Attributes of Venture Capital Financing Model: The Case of SMEs Growth in Nairobi City County, Kenya

Abstract

In a growing economy, it is imperative for players along the venture capital financing value chain model to understand the factors at play that may initially seem trivial but have a bearing in the growth of start-ups. A number of scholarly theories assert that venture capital financing contributes to the growth of venture-backed portfolio companies. However, very few have been able to delve into the tail-end latent attributes of venture capital financing that might seem trivial but immensely contribute to SMEs growth in developing economies. In view of this, this study critically analyzes the intrinsic attributes of venture capital financing model: The case of Small and Medium Enterprises (SMEs)growth in Nairobi City County, Kenya. The study adopted both qualitative and quantitative approaches in a sequential mixed research design to identify and analyze underlying factors that influence the growth of venture capital-backed SMEs. The findings from the qualitative approach were used to develop the survey questionnaire. Purposive sampling method was used to identify 79 venture-capital SMEs which had received funding for the last five years in their operations. Out of these, 51 venture-backed SMEs successfully filled and returned complete questionnaires which were analyzed using exploratory factor analysis. Out of the twelve factors identified by the respondents, five factors were extracted using Principal Component Analysis. These five factors were strategic alliances, non-current assets, initial public offerings (IPOs), management buy back and trade sale of the venture enterprise as factors contributing to SMEs growth. The Kaiser- Meyer-Olkin (KMO) measure of the five factor was 0.576 which exceeded 0.50 as recommended by Hair et al (2006) and the Bartlett’s Test of Sphericity was statistically significant at p=0.017. The results show that two factors: IPOs and Management buy-back were found to contribute to growth of venture capital-backed SMEs with IPOs contributing 32.385% and Management buy-back 27.301%, both having cumulative 59.686% which explains the variance of SMEs growth and the two had eigenvalues of greater than 1. The study concludes that a positive relationship exists between the venture capital exit route and growth of venture capital –backed SMEs. This shows that in venture capital financing, the exit route is quite critical as it provides market for the venture capitalists to recoup their investment back. Cost of venture capital financing too was found to be critical for growth of venture capital-backed SMEs in Nairobi City County, Kenya. The study concluded that availability of clearly defined exit route for venture capitalists in an economy positively influences the growth of venture capital backed SMEs. structure sequential rounds. to innovation in exchange of a percentage of equity in governance structure. ensure continued availability of the for a good working relationship between the venture and the is cemented through of equity shares.