from Ksh 7,204,653 to Ksh 12, 202,775).
– This study also looked at the growth in profit in relation to the different types of business. Merchandizing types of business reported an average growth in profit margin of 18.2%, followed by agriculture 14.4%, services 12.8% and manufacturing 9.3%. This implies that all the businesses, from whatever sector they belong, realized growth in profit as a result of the use of venture capital with merchandizing and agriculture showing the biggest gains.
– The maximum value of net assets reported increased from Ksh 600 million to Ksh 640 million. The average net assets also increased from Ksh 75.2million to over Ksh 102.5 million. This increase in the value of net assets after use of venture capital is a worthy evidence to say that there is growth. Literature (Brigham and Houston, 2001) confirms that growth in assets can be directly linked with availability of funds as the business expands. Since venture capital is equity capital to the business then net assets also increase.
– After use of venture capital, the findings revealed that 65 firms employed a total of 24,802 workers. The sector that employed the majority of the workers was in the manufacturing sector (10,174), then the service sector (7,766), agriculture (5,005) and merchandizing (1,857). The number employed depended on the number of firms in each sector. There were more firms in the manufacturing and service sectors (25 in each) than in merchandising and agriculture, hence the high number of employee recorded. The report concludes that the 65 businesses that used venture capital contributed significantly to creation of employment opportunities. Overall, upon use of venture capital there was a tremendous increase in total number of workers by 186%.
The impact of venture capital on the growth of SMEs is real. This study reaffirms the correlation between SME development and poverty alleviation. The study has demonstrated that use of venture capital can be profitable in Kenya even in an inauspicious political and economic climate. The impact touched on both economic and social-economic factors. The economic impact of venture capital has been realized by SMEs in sales growth, profit, asset and improvement in management of finance and other resources. The social impact from a venture capital perspective include the employment opportunities created. The increased profits imply revenue collection for government expenditure through collection of tax. Also venture capitalists do not just provide funds, but add value to SMEs, that is, they are not only involved in financing but also spur entrepreneurs who are responsible for economic growth. Venture capital involvement has demonstrated that the partnership implicit in equity capital is as important as the finance and that these two aspects of the relationship are mutually reinforcing. Venture capital not only assists SMEs in the provision of funds, but also in the internal operations of the business and especially in policy formulation. As a result, this study concluded that venture capital has demonstrated the business case for SME investment.
At VC4Africa we are pleased to come across research like this. There is very little date and information available on the subject and we look forward to highlighting new findings & improved insights that give new perspectives on the role of venture capital in SME development. For more information see the full report.