factors affecting venture capital and private …
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FACTORS AFFECTING VENTURE CAPITAL AND PRIVATE
EQUITY INVESTMENT AMONG SMES IN NAIROBI,
KENYA
BY
GERMANO KIRUTHU MUTAHI
UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA
SUMMER 2020
ii
FACTORS AFFECTING VENTURE CAPITAL AND PRIVATE
EQUITY INVESTMENT AMONG SMES IN NAIROBI,
KENYA
BY
GERMANO KIRUTHU MUTAHI
A Project Report Submitted to the School of Business in Partial
Fulfilment of the Requirement for the Degree of Masters in
Business Administration (Global)
UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA
SUMMER 2020
iii
STUDENT’S DECLARATION
I, the undersigned, declare this is my original work and has not been submitted to any other
College, institution or university other than United States International University – Africa for
academic credit.
Signed: ______________________ Date: _____________________________
Germano Mutahi Kiruthu (ID 659882)
This Project has been presented for examination with my approval as the appointed
supervisor
Signed: _______________________ Date: ___________________________
Dr. Selefano F. Odoyo
Signed: ____________________________ Date: ___________________________
Dean, Chandaria School of Business
iii
COPYRIGHT
All rights reserved. No part of this proposal may be photocopied, recorded or otherwise
reproduced, stored in a retrieval system or submitted in any electronic or mechanical means
without prior permission of the copyright owner.
Germano Mutahi Kiruthu©2020
iv
ABSTRACT
The general objective of this study was to determine the requirements needed by Small and
Medium-sized Enterprises (SMEs) for private equity (PE) or venture capital (VC)
financing/investment in Kenya. This study was guided by three specific objectives. The first
objective was to determine the challenges and exposures faced by the Small and Medium Sized
Enterprises from accessing Private Equity and Venture Capital funding; the second objective
was to determine key financial performance indicators used for funding by private equity and
venture capitalists. The third objective was to determine the role of leadership in successful
funding. The significance of this study will be to first assist SMEs who are in the path of
becoming funding-ready to know of the critical success features to secure financing from VC
and PE firms. This study will help new VC firms yet to set office in the region to better
understand the critical success factors of start-up SMEs in securing funding in Kenya as well
as enable researchers borrow from the findings and discussions of this study to further the
knowledge around the financing of SMEs in the PE and VC sector.
Descriptive research design was used to obtain quantifiable data that was used in the analysis
and development of conclusions and recommendations. A questionnaire was used for data
collection. The population under study was 35 funds operating in the Venture Capital and
Private Equity space in Nairobi, Kenya. The analysis of the data was conducted using the
Statistical Package for Social Sciences (SPSS) software as well as Microsoft Excel.
The findings of this study revealed that there is a significant relationship between the
investment environment, globalisation, fund structure, SME financing and the investment
decisions that would be made by the PE and VC firms. From the ANOVA analysis, the
challenges and exposures faced by SMEs were found to be statistically significant as the p-
value was less than 0.05. In addition, all the critical success factors were considered to be
pivotal in the decision making process by the PE and VC firms. These factors comprised: the
investment process, the financial performance of the SME, SME relationship with suppliers,
firm reputation, management skillset, market potential growth / attractiveness, evidence of a
business plan, PE or VC fund restrictions as well as availability of complemetary financing. In
light of these, the ANOVA test yielded a p-value that was less than 0.05, which indicated that
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the factors were statistically significant, in determining .The role of leadership, change
management and transformation in the firm were regarded important in the determining
whether a PE or VC firm would invest in an SME. The ANOVA analysis similaryl yielded a
p-value<0.05, showing that leadership, change management and transformational leadership
were statistically significant in determining whether PE and VC firms might invest an SME or
not.
The study concluded that SMEs need to specifically manage their business ethics, financial
performance and presentation, level of global presence as well as the level of technology used
within the organisation in order to encourage PE and VC investment. In addition, the SME
should aim for a strong financial performance, a good firm reputation and a well constituted as
well as highly skilled management. The leadership of the SME would also be expected to be
one that embraces transformation within the organisation, for them to attract such investment
in their organisation.
The study recommends that SMEs needs to manage their business ethics, financial
performance and presentation, level of global presence and technology used within the
organisation in order to overcome challenges and exposures they face from an operational as
well as reputational perspective. SMEs should also be willing to engage with PE and VC firms
that invest within their sector of operation as well as accommodate and appreciate the
investment process being used by the Private Equity or Venture Capital firm. In terms of
overall leadership, SMEs should be willing to adopt change during pre- and post-investment
phases. This is in addition to the organisation’s leadership need of embracing transformation
within the organisation with the aim for increased performance steered by stewardship and
human capital development. This study also recommends further research in other countries as
well as firms who have already gone through their first series of funding from a Private Equity
and Venture Capital perspective, in the search for new capital to scaling their businesses.
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ACKNOWLEDGEMENT
I would first like to thank the Almighty God for providing His grace during this research
period. I would like to also appreciate the Faculty of Chandaria Business School as well as the
Library and staff of United States International University-Africa and most specifically my
supervisor, Dr. Selefano Odoyo Fredrick who provided boundless insights and advice during
my research. I am immensely grateful to my family and colleagues, who have been with me
over the period of this project and provided the necessary moral support.
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DEDICATION
I dedicate this research project to my family: John, Julia, Jerioth, Felista and Kelvin, for their
undoubted love and moral support.
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TABLE OF CONTENTS
STUDENT’S DECLARATION ............................................................................................ iii
COPYRIGHT ......................................................................................................................... iii
ABSTRACT ............................................................................................................................ iv
ACKNOWLEDGEMENT ..................................................................................................... vi
DEDICATION....................................................................................................................... vii
LIST OF TABLES ............................................................................................................... xiii
LIST OF FIGURES ............................................................................................................. xiv
LIST OF ABBREVIATIONS .............................................................................................. xv
CHAPTER ONE ..................................................................................................................... 1
1.0 INTRODUCTION .................................................................................................... 1
1.1. Background of the Study ............................................................................................ 1
1.2. Statement of the Problem ........................................................................................... 5
1.3. General Objective of the Study .................................................................................. 6
1.4. Specific Objectives ..................................................................................................... 6
1.5. Significance of the Study ........................................................................................... 6
1.6. Scope of the Study...................................................................................................... 7
1.7. Definition of Terms .................................................................................................... 7
1.8. Chapter Summary ....................................................................................................... 8
CHAPTER TWO .................................................................................................................... 9
2.0 LITERATURE REVIEW ........................................................................................ 9
2.1 Introduction ................................................................................................................ 9
ix
2.2 Challenges and Exposures Faced by SMEs ............................................................... 9
2.2.1 Human Capital as a Driver for Investment................................................................. 9
2.2.2 Evidence of Business Development Services .......................................................... 10
2.2.3 State of the Investment Environment ....................................................................... 11
2.2.4 Level of SME Globalization .................................................................................... 11
2.2.5 Constitution of the Fund Structure ........................................................................... 12
2.2.6 Challenges Evidenced in SME Financing ................................................................ 12
2.3 Key Performance Indicators and Critical Success Factors for Funding SMEs ........ 13
2.3.1 The Investment Process ............................................................................................ 13
2.3.2 The Evaluation Criteria used for Funding ................................................................ 15
2.3.3 Other Factors to Consider ........................................................................................ 16
2.4 Leadership and Change Management in Successful Funding .................................. 17
2.4.1 Leadership in the Change Management Process ...................................................... 17
2.4.2 Role of Transformational Leadership ...................................................................... 18
2.5 Chapter Summary ..................................................................................................... 21
CHAPTER THREE .............................................................................................................. 22
3.0 RESEARCH METHODOLOGY ......................................................................... 22
3.1. Introduction .............................................................................................................. 22
3.2. Research Design ....................................................................................................... 22
3.3. Population and Sampling Design ............................................................................. 23
3.3.1. Population................................................................................................................. 23
3.3.2. Sampling Design ...................................................................................................... 23
3.3.2.1. Sampling Frame ....................................................................................................... 23
3.3.2.2. Sampling Technique ................................................................................................. 24
3.3.2.3. Sampling Size ........................................................................................................... 24
3.4. Data Collection Methods .......................................................................................... 24
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3.5. Research Procedures ................................................................................................ 25
3.6. Data Analysis Methods ............................................................................................ 25
3.7. Chapter Summary ..................................................................................................... 26
CHAPTER FOUR ................................................................................................................. 27
4.0 RESULTS AND FINDINGS ................................................................................. 27
4.1. Introduction .............................................................................................................. 27
4.2. General Information and Response Rate .................................................................. 27
4.2.1. Response Rate .......................................................................................................... 27
4.2.2. Demographic Statistics ............................................................................................. 27
4.2.2.1. Years Spent in the Firm ........................................................................................ 28
4.2.2.2. Position in the Organisation ................................................................................. 28
4.3. Challenges and Exposures Faced by SMEs ............................................................. 29
4.3.1. Human Capital as a Driver for Investment............................................................... 29
4.3.2. Evidence of Business Development Services .......................................................... 30
4.3.3. State of the Investment Environment ....................................................................... 31
4.3.4. Level of SME Globalization .................................................................................... 32
4.3.5. Constitution of the Fund Structure ........................................................................... 33
4.3.6. Challenges Evidenced in SME Financing ................................................................ 34
4.3.7. ANOVA Results on the Challenges and Exposures Faced by SMEs ...................... 35
4.4. Critical Success Factors ........................................................................................... 35
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4.4.1. The Investment Process ............................................................................................ 35
4.4.2. The Evaluation Criteria used for Funding ................................................................ 36
4.4.3. Other Success Factors .............................................................................................. 38
4.4.4. ANOVA Results on the Critical Success Factors .................................................... 39
4.5. Leadership in the Change Management Process ...................................................... 39
4.6. Transformational Leadership in the Investment Process ......................................... 42
4.7. ANOVA Results on Leadership and Change Management in Successful Funding 43
4.8. Chapter Summary ..................................................................................................... 43
CHAPTER FIVE .................................................................................................................. 44
5.0 DISCUSSION, CONCLUSION AND RECOMMENDATION ......................... 44
5.1. Introduction .............................................................................................................. 44
5.2. Summary .................................................................................................................. 44
5.3. Discussions ............................................................................................................... 47
5.3.1. Challenges and Exposures Faced by SMEs from Accessing PE and VC Funding .. 47
5.3.2. Critical Success Factors Used Relied Upon by PE and VC Firms on SME
Investment ............................................................................................................................... 49
5.3.3. Role of Leadership in the Securing of PE and VC Funding .................................... 51
5.4. Recommendations .................................................................................................... 53
5.4.1. Recommendations for Improvement ........................................................................ 53
5.4.1.1. Challenges and Exposures Faced by SMEs .......................................................... 53
xii
5.4.1.2. Key Performance Indicators and Critical Success Factors for Funding in SMEs 53
5.4.1.3. Role of Leadership and Change Management in Successful Funding ................. 53
5.4.2. Recommendations for Further Research .................................................................. 54
REFERENCES ...................................................................................................................... 55
APPENDICES .......................................................................................................................... i
Appendix I: Introduction Letter ................................................................................................. i
Appendix II: Population – List of Venture Capital and Private Equity Funds ........................ iii
Appendix III: Questionnaire ................................................................................................... vii
Appendix IV: NACOSTI License ............................................................................................ vi
xiii
LIST OF TABLES
Table 4.1: Response Rate ........................................................................................................ 27
Table 4.2: Respondents Years in the Firm .............................................................................. 28
Table 4.3: Summary Results - Human Capital as a Driver for Investment ............................ 30
Table 4.4: Evidence of Business Development Services ........................................................ 31
Table 4.5: Summary Results: State of the Investment Environment ...................................... 32
Table 4.6: Summary Results: Level of SME Globalization ................................................... 33
Table 4.7: Summary Results: Constitution of the Fund Structure .......................................... 34
Table 4.8: Summary Results: Challenges Evidenced in SME Financing ............................... 35
Table 4.9: ANOVA Table - Challenges and Exposures Faced by SMEs ............................... 35
Table 4.10: Summary Results: The Investment Process as a Critical Success Factor ............ 36
Table 4.11: Summary Results: The Evaluation Criteria used for Funding ............................. 37
Table 4.12: Summary Results –Other Success Factors .......................................................... 38
Table 4.13: ANOVA Table - Critical Success Factors ........................................................... 39
Table 4.14: Leadership in the Change Management Process ................................................. 41
Table 4.15: Summary Results – Transformational Leadership in the Investment Process .... 43
Table 4.16: ANOVA Table - Leadership and Change Management in Successful Funding . 43
xiv
LIST OF FIGURES
Figure 4.1: Respondent Position in the Organisation ............................................................. 29
xv
LIST OF ABBREVIATIONS
DFI - Development Finance Institution
DUI- Doing, Using and Interacting
ICT – Information and Communication Technology
IFC – International Finance Corporation
IRR - Internal Rate of Return
KNBS – Kenya Naitonal Bureau of Statistics
OECD - Organisation for Economic Co-operation and Development
PE – Private Equity
SME – Small and Medium-sized Enterprises
SPSS - Statistical Package for Social Sciences
STI - Science, Technology and Innovation
USD – United States Dollars
VC – Venture Capital
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CHAPTER ONE
1.0 INTRODUCTION
1.1. Background of the Study
The choice of the source of finance between debt and equity is crucial for the financial health
of an organisation as it depends on organizational factors or conditions which comprise
liquidity, leverage, organizational size, sales growth, dividend pay-outs, variability and
profitability(Salman & Munir, 2012). According to Peavler, (2019), an organizational leverage
is defined as the borrowing of debt to finance the acquisition of inventory, property, plant,
equipment as well as other assets. An organization with relatively low financial leverage when
compared to the industry average or company developed target would tend to issue more debt
than equity. Similarly, the issuance of more debt would be directly proportional to the liquidity
size, higher dividend pay-out, size of the company as well as a lower stock price. The firms
that focus in growing their profitability, anticipate increased sales growth and are in a highly
variable industry tend to issue more stock to fund for their operations Peavler, (2019).
It is for the above reason that the access to equity is vital for the progress and success of
businesses which are young and have inadequate access to debt capital (Julia, 2003). In
addition to this, Janke, (2014) continues to elaborate that venture capital as well as private
equity play a dual role in the innovation process of not only providing the required equity
financing that a business might require for long term, exploratory growth, but also for the
exploitation of short term opportunities. Here in Africa, the segment of start-ups and Small and
Medium-Sized Enterprises being a fundamental part of the structure and development of the
economies within the continent (Pascale, 2011). Pascale, (2011) continues to elaborate that the
access to private equity financing plays a crucial role in meeting needs of such businesses
including, reinforcement of resources as well as instilling of improved management and
technical know-how within such organisations.
Small and Medium-sized Enterprises (SMEs) are therefore inclined to seek more of equity
financing than debt financing. This is supported by the trade-off theory which states that an
organization with a high target debt ratio would tend to enjoy high taxable income and hold
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significant tangible assets, while less profitable and risky firms with intangible assets would
tend to lean towards equity financing (Brealey et al., 2012). According to the World Bank
Group (2018), SMEs account for over 90% of all the organisations worldwide, with the number
set between 420 and 510 million, of which 87% of this range are located in developing
countries. SMEs have also been seen to vary in size within various industries,
governments/jurisdictions and financial institutions (SEAF, n.d.), whose overall perceived
market risk as well as the growth capital available remain small and fragmented (Divakaran et
al., 2014). A case in point would be Israel, where an SME is referred to as an organisation
which has less than 100 personnel and earns revenues below USD 27 million per annum (Harel
& Kaufmann, 2016).
Divakaran et al., (2014) also explained that SMEs encompass a variety of businesses and
sectors, ranging from relatively stable businesses who seek expansion, to entities that leverage
on innovation to disrupt an existing market. In addition to this, the Organisation for Economic
Co-operation and Development (OECD)(2010) mentions that innovating SMEs are best seen
as positive economic disruptors, introducing new products and services as well as more
efficient ways of working. They underpin the adaptation of our economies and societies to new
challenges and drive economic development.
In emerging markets, Micro, Small and Mid-sized Enterprises are believed to be the engine of
growth in their economies as they employ majority of the population (IFC, 2017). The creation
of opportunities as well as support from institutions such as the World Bank Group and other
development institutions, for Micro as well as Small and Medium-sized Enterprises in
emerging markets has been a key approach for developing nations to advance economic
development and reduce poverty (IFC, 2017).
Besides the advancement of the economy and reduction of poverty of a country, the
Organisation for Economic co-operation and Development (2010) also emphasises that SMEs
have a significant role in the innovation process. Their main purpose is to basically come up
with advancements in products (goods and/or services), processes, organisational methods and
marketing techniques into the economy. This would be achieved by either making significant
breakthroughs in innovation or having incremental improvements bringing the economy into
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a leader in technology. There are two modes of innovation which comprise: the Science,
Technology and Innovation (STI) mode, and other, Doing, Using and Interacting (DUI-mode)
which is an experienced-based mode of learning (Jensen et al., 2007). However, OECD (2010)
indicates that only 2%-8% of all SMEs are within the highly innovative and high growth
potential bracket, which cause significant impacts in their economies.
Despite the innovation that is promoted by SMEs, the issue of financing comes aboard. A
financing gap has been recognised amongst various SMEs in the world. The World Bank,
through its investment arm, the International Finance Corporation (IFC), expresses the need to
help the SMEs in bridging this gap through: the provision of investment and financial advisory
services to financial institutions who are targeting SME financing. It also expresses the
requisite to support credit bureaus and collateral registries, invest in FinTech companies as
well as promoting the sharing of knowledge in order to bridge this gap (IFC, 2017).
From a local perspective, SMEs have been categorised as businesses that have a workforce of
between 10 and 99 employees (KNBS, 2016). This report elaborates that as at 2016, there were
1.56 million that were licensed by the local county governments while 5.85 million enterprises
operated unlicensed. KNBS, (2016) also identifies that businesspeople face financing
challenges in raising funding for their entrepreneurial pursuits. The main sources of financing
have been through personal savings, loans from friends and relatives as well as informal
sources such as shylocks.
The Government of Kenya, through the Central Bank of Kenya has focused its sight on Micro,
Small and Medium-sized Enterprises through several lending and credit facilitation programs
in order to bridge the financing gap (Kenya National Bureau of Statistics (KNBS), 2016). In
addition to this, the Kenyan Government, through the Youth Enterprise Development Fund is
encouraging the Kenyan youth in securing nation building projects by assisting in providing
easy and affordable financial (loans) and business development support services, seeking to
start or expand businesses (Youth Enterprise Development Fund, 2019).
Despite the presence of support from the micro and low-level small enterprise, medium-sized
enterprises face a significant financing gap. As some have access to credit funding, others are
4
overleveraged and are unable to seek more funding through debt. As a result, they target
informal credit lenders, whose cost of debt tend to be higher than that of the local retail and
commercial banks (Kaffenberger Michelle, 2016). According to Abraham & Schmukler,
(2017), SMEs mainly fail to secure financing due to the opaqueness of the businesses as they
have less public information compared to large firms. As a result, lenders tend to trade this
lack of information with high collateral, which the SMEs would not have to provide to secure
funding.
Given the above, some SMEs purpose to explore the Private Equity and Venture Capital route
in order to fund raise for expansion and/or growth. According to Divakaran et al., (2014),
Private Equity is an asset class in which investors purchase the illiquid equity (or equity-like)
securities of operating entities/ businesses that are not publicly traded, while Venture Capital
is the type of Private Equity investment that is used in funding new or young enterprises with
innovative ideas (KOCIS et al., 2009).
Private Equity has been in existence from time immemorial, as seen from buy-outs where there
were significant transfers of ownership with cash as a consideration (Demaria, 2013). Demaria,
(2013) goes ahead to describe that there cannot be any Private Equity without entrepreneurs;
the attractiveness of Private Equity backed by the reasonable and proven prospect of achieving
a significant reward than on traditional financial markets. This high reward is a result of a
substantial risk taken up by the Private Equity fund and as a result, there are few businesses
backed by Private Equity Firms in the world.
On the other hand, Venture Capital is seen to be a new frontier to financing, more so in Sub-
Saharan Africa, where it is mainly channelled into information and communication
technology(ICT) projects and businesses, in a bid to improve IT infrastructure in Sub-Saharan
Africa nations (Hain & Jurowetzki, 2018). Hain goes further to recognize that the western
Venture Capital investments arrival in Sub-Saharan Countries such as Kenya illustrate
positivity in the Venture Capital space as companies operating in such economies yield
innovative products, services as well as business models which are even potentially suited for
international markets.
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Venture Capital has also significantly contributed to innovation within businesses operating in
Sub-Saharan Africa by: influencing the environment by reshaping the capital markets for high
risk and high growth investments; creating value to investments through coaching and also
provide contacts from networks to the investments (Baum & Silverman, 2004). Onsomu (2015)
identified that major factors that hinder access to Venture Capital investment in Kenya
included the high-risk nature of SME start-up businesses, high fixed costs of operations,
experience of management running the business and the lack of adequate contacts for
marketing products and services.
This study seeks to determine the drivers/requirements that aid SMEs in securing financing
from Private Equity and Venture Capital funds. It will seek to identify the exposures faced by
SMEs from accessing Private Equity and Venture Capital funding from an internal
environment perspective, understand the key performance indicators used to provide financing
to SMEs by Private Equity players and Venture Capitalists and identify the critical success
factors and strategies to be employed by SMEs in order to secure private equity and venture
capital funding.
1.2. Statement of the Problem
Small and Medium-sized Enterprises have faced challenges in accessing financing to meet
their strategic initiatives as well as their operational deficits. Such businesses that operate in
developing nations have been estimated to suffer a USD 5.2 trillion finance gap annually (IFC,
2017), which is around 22% to 36% of the total credit funding gap in the world. On one hand,
financiers comprising Venture capital funds have various investment criteria which comprise
cash, target returns and time horizons to determine their asset class allocation of funds
(Ramsinghani, 2011). As a result, traditional SMEs need to source for a more sustainable
source of cash from financiers who are aligned to their investment preferences in order to
continue funding for their investments and operations. As aforementioned, with the presence
of funding support for micro enterprises, small and especially medium-sized enterprises have
a narrow funding opportunity to scale up their businesses.
6
There is the need to determine a roadmap which would be used to determine the
drivers/requirements that would not only apply to ICT firms but also traditional SMEs in
securing funding from Private Equity and Venture Capital. In addition, there is hardly any
evidence to guide SMEs operating in Kenya on the process of securing finance from venture
Capitalists and Private Equity players. There is also a shortage of literature surrounding the
role of leadership and change management in the successful funding of SMEs in Kenya. This
study therefore intends to determine the drivers which promote success of SMEs in securing
Venture Capital and Private Equity funding.
1.3. General Objective of the Study
The purpose of this study was to determine the drivers for securing private equity and venture
capital investment in SMEs in Kenya.
1.4. Specific Objectives
The specific objectives of this study comprise the following:
1.4.1. To determine challenges and exposures faced by SMEs from accessing Private Equity
and Venture Capital funding.
1.4.2. To determine the critical success factors relied upon by Private Equity and Venture
Capital Firms on SME investment.
1.4.3. To determine the role of leadership in the accessing private equity and venture capital
funding.
1.5. Significance of the Study
This research study is of importance to the following:
1.5.1. Policy Makers
This study will assist policy makers such as the Government of Kenya to understand the key
performance indicators that would enable SMEs obtain foreign funding from Private Equity
7
and Venture Capital Firms, as well as understand the challenges these SMEs would face from
accessing such financing, for planning of the economy.
1.5.2. Start-up Entrepreneurs as well as Small and Medium-sized Enterprises
This study will assist SMEs who are in the path of becoming funding-ready to know of the
critical success features to secure financing from Venture Capital and Private Equity Firms.
1.5.3. Private Equity Firms
The findings, conclusions and recommendations of this study will enable Private Equity Firms
that have set presence in Kenya and the East African Region to further understand the needs
required by SMEs in order to secure funding from their peers. In addition, they will be able to
learn about the challenges as well as the critical success factors that PE firms who have
operated for a substantial amount of years in Kenya, before they commence operations in the
country and region.
1.5.4. Venture Capital Firms
Since these are high-risk investors, this study will help new venture capital firms yet to set
office in the region to better understand the critical success factors of start-up SMEs in
securing funding in Kenya
1.5.5. Researchers
Academicians will be able to borrow from the findings and discussions of this study to further
the knowledge around the financing of SMEs in the Private Equity and Venture Capital sector.
1.6. Scope of the Study
This research project was limited to SMEs operating in Nairobi, Kenya and have been funded
through private equity and venture capital. The respondents will be representatives of Venture
Capital and Private Equity firms that would comprise investment principals, investment
officers and associates. A population of 35 Venture Capital and Private Equity Firms will be
used for this study. This research was conducted on current data on the investments that have
taken place between January 2016 and September 2019.
1.7. Definition of Terms
1.7.1. Small and Medium-sized Enterprises
Small and Medium-sized Enterprises are defined as non-subsidiary and independent
entities that employ fewer than a set population of employees, whose number would tend
8
to vary from one region to the next. The European Union set this benchmark number as
250 employees while the United States sets it at 500 employees(OECD, 2010).
1.7.2. Private Equity
Private Equity is defined as an asset class in which investors purchase the illiquid equity
(or equity-like) securities that are not publicly traded off operating entities/business
(Divakaran et al., 2014). It is also referred to as a stake which could be either large or
small in a non-traded or private company (KOCIS et al., 2009).
1.7.3. Venture Capital
Venture Capital is the type of private equity investment that is used in funding new or
young enterprises with innovative ideas (KOCIS et al., 2009).
1.7.4. Financial Performance
Financial performance is an indicator of how well a business utilizes its resources for
shareholders’ wealth maximisation and growth of company profitability (Naz et al.,
2016).
1.8. Chapter Summary
This chapter has introduced the study on the drivers for securing venture capital and private
equity investment in SMEs in Kenya. The background of this study describes the SMEs
demographics around their global composition. The statement of the problem, purpose of the
study and specific objectives which include: determining: the challenges faced by SMEs, the
critical success factors used in the funding process as well as the role of leadership and change
management in the successful securing of Private Equity or Venture Capital funding have been
included. In addition to these, the importance of the study, scope of the study and the definition
of terms were also incorporated in this chapter.
Chapter two covers the literature review of this study; it is presented with regards to the specific
objectives of the study. Chapter three presents and justifies the research methodology which
includes the research design as well as the techniques that will be used to collect the data and
analyse it. Chapter four will present the analysis and interpretation of the findings. Chapter
five will finally present the summary of the study, discussions, conclusions as well as
recommendations.
9
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Introduction
Chapter two delves into the studies done from a global perspective, as well as a regional and
local domain. The first part covers the challenges and significant exposures faced by SMEs in
accessing Private Equity and Venture Capital funding from an internal environment
perspective. The second part covers the key performance indicators used to provide financing
to SMEs by Private Equity and Venture Capital Firms, while the third part covers the critical
success factors and strategies to be employed by SMEs in order to secure private equity and
venture capital funding. A summary subsequently follows to summarise this chapter.
2.2 Challenges and Exposures Faced by SMEs
2.2.1 Human Capital as a Driver for Investment
Talaia, Pisoni, & Onetti, (2016) describe that characteristics of the human capital function of
the SME plays a vital role in the determination whether SMEs will secure funding. They
classify this challenge into three subsets: the level of education of the entrepreneur, the age of
the entrepreneur as well as the experience of the entrepreneur. Talaia et al., (2016) goes ahead
to describe that the level of education positively impacts of the magnitude of funding received
by SMEs.
The level of education possessed by the entrepreneur is considered more crucial in the
determining the finding received as he/she is able to develop and communicate the business
plan in a better manner to financiers. (Talaia et al., 2016). In addition, the previous experience
envisaged by the human capital of the SME and by this the age is also a factor taken into
consideration in determining whether an SME can be funded or not. On the other hand,
research done on Canadian start-ups in the biotechnology space showed that SMEs with
presidents/CEO who have had experiences in other SME start-ups but however not succeeded,
might negatively impact funding from Venture Capital (Baum & Silverman, 2004).
10
2.2.2 Evidence of Business Development Services
The challenge of business development services is fueled by constraints related to the
compatibility, limited skills and technical know-how on particular technology, third party
support and transferring data from one technological environment to another (Chibelushi &
Costello, 2009). A significant number of SMEs utilise Information and Commumnication
Technology (ICT) as a tool for communication, information gain as well as social networking.
However, according to Kiveu & Ofafa, (2013) a number of SMEs lack awareness of the vast
opportunities generated by the use of ICT media in access to markets by SMEs. In addition to
this, Kiveu & Ofafa, (2013) also mentions that the challenges of business development services
also include: inadequate market information of particular market segements, poor access to
premises, spaces, relations with export markets, poor advertising and promotional campaigns,
weak e-commerce infrastructure within the SME as well as narrow product diversity.
According to Issa, Chang, & Issa, (2010), the business development services can also be
described with reference to the PESTEL framework. This covers the political, economic,
social, technological, evnironemental and legal factors of the macro environment of a whereby
political factors of the macro environment focuses on the governement regulations that
organisations must adhere to. Issa et al., (2010) continues to elaborate that economic factors
relate to the cost-related matters of the organization while socio-cultural factors are concerned
with the changes to the customer awareness and attitudes as well as individual practices of the
people. The technological factors focus on how technology is used in the organisation while
the enivronmental factors relate to on the impacts of organizaitons towards environmental
issues.
Legal factors relate to activities or practices which are allowable by the locality an organization
operates in; these may span from employment laws, data protection laws, business laws, health
and safety regualtions as well as environmental regulations (Blue Ocean University, 2017).
From a global scale, the of registration of businesses such as in Oman have been viewed to be
complex in nature across various economic factions (Bilal & Al Mqbali, 2015). Bilal & Al
Mqbali,(2015) goes ahead to describe that this challenge is combated by the government’s
commitment to support SMEs around the legal and technology fronts. Nevertheless, the
11
presence of Venture Capital firms have been viewed as shapers to such environments as they
invest in significant research in various industries and economies to fund startups, which also
go a long way in lowering the costs of investors in the searching and funding of businesses
(Baum & Silverman, 2004).
2.2.3 State of the Investment Environment
According to Turyahikayo, (2015), the challenge of the investment environment is affected by
issues surrounding ethics and professionalism. These are fueled by doubius legal systems, in
addition to the unattractive tax incentives (Kauffmann, 2005).The challenges of an SME with
regards to its investment climate is usually affected by the horizontal and vertical issues faced
by that SME, horizontal issues being those that relate to the overall business and regulatory
environment while vertical issues relating to industry specific factors (Ross Herbert, n.d.).
2.2.4 Level of SME Globalization
Globalization can be easily defined as the reach of a particular resource over the entire world
(Oladimeji et al., 2017). Globalization also entails the integration of industry resources,
economies and markets as well as the formulation of policies over a wide geographical area
(Mwika et al., 2018).
According to Al Mubarak, (2016), there are four factors that affect the gloablization of SMEs,
which inlclude: technology, culture, market conditions as well as regulations. The technology
challenge is usually emphasised by the lack of information and knowledge, outdated
technology in addition to the inadequate thought leadership around vision, creativity, strategic
planning and logistics planning for products and services. The cultural factor that brings about
challenges around globalization comprise of cultural adjsutments brought about by the
progression from loacl to internaltional market level. The lack of marketing is an additional
issue towards this challenge as it is portrayed as an issue that involves a lack of knowledge
regarding the best business practices whithina foregin market. The regulations also on the other
hand may contribute towards this challenge andwould be driven by factorscomprising lack of
governemental support of the foreign market as well as lack of information regarding trading
agreements in the foreign jurisdicrition (Al Mubarak, 2016).
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2.2.5 Constitution of the Fund Structure
The fund or capital structure of an organisation has been described with several theorems; the
first being Modigliani and Miller’s Theorem of capital structure, which states that the changes
in the capital structure of an organisation cannot inlfuence the value of tha t organisation if and
only if, the capital markets are perfect, information provided to all investors in the capital
markets is the same, there’s equal access to the securities in the capital markets at exactly the
same terms and there are given investment strategies(Culp, 2011). If any of these assumptions
are not met, then the capital structure of a firm would affect its overall value.
The Trade-off Theory was developed after Modigliani and Miller’s Theorem; it states that
there is some form of optimal capital structure exists persuant to some leverage ratio that would
be exactly equivalent the marginal benefit of debt to its marginal cost (Culp, 2011). The
Pecking Order Theoy on the other hand states that there is no target capital structure and
organisations would first prefer internal financing to external finance which comprises of debt
and equity, therefore opting to acquire the cheapest form of financing first (Chen & Chen,
2011).
2.2.6 Challenges Evidenced in SME Financing
With regards to emerging markets, majority of the Venture Capital and Private Equity funding
emanate from Development Finance Institutions (DFIs) as well as impact investment firms
(Divakaran et al., 2014). Divakaran et al., (2014) goes further to elaborate that issues emanating
from DFIs mostly stem from their tendency of employing strict investment criteria while
injecting funds into PE firms; they tend to use traditional economic models and expect high
internal rate of returns (IRRs) ranging between 20% and 30%. This poses a significant
challenge for PE firms especially for investments in SMEs that carry very significant risks and
internal challenges. As a result PE and VC firms find it challenging to secure sufficient capital
to invest in high risk SMEs and thereby has a spiral effect in the funding towards the small and
medium sized enterprises. This is also explained by the fact that majority of the private eqiuty
firms of the world prefer to invest in larger companies that are highly structured and well
13
established. In addition to the above, private equity firms employ various structuring models
which are in relation to the location they are investing in.
In today’s financial markets, small and medium-sized enterprises face a significant challenge
in securing cheaper financing in form of debt from banks, as they tend to be still conservative
in their approach to providing loans to SMEs due to the fact that they prefer mainintaing lower
loan to deposit ratios (Wonglimpiyarat, 2015).In addtion, according to Miller, (2013), the
capping of interest rates is a strategy used by governements across the world for political and
most specifically for economic reason in order to support particular sectors or industries.
However, the capping to these rates have also been seen to be detrimental as wellas an
inefficient tool in the lowering the cost of debt from a long term perspective. They distort
markets and financial institutions such as banks would thus prefer lending to businesses that
possess high collateral and as a result, such businesses end up borrowing from informal lenders
at high interest rates (Koech & Moronge, 2018).
Other challenges that SMEs face with regards to financing is the lack of credit information
which financial instiutions can use to assess their creditworthiness; these also include bank
deposit information (Okoth Michael Okoth, 2013). Okoth, (2013) goes on to elaborate that
other financing challenges include lack of proper book keeping and preparation of financial
information/statements regarding the SME’s financial performance over the year(s). As a
result, majority of these SMEs look onto informal money lending schemes which charge very
high interest rates.
2.3 Key Performance Indicators and Critical Success Factors for Funding SMEs
2.3.1 The Investment Process
In order to determine the metrics used by private equity and venture capital firms in the funding
processes for SMEs, there is the need to understand the backbone of how an investment
decision is made from a Venture Capital or Private Equity perspective. There have so far been
six different processes that were used in investment decision-making. These include Wells six
step model, Tyebjee and Bruno’s four step model, Hall’s six step decision model, Fried and
14
Hisrich four step decision model, Boocock and Woods seven step decision model as well as
Gluer’s four step decision model (Narayanasamy et al., 2011).
According to Silva, (2004), the Wells model of 1974 shows that venture capital firms would
tend to use a six-step decision making process that would comprise of the investment search,
proposal screening, the proposal evaluation, meetings and follow-ups, operations handling and
cashing out processes. Tyebjee and Bruno’s four step model first focuses on the deal
origination process followed by proposal screening; proposal evaluation and finally the
structuring of the deal (Narayanasamy et al., 2011). According to AsianFA, (2012), Tyebjee
and Brunos’ first stage looks into investment case or the deal generation phase, which
comprises the establishment of a sound investment source which will produce the desired
investment returns. The second stage, otherwise known as the initial screening phase, involves
the preview process of the investment case, where major investment proposals whose business
decisions yield more favourable assessments would be selected. The third stage of the model
involves the evaluation of proposals. Otherwise known as the audit excellent investment cast,
this includes the implementation of in-depth investigation of the investment plan provided.
From here, the venture capital firm would then provide more decision-making information that
would be used as a reference for the subsequent stages. The fourth stage is the deal structuring
phase or investment agreement stage. Here, the investor decides to engage on a special
investment case and see whether they can come into an agreement with the investees.
AsianFA, (2012) expands Tyebjee and Bruno’s four step model into two further stages which
comprise, post investment stage and the investment exit stage. The post investment stage sets
in once the investment agreement is signed and the target company happens to be part of the
investor’s portfolio. Activities in the post-investment stage of which the venture capital or
private equity firm would partake in include contribution towards decision-making,
supervision and injection of additional funds raised to assist in strategic consultancy services
inclusion in the board of directors in order to steer the organization’s objectives. AsianFA,
(2012) continues to elaborate that the final stage, the investment exit stage, involves the
investor divesting from a company in order to obtain economic profits. In addition to this, the
Private Equity or Venture Capital firm play an active role in directly assisting the target
15
company and the merger transaction sales, initial public offering or other exit strategy, which
will make the venture capitalists in the initial investment to obtain a great reward.
Similarly, Guler developed a four-pronged approach in 2003 towards the investment process.
It slightly differed from Tyebjee and Bruno’s four step approach with the first and third stages
changing to;deal flow generation and conducting due diligence; the preparation of the term
sheet was similarly viewed as part of the deal structuring stage (Narayanasamy et al., 2011).
On the other hand, Hall’s decision model describes the investment process into the deal flow
generation, proposal screening, proposal assessment, evaluation of the project, conducting due
diligence, deal structuring, venture operations and then cashing out (Hall & Hofer, 1993).
Narayanasamy et al., (2011) also explained the Fried and Hisrich four step decision model of
1994 as the management process that involves origination of the deal; firm-specific screening;
generic screening; first phase evaluation; second phase evaluation and finally closing the deal.
Boocock and Woods later proposed in 1997 that the decision model to have a seven-step
process: deal flow generation, initial screening, first investor meeting, second investor meeting,
board presentation, conducting due diligence on the target and finally deal structuring.
2.3.2 The Evaluation Criteria used for Funding
MacMillan, Siegel, & Narasimha, (1985) analysis on the commonly used evaluation criteria
used for the financing of SMEs is based on four factions that comprise: the entrepreneur’s
characteristics, the products’ or service’s characteristics, the characteristics of the market as
well as the financial considerations. The entrepreneur’s characteristics would be supported by
the entrepreneur’s personality, management skills as well as possessed experience, the stake
owned by the management in the firm, the personal motivation of the entrepreneur to seek
Venture Capital or Private Equity funding as well as the quality of the venture team who have
been tasked to apply for such funding (Hudson, 2005). Hudson, (2005) continues to define the
product or service characteristics as those that comprise the attributes, differentiation,
intellectual property status, growth and market potential as well as proof of concept towards
new products. Tyebjee & Bruno, (1984) described the evaluation criteria on the market in
which a corporate applicant operates to be supported by the features comprising, market size,
market attractiveness, market barriers to entry resistance to economic cycles as well as the
16
potential towards market growth. Tyebjee & Bruno, (1984) further described financial
characteristics as those that would be evaluated using the profit margins, potential for the
applicant to merge or get acquired, tax benefits, hedging process against current investments
as well as the investment exit opportunities available.
According to Ng, Kee, & Ramayah, (2016), enterprise success is a relevant variable concerned
with firm performance. Despite this relevance, there is hardly a consensus about its definition,
dimensionality and measurement. In this research, enterprise success is defined as an
achievement accomplished in both financial performance and non-financial performance,
which is reflected in growth-orientated SME owner-managers’ perceived satisfaction (Ahmad
et al., 2011). In this study, firm performance is conceptualised as a multidimensional construct
where financial performance includes profitability, sales, sales growth, return on investment,
cash flow and market share, while non-financial performance covers autonomy, customer
retention, ability to balance family and work, relationship with suppliers, business image and
relationship among employees in the company. Revisiting the results of the initial survey, the
results identified three crucial factors as antecedents to enterprise success: transformational
leadership, entrepreneurial competence, and technical competence. Six hypotheses are posted
to examine and explain the role of these constructs in influencing the enterprise success of
SMEs.
2.3.3 Other Factors to Consider
Despite having an elaborate process for investment, it is not guaranteed that an investment
proposal would be accepted by the Venture Capital or Private Equity Firm past the investor
screening stage. Boocock & Woods, (1997) elaborates that the main purpose of Venture
Capital and Private Equity firms rejecting investment proposals is the fact that potential
investees would have an incomplete plan, where key data was omitted from the original
submission and the investment proposal was unacceptable for consideration to the next
investment stage. Unfavorable market characteristics which would comprise narrow markets,
contracting markets, saturation, and insufficient growth potential may be reasons as to
discouraging private equity and venture capital firms from continuing with the investor
screening. Additionally, there are restrictions towards the investments made by the funds. Due
17
to the requirement of spreading the investment risk, applications that required a large
investment size would be foregone. Another major reason as to the discontinuance of
investment screening as per Boocock & Woods, (1997) would be the withdrawal of the
application by the applicant/investee/target company. This withdrawal would be mainly
because of the unwillingness of the applicant to comply with the due diligence findings.
Other reasons as to why the investment would not go through include: financial factors
comprising the lack of complementary financing outside the Private Equity or Venture Capital
funding, excessive risks around the business conducted by the applicant, lack of seriousness
from management towards the investment process set out by the Venture Capital and Private
Equity firms as well as a lack of response towards the queries brought forward from the due
diligence exercise conducted (Hudson, 2005).
2.4 Leadership and Change Management in Successful Funding
2.4.1 Leadership in the Change Management Process
In the event of an acquisition, the aspect of change is inevitable in an organization. The role of
leadership in change management is also required in order to meet the set objectives of the
change. There is a disparity between what leaders view as success in the change process and
the resultant effect of the change to the overall business (Deshler, 2016). Deshler, (2016)
continues to elaborate that around 55% of leaders whose organizations have been part of a
change process felt that those changes met their purpose, yet in the long run they were only
25% of the time successful.
For an SME to experience an effective change management process, Kotter & Bourner, (1998)
developed an eight stage action plan which could be used to ensure organizations experience
an efficient and effective change process. The first action plan involved the establishing of the
sense of urgency; this involves the identification and examination of the market and
competitive realisms which would include: opportunities, crises which are currently faced and
those that could occur. The second action point would be developing a powerful change
management coalition or team, which would lead the change process. The leader of the
organization would also need to display enthusiasm and commitment to help the right team
18
members to effect the change as well as model the trust and teamwork needed in the group
(Reyerson, 2011). The third stage would be to develop an appropriate strategy as well as the
vision for the change through providing specific goals as well as providing effective direction.
The fourth action plan wold involve the frequent and simple communication of the change
vision across the whole firm, followed by the action empowerment stage. Reyerson, (2011)
described that the latter stage involves the use of individuals who have experience in change
management to influence employees towards accepting the change process as well as the use
of systems that inspire, promote optimism with respect to the change being adopted in the
organisation.
The sixth action plan involves the generation of short-term wins; this would be achieved
through rewarding individuals who conform to the changes. In the event of generating short-
term wins, the guiding team should consolidate the gains already made within the organisation
and thereby bolster the process by introducing more projects and change agents. Last, the
change management process should complete with the integrating change into the
organization’s culture(Kotter & Bourner, 1998).
The anchoring of the change towards the organization’s culture is significant especially in the
event of a corporate acquisition. However, this change can be effectively integrated into the
corporate culture in two approaches which include task integration and human integration
(Lund & Whitt, 2017). Lund & Whitt, (2017) also explains that the task integration as the type
of integration which involves the identification and realization of operational synergies in an
organization. It focuses on the technical aspect of the change process and it targets towards
shaping operations of both the investor and investee. Notwithstanding, the human integration
approach focuses on the development of positive attitudes towards the integration amongst the
employees working under the investor and investee with the aim of building on trust and
respect.
2.4.2 Role of Transformational Leadership
Transformational leadership is defined as the leadership approach that seeks to change the
status quo of an organization by articulating to followers the problems of the current system
19
and a compelling vision to which a revamped organization could be (Achua & Lussier, 2013).
In the event of a business acquisition, it is mandatory that management and employees have to
adapt these changes. Martin, (2015) elaborates that leaders need to challenge the company style
and allow followers to decide on unchallengeable values from the historical procedures they
need to undertake.
With regards to the drivers of success of an organisation, transformational leadership could
affect the performance of such an organisation from both a financial and non-financial
perspective (Ng et al., 2016). Transformation management criticizes multiple variables that
include the leader’s personality, clarity as well as complication. The main criticism within
transformational leadership is that it possess a high likelihood of energy abuse (Antonakis &
Day, 2017). This energy abuse relates to the management of morality, as a transformative
leader affects the emotional viewpoint of his follower. The impact would be bad if the direction
or route tends to be in the wrong path. Lee, (2014), additionally informs that the quality of the
acquisition and balancing the relevant interests and variables is lacking in transformation
leadership that could promote the avoidance of dictatorship and the repression of minorities.
Additionally, Mhatre & Riggio, (2014) furthers the argument that transformational
management focuses more on creating an individual personality characteristic than a behaviour
that can instruct individuals. Because management of transformation is a mixture of multiple
management models, understanding the concept and teaching is more complicated. The leader
is seen as a visionary idol in a transformative management and the leader and his supporters
are engaged in the business process. This creates a dilemma when viewing leadership from a
point of perspective of the characteristic.
Reviewing the arguments of the critique, a question emerges as to whether an organization
could follow the transformation management to operate effectively. Criticism reviews morality
through transformative management and false authority. McCleskey, (2014) describes the
classification of transformation management as socialized and personalized features. The
leaders who use their ability to inspire and lead their supporters to an incorrect route are called
pseudo leaders of transformation. They have characteristics comparable to those of
transformative rulers, but the motivation would be personal and exploitative. To determine or
choose their motivation and path, it depends on the individual characteristics; transformational
20
leadership concept cannot be blamed. Transformational leadership focuses on creating
individual personality trait. The important characteristic of transformative leadership is that it
concentrates followers' development and attempts to enrich their personality. It encourages and
needs inspiring followers to engage with the organization's shared vision and goal. A
transformative leader promotes others to take the lead; as a consequence, people with effective
leadership characteristics will fill the entire organisation McCleskey, (2014). In addition to
this, McKinnon-Russell, (2015) elaborate the development of followers also through training
which was also a key component in the improvement of the employee performance.
The transformative leader also motivates his supporters to be innovative in solving issues and
developing the leadership characteristics of supporters through training, mentoring, and
challenging and support. This leads to cooperation within a leader and follower, where the
follower develops his leadership characteristics and the leader becomes a moral agent.
Transformative leadership therefore needs to be founded on moral foundations McKinnon-
Russell, (2015).
In addition, it is notable that transformative leadership has characteristics that are relatable to
charismatic leadership characteristics. Charisma is an element of the transformative leader; it
is considered an idealized effect correlating. It is generally categorized as categories that are
socialized and personalized. Authentic charismatic or transformative leaders must be
socialized leaders for an organization to perform better (Mhatre & Riggio, 2014). Four
essential organizational operations are carried out under transformative management, making
a compelling case for change to increase the sensitivity of followers to organizational change,
inspiring shared vision for a new and better future, bringing about and embedding new
changes. Some critics consider transformative management to be discriminatory and autocratic
and a questionnaire to be a directive or participatory. The aspect of leadership in the
determination of success of funding was also examined by McKinnon-Russell, (2015) where
the aspect of proper managerial skills form part of the evaluation criteria of the entrepreneurs
characteristics. In the context of entrepreneurship, transformational leadership practices would
comprise of relay of the organization’s vision to their employees as well as instilling the values
and beliefs of their enterprise (Paladan, 2015).
21
2.5 Chapter Summary
This chapter reviewed literature in the challenges faced by SMEs, key performance indicators
and critical success factors that promote PE and VC funding, as well as the role of leadership
and change management in successful funding of SMEs. The literature reviewed comprised
journals, company reports, as well as thesis and dissertations prepared around SMEs. It was
however noted that there is little literature around private equity and venture capital covering
the African continent in general. The following chapter covered the research methodology to
be adopted for this project. This included the research design, tool of data collection as well as
the method used for data analysis. Chapter four provided results and findings while Chapter
five covered the summary, discussion, conclusion and recommendations.
22
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1. Introduction
Chapter three outlines the research methodology used in this study. It explains the research
design, identifies the population and sampling design, explains data collection method used,
research procedures followed as well as data analysis methods utilised.
3.2. Research Design
Research design is described as the tool from which the work plan used to complete a research
project is derived; it is used to ensure that the evidence gathered enables the research to
determine the general objective of the project in an unambiguous manner (De Vaus & de Vaus,
2001). According to Cooper & Schindler, (2014), the research design could be described as an
activity and time based plan that is based on the general objective and contains a guide and
framework for selecting source and kinds of information as well as specifying the relationships
among variables. It also contains a stepwise outline for every research activity that will be
conducted.
The research design contains clear objectives from which the general objective is derived,
specification of resources from which data is meant to be collected, the proposed manner of
collecting and analysing it. In addition, it contains discussions around the ethical issues and
constraints that could be faced by the researcher while collecting the data(Saunders et al.,
2016).Saunders et al., (2016) continues to elaborate that the research design can be developed
using threw methodologies: the quantitative, qualitative and mixed methods. The quantitative
methodology is used in the event when and where there is predetermined and highly structured
data collection techniques and where the research is based on a deductive approach and
variables measured numerically as well as analysed using statistical and graphical tools. For
this study, the descriptive research design was used in order to obtain quantifiable data in form
of characteristics and trends in which the respondents provided with regards to the drivers that
23
promote PE and VC funding in SMEs. The data obtained was then used to analyse and form
conclusions and recommendations.
3.3. Population and Sampling Design
3.3.1. Population
According to Saunders et al., (2016) a population is referred to as the full set of individuals
from which the sample is derived as well as which results can be obtained. A population may
also be referred as the elements about which some inferences would like to be made (Cooper
& Schindler, 2014).The population size for this study was of 35 Venture Capital and Private
Equity funds operating in Kenya and have target deals of less than USD 10 million. Cooper
& Schindler, (2014) continues to describe a population element as an individual participant
or object in which a measurement is taken.
3.3.2. Sampling Design
Sampling design is described as the method used to find a sample from a specific population
and as such it is the procedure that a researcher uses while selecting items for the study’s
sample (Cooper & Schindler, 2014). Cooper & Schindler, (2014) summed up sampling
design as the determination of the target population, parameters of interest, sampling frame,
sampling method and sample size as outlined.
3.3.2.1.Sampling Frame
The sampling frame is defined as the list of every member of the population (Donald, 2011).
Donald, (2011) goes further to describe that a sampling frame comes about from the
determination of a complete list of a population and the common sources of a sampling frame
may comprise electronic registers, list of stakeholders, account holders, registered users,
website addresses as well as credit rating agencies. For the purpose of this study the sampling
frame was derived from the 35 management personnel drawn from the listed private equity
and venture capital firms with presence in Kenya.
24
3.3.2.2.Sampling Technique
This study will adopt the census technique. Cooper & Schindler, (2014) defined a census as a
count of all the elements within a given population. The census technique was used in this
study due to the nature of the industry the Venture Capital and Private Equity funds operate
in; a highly closed and confidential industry.
3.3.2.3.Sampling Size
According to Onwuegbuzie & Collins, (2007), the sample size is defined as the number of
participants selected from a population determined in a qualitative and quantitative studies.
The sample size is determined by the optimum number necessary to enable a valid reference
to be made about the population(Marshall, 1996). Marshall, (1996) continues to describe that
the sample size that is most optimal will depend on the parameters of the study. A large sample
size will tend to have a low sampling error. On the other hand, ABS, (2013) describes a census
as a study of every unit in a population. Therefore, a census of 35 funds was determined based
on their criteria of investment in target deals that are below USD 10million, since the size of
the population was low. The table comprising the funds was shown under Appendix II.
3.4. Data Collection Methods
According to Cooper & Schindler, (2014), data is described as the information that comprises
of attitudes, behaviour, motivations as well as attributes collected form participants,
observations made in the environment or secondary sources. This study used primary data
which was obtained using a questionnaire that was delivered to the participants via personal
means and completed by them.
The questionnaire was the most appropriate data collection tool for this study because of the
bulky data that was sourced from the sample size. It was divided into four sections comprising:
the background information of the participant, followed by the challenges facing SMEs from
Venture Capital and Private Equity funding. The third section dealt with the key financial
performance indicators and critical success factors used for funding by Private Equity and
25
Venture Capitalists while the last section covered the role of leadership and change
management in successful funding.
3.5. Research Procedures
After the submission and successful approval of the proposal, a letter of authorization was
sought from the University to seek permission to carry out the data collection process from
each of the funds in the sample size. This letter was accompanied by the questionnaire that was
drafted and successfully approved by the Supervisor to the intended respondents.
Questionnaires were shared personally as well as via email in order to ensure fluid and quick
collection of data. A reminder was sent every three days to have the respondents facilitate
completion of the questionnaires. The questionnaires that were retuned were reviewed to
ensure that they were complete and any missing information was sought from the respondents.
The questionnaire responses then underwent a coding process and were keyed into the
Statistical Package for Social Sciences (SPSS) program for analysis to come up with a
quantitative inferences, conclusions and recommendations. A research authorization letter was
sought from the National Commission for Science, Technology and Innovation (NACOSTI)
for the collection of data from respondents of the 35 funds.
3.6. Data Analysis Methods
The data analysis methods involved establishing a correlation between the challenges faced by
SMEs, the key performance indicators and critical success factors for funding SMEs as well
as leadership and change management in the successful funding of SMEs through Venture
Capital and Private Equity. Factor analysis was utilised in order to determine the correlation
between the independent variables and the dependent variable. ANOVA analysis was adopted
to determine the latter. According to Clayton-Soh, (2016), ANOVA analysis involves the
assessment of potential statistical differences between the means of two or more independent
or unrelated groups, in order to determine whether the explained variance in a particular set of
data is significantly greater than the unexplained variance.
26
The data analysis was in the form of descriptive statistics from which the research findings
were obtained. The data analysis involved the use of both Statistical Package for Social
Sciences (SPSS) as well as Microsoft Excel 2016. The findings were then presented visually
in the form of tabular formats or frequency tables, charts and graphs to establish whether the
information obtained represents the entire population of the study or were in any way biased
towards the various sections of the population such as that from the SMEs that have secured
Venture Capital or Private Equity funding.
3.7. Chapter Summary
This chapter delved into the components of the research methodology that will be used in this
study. The main methods of data collection used will be questionnaires and interview guides,
to obtain necessary data for the specific objectives. It also outlined the population and sampling
design, explains data collection method used, research procedures followed as well as data
analysis methods utilised. A population as well as a sample size of 35 funds with target deals
below USD 10 million will be used for this research project. A sampling frame of 35
management personnel will also be employed in obtaining this data, while the sampling
technique used will be judgement sampling. The data obtained from the population will
collected using a questionnaire which will be shared personally and on email. Data analysis
will be conducted using both Statistical Package for Social Sciences (SPSS) and Microsoft
Excel 2016 and visually represented in both graphical and tabular formats. Chapter four covers
the results and findings of the data collected from the field work while Chapter five includes
the summary, discussion, conclusion and recommendation.
27
CHAPTER FOUR
4.0 RESULTS AND FINDINGS
4.1. Introduction
This chapter covers the results as well as findings from the data collection exercise that was
conducted as well as the analysis that was performed. This chapter has been guided by the
questionnaire that provided responses to the challenges and exposures faced by SMEs, the key
performance indicators and critical success factors that promote funding of SMEs; and the role
of leadership and change management that promotes successful funding from PE and VC
Firms. Descriptive analysis was performed, and the findings were presented in both Tables and
Figures.
4.2. General Information and Response Rate
4.2.1. Response Rate
A population of thirty-five people from various Private Equity and Venture Capital Firms
operating in Kenya were targeted and approached to fill in the questionnaire electronically
during the data collection stage. The respondents ranged from firm partners, directors,
investment principals; investment officers as well as investment associates. The response rate
was 77.14%, as 27 of these respondents were able to provide answers to the questionnaire.
Table 4.1: Response Rate
Category Frequency Percentage
Responded 27 77.14%
Not Responded 8 22.86%
Total 35 100.00%
4.2.2. Demographic Statistics
The respondents’ demographics that were captured comprised the years spent in the firm as
well as the position of the respondent within the organisation.
28
4.2.2.1.Years Spent in the Firm
The distribution regarding the years of experience of which the respondents had in their firms
was positively skewed, as 81.5% of the respondents had been in their respective firms between
zero and seven years.
Table 4.2: Respondents Years in the Firm
Number of Years in the Firm
Frequency Percent Cumulative
Percent
0 - 3 Years 11 40.7% 40.7%
4 - 7 Years 11 40.7% 81.5%
8 - 11 Years 4 14.8% 96.3%
12 years and Above 1 3.7% 100.0%
Total 27 100.0%
4.2.2.2.Position in the Organisation
When asked to indicate the position in their organisation, 48.1% of the respondents indicated
that they were of the Investment Associate level. The Partner, Portfolio, Manager and Director
positions had an equal number of respondents, each repressing 14.8% of the total respondents.
29
Figure 4.1: Respondent Position in the Organisation
4.3. Challenges and Exposures Faced by SMEs
This section of the questionnaire used a Likert scale which had the options: 1 = Less
Significant, 2 = Partially Significant, 3 = Neutral, 4 = Significant and 5= Most Significant.
Overall, the respondents viewed that the challenges evidenced in an SME with regards to their
human capital, business development services, investments environment, globalization and
access to finance were critical in determining whether an SME would pass the investment
screening stage. In addition, the fund structure of the PE and VC firm is a significant factor in
determining whether an SME qualifies for screening because of the regulations set by the
partners providing the funds for investment.
4.3.1. Human Capital as a Driver for Investment
The human capital variable was measured using the level of education of the entrepreneur, the
age of the entrepreneur and the level of experience with regards to other SME start-ups. Of the
total respondents, 40.74% agreed that the entrepreneur’s level of education is significant in
determining whether to invest in the business. A similar frequency distribution disagreed with
this notion while 18.52% of the respondents are neutral. With regards to the age of the
entrepreneur, 59.26% of the respondents agreed that this was not significant in determining
3.7% 3.7%
14.8%
48.1%
14.8% 14.8%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Chief
Executive
Country
Manger
Director Investment
Associate
Partner Portfolio
Manager
Fre
quen
cy
Position
Respondent Position
Chief Executive Country Manger DirectorInvestment Associate Partner Portfolio Manager
30
whether to invest in the SME. 29.63% were neutral while 11.11% viewed this metric as a
significant factor in the investment process. 48.15% of the respondents agreed that the
experience that an entrepreneur has had with other start-ups is a significant factor in
determining whether to invest in the SME or not. However, 29.3% of the respondents disagreed
with this while 22.22% were neutral.
The summary statistics on the entrepreneurs’ level of education indicated a median of 3 and a
standard deviation of 1.311, indicating that the approach towards this metric was neutral. The
median of the responses regarding the entrepreneurs age was 2 while the standard deviation
was 0.953; this indicated that the age was not a significant metric in determining whether to
invest in the SME or not. The responses regarding the entrepreneurs’ experience with other
SME start-ups yielded a median of 3 and a standard deviation of 1.137; this indicated that there
was a neutral approach towards requiring this factor as a determinant in the investment process.
Table 4.3: Summary Results - Human Capital as a Driver for Investment
Challenge of Human Capital
Entrepreneurs Level of
Education Entrepreneurs Age
Experience with SME
Startups
Mean 2.78 2.3 3.3
Median 3 2 3
Std.
Deviation 1.311 0.953 1.137
Variance 1.718 0.909 1.293
Skewness -0.22 0.206 -0.13
4.3.2. Evidence of Business Development Services
The evidence of business development services as a driver for Private Equity and Venture
Capital investment was measured using the level of ICT infrastructure in the organisation, the
level of political exposure the organization experiences, the legal constraints faced by the SME
and the level of environmental constraints in the industry the SME operates in. 59.26% of the
respondents agreed that the level of ICT infrastructure in the organisation is significant in
determining the investment in the SME. 25.93% of the 27 respondents were neutral towards
this metric while 14.81% found it not a significant factor in the investment process. The level
31
of political exposure the organization experiences was similarly significant, as 40.74% of the
respondents agreed that it was an important metric in the investment process. 33.33% of the
respondents however disagreed with this while 25.93% were neutral regarding this metric in
the investment process. 48.15% of the respondents agreed that the legal constraints faced in
the SME were significant in the determining whether to invest in the SME or not; 37.40% of
the respondents did not agree with this factor being a significant factor while 14.81% were
neutral. The level of environmental constraints was determined as a significant metric as a
result of 44.44% agreeing to this; 25.93% did not find this metric as significant while 29.63%
were neutral.
The summary statistics on the level of technology used indicated a median of 4 and a standard
deviation of 0.975, indicating that the approach towards this metric was significant. The
median of the responses regarding the firm political exposure was 3 while the standard
deviation was 1.299; this indicated that this metric was neutral in determining whether to invest
in the SME or not. The responses regarding the firm legal exposure and level of environmental
constraints both yielded a median of 3; the standard deviations were 1.34 and 1.027
respectively. This indicated that there was a neutral approach towards requiring this factor as
a determinant in the investment process.
Table 4.4: Evidence of Business Development Services
Level of
Technology Used
Firm Political
Exposure
Firm Legal
Exposure
Level of
Environmental
Constraints
Mean 3.52 3.07 3.11 3.15
Median 4 3 3 3
Std.
Deviation 0.975 1.299 1.34 1.027
Variance 0.952 1.687 1.795 1.054
Skewness -0.727 -0.147 -0.218 -0.548
4.3.3. State of the Investment Environment
The state of the investment environment as a driver was measured using the level of business
ethics practised in the industry the SME operates in as well as the firm’s business ethics.
32
77.78% of the respondents agreed that the presence of business ethics in the industry was a
significant factor in determining whether to invest in the SME or not.14.81% of the
respondents were neutral towards this view while 7.41% disagreed to this factor being a
significant driver in promoting SME investment. With regards to the firm business ethics,
59.26% of the respondents confirmed that this factor was significant in determining SME
investment; 14.81% were neutral while 25.93% indicated that this metric was insignificant in
investing in the SME.
The summary statistics on level of business ethics practised in the industry the SME operates
in and the firm’s business ethics both had a median of 4 and standard deviations of 1.091 and
1.341 respectively, indicating that the approach towards these metrics were significant.
Table 4.5: Summary Results: State of the Investment Environment
State of the Investment Environment
Industry Business Ethics Firm Business Ethics
Mean 3.96 3.48
Median 4.00 4.00
Std. Deviation 1.091 1.341
Variance 1.191 1.798
Skewness -1.456 -.578
4.3.4. Level of SME Globalization
This driver for PE and VC investment was measured using the level of marketing done by the
SME for promotion of its goods / services and the use of technology in the marketing initiatives
for the SME. 51.85% of the respondents agreed that marketing of goods/services by the SME
is a significant factor in the investment process.25.93% of the respondents were neutral
towards this metric, while 22.22% did not find this metric significant in promoting SME
investment. With regards to the use of technology in the marketing initiatives of the SME,
40.74% of the respondents confirmed that this factor was significant in determining SME
33
investment; 33.33% were neutral while 25.93% indicated that this metric was insignificant in
investing in the SME.
The summary statistics on the level of marketing initiatives conducted by the SME had a
median of 4 and a standard deviation of 1.068. This indicated that the respondents treated this
factor as a significant metric in promoting investment in SMEs. The use of technology in the
SME marketing initiatives had a median of 3 and a standard deviation of 1.013, indicating that
a neutral approach towards this factor driver.
Table 4.6: Summary Results: Level of SME Globalization
Challenge of Globalization
Firm Marketing Initiatives Use of Technology in Marketing
Mean 3.3 3.11
Median 4 3
Std. Deviation 1.068 1.013
Variance 1.14 1.026
Skewness -0.65 -0.477
4.3.5. Constitution of the Fund Structure
The constitution of the fund structure was supported by the positive correlation between the
fund and industry the SME operates in as well as the potential returns to the fund. With regards
to the correlation between the industry in which the SME operates in and the target industries
set out by the fund, 55.56% of the respondents confirmed that this factor was significant in
determining SME investment; 14.81% were neutral while 29.63% indicated that this metric
was insignificant in investing in the SME. 70.37% of the respondents agreed the potential
returns based on the allowable risk of the fund was a significant factor in promoting investment
in the SME. 25.93% of the respondents were neutral towards this metric while 3.70% viewed
this driver as partially significant.
34
The summary statistics on the fund correlation and potential returns both had a median of 4
and standard deviations of 1.334 and 0.877 respectively, indicating that the approach towards
these metrics were significant.
Table 4.7: Summary Results: Constitution of the Fund Structure
Challenge of the Fund Structure
Fund Correlation Potential Investment Return
Mean 3.37 4
Median 4 4
Std. Deviation 1.334 0.877
Variance 1.781 0.769
Skewness -0.434 -0.369
4.3.6. Challenges Evidenced in SME Financing
This driver was supported by two factors: the macroeconomic factors influencing the interest
and foreign exchange rates charged to the SME; and the presence of credit information on the
SME. 81.48% of the respondents agreed that the macroeconomic factors influencing interest
and foreign exchange rates charged were significant drivers which would either promote or
discourage investment in SMEs. 11.11% were neutral in view while 7.41% of the respondents
did not find this factor significant in determination of investment.
With regards to the presence of credit information on the SME, 70.37% of the respondents
confirmed that this factor was significant in determining SME investment; 18.52%% were
neutral while 11.11% indicated that this metric was insignificant in investing in the SME.
The summary statistics on the fund correlation and potential returns both had a median of 4
and standard deviations of 0.917 and 1.115 respectively, indicating that the approach towards
these metrics were significant.
35
Table 4.8: Summary Results: Challenges Evidenced in SME Financing
Challenge of SME Financing
Macroeconomic Exposures Firm Credit Profile
Mean 3.93 3.63
Median 4 4
Std. Deviation 0.917 1.115
Variance 0.84 1.242
Skewness -1.463 -1.342
4.3.7. ANOVA Results on the Challenges and Exposures Faced by SMEs
The result of the ANOVA analysis indicated that the p-value was below 0.05, indicating that
the challenges and exposures faced by SMEs were significant in determining whether Private
Equity and Venture Capital firms would invest in them or not.
Table 4.9: ANOVA Table - Challenges and Exposures Faced by SMEs
ANOVA Table
Source of
Variation
Sum of
Squares df MS F P-value F crit
Between
Groups 78.96296 14 5.64021 4.40785 2.46362E-07 1.71720
Within
Groups 499.03704 390 1.27958
Total 578.00000 404
4.4. Critical Success Factors
4.4.1. The Investment Process
This driver was measured by level of significance the respondents viewed regarding the type
of investment process used by the investment committee for screening and selection of an SME
for funding. 55.56% of the respondents agreed that the type of investment process used by the
investment committee for screening and selection of an SME for funding was a significant
driver which would promote investment in SMEs. 33.33% were neutral in view while 11.11%
of the respondents did not find this factor significant in determination of investment. This
36
metric had a median of 4 and standard deviations of 1.177, indicating that the approach towards
these metrics were significant.
Table 4.10: Summary Results: The Investment Process as a Critical Success Factor
Type of Investment Process
Mean Median Std. Deviation Variance Skewness
3.67 4 1.177 1.385 -0.663
4.4.2. The Evaluation Criteria used for Funding
The evaluation criteria success factor was measured by: financial performance or success of
the SME over the period of its existence; the SME’s relationship with suppliers; the SME’s
reputation with respect to other stakeholders including, the general public, the environmental
lobby groups, the Government; the level of skills that the top management have in running the
SME; the percentage of ownership by the top management of the business; and market factors
that comprise the market potential growth/ attractiveness and barriers.
96.30% of the respondents agreed that the financial performance of the SME over its existence
period was very significant in determining investment in the SME; 3.70% however viewed this
factor as partially significant in their investment process. The respondents who viewed the
factor of the SME relationship with suppliers as significant were 55.56%; 29.63% were neutral
while 14.81% did not view this factor as significant. 66.67% of the respondents also identified
that the SME’s reputation with respect to other stakeholders mentioned above as significant in
the investment decision; 25.93% had a neutral view while 7.41% view this factor as a partially
significant one in their investment decision.
The skillset of top management was viewed to be significant with 88.89% of the respondents
supporting this. The remaining 11.11% had a neutral view towards this factor. The percentage
ownership by top management had varied views: 40.74% of the respondents viewed this factor
as a significant determinant in the investment decision, 29.63% were neutral while a similar
number viewed it as insignificant in determining their investment decision in an SME.
37
With regards to external market factors, 92.59% of the respondents considered this success
factor as critical in their investment decision. 3.70% were neutral towards this factor while a
similar proportion viewed it as a partially significant success factor.
The financial performance metric had a median of 5 and standard deviation of 0.7, indicating
that this was a very significant success factor in determining the investment decision. The SME
relationship with suppliers’ metric yielded a median of 4 and standard deviation of 0.975. This
indicated that this metric was fairly significant in the investment decision process.
The firm reputation with respect to other stakeholders mentioned above yielded a median of
4 and standard deviation of 0.958, indicating significance in determining the investment
decision in SMEs that are being screened. The management skillset was a critical success factor
with a median of 5 and standard deviation of 0.7, indicating high significance in the
determination of the investment decision on an SME. The level of ownership by top
management yielded a median of 3 and standard deviation of 1.134; this indicated that there
was a neutral view from the PE and VC respondents towards this factor being a driver
promoting investment in SMEs.
Table 4.11: Summary Results: The Evaluation Criteria used for Funding
Evaluation Criteria used for Funding
Mean Median Std.
Deviation Variance Skewness
Firm
Financial
Performance
4.48 5 0.7 0.49 -1.746
SME
Relationship
with
Suppliers
3.48 4 0.975 0.952 -0.615
Firm
Reputation 3.93 4 0.958 0.917 -0.411
Management
Skillset 4.52 5 0.7 0.49 -1.16
Top
Management
Ownership
3.15 3 1.134 1.285 -0.141
38
4.4.3. Other Success Factors
These included the presence of a complete business plan from the SME; restrictions on the
funds’ investment profile; and the presence of alternative sources of funding besides PE and
VC. Of the total respondents, 81.48% agreed that a business plan is required in the
determination of the investment decision.11.1% of the respondents were neutral regarding this
variable while 7.41% view is a partially significant in the investment process. With regards to
the restrictions placed in the funds’ investment profile, 62.96% of the respondents agreed that
the investment profile would influence the decision that would be made with respect to
investing in an SME. 29.63% of the respondents were neutral regarding this variable while
7.41% view it as insignificant in determining their investment decision.62.96% of the
respondents also agreed that the presence of alternative source of finance would impact their
investment decision in an SME; 18.52% were neutral towards this variable while a similar
18.52% proportion found the factor insignificant in determining the investment decision.
The summary statistics on the existence of a business plan indicated a median of 5 and a
standard deviation of 0.953, indicating that the approach towards this metric was very
significant in determining the investment decision. The median of the responses regarding the
fund restrictions was 4 while the standard deviation was 1.013; this indicated that this factor
was significant in determining whether to invest in the SME or not. The responses regarding
the presence of alternative sources of funding besides PE and VC yielded a median of 4 and a
standard deviation of 1.083; this indicated that this factor was significant in determining the
investment decision in an SME.
Table 4.12: Summary Results –Other Success Factors
Other Success Factors
Existence of a Business
Plan Fund Restrictions
Other Funding
Channels
Mean 4.3 3.78 3.59
Median 5 4 4
Std. Deviation 0.953 1.013 1.083
Variance 0.909 1.026 1.174
Skewness -1.232 -0.717 -0.649
39
4.4.4. ANOVA Results on the Critical Success Factors
The result of the ANOVA analysis on the critical success factors that determine whether PE
and VC firms would invest in an SME, indicated that the p-value was below 0.05. This
indicated that the critical success factors which comprised: the fund’s investment process, the
evaluation criteria used for funding and other success factors, were statistically significant in
determining whether Private Equity and Venture Capital firms would invest in them or not.
Table 4.13: ANOVA Table - Critical Success Factors
ANOVA Source of
Variation
Sum of
Squares df MS F P-value F crit
Between
Groups 56.89259 9 6.32140 6.87577 7.05598E-09 1.91599
Within
Groups 239.03704 260 0.91937
Total 295.92963 269
4.5. Leadership in the Change Management Process
The respondents of the study had a uniform view that their firms tend to backstop and fund
SMEs who have a tried and tested leadership who would be able to provide the required change
that would be used to expand and create new growth avenues in the SME once the funding has
been provided. The need for PE and VC firms to institute change in overall management of the
SME during the screening is viewed as a significant red flag that would deter them from
investing.
The variables used with regards to the leadership in the change management process
comprised: the willingness of the leadership or top management to exercise change in the
management of the SME; the willingness of the owner of the business to effect change in the
leadership of the business; the willingness of the leadership or top management to identify
other opportunities in which the business can tap or exploit in order to maximize returns; the
ability of the leadership of the SME to construct a powerful change management coalition or
40
team; the presence of a strategy to drive the change successfully; willingness and enthusiasm
of the leadership to effect the change of processes as well as the level of communication within
the organization; ability of the change management team to complete milestones and reward
employees driving the change; and evidence of the changes in the organization being
embedded into the organization’s culture.
Of the total respondents, 81.48% agreed that the willingness to adopt change management is
required in the determination of the investment decision.11.11% of the respondents were
neutral regarding this variable while 7.41% viewed it as partially significant in the investment
process. With regards to the effect of change in leadership, 88.89% of the respondents agreed
that the willingness of the owner to effect change in the leadership would influence the decision
that would be made with respect to investing in an SME. 3.70% of the respondents were neutral
regarding this variable while 7.41% viewed it as partially significant in determining their
investment decision. 77.78% of the respondents also agreed that the innovation by leadership
would impact their investment decision in an SME; 18.52% were neutral towards this variable
while a 3.70% proportion found the factor insignificant in determining the investment decision.
The formation of the change management team was found to be significant with 62.96% of the
team agreeing to variable being critical in the investment decision making process. 29.63% of
the respondents took neutral position while 7.41% did not find this variable significant. 74.07%
of the respondents agreed that the change management strategy would impact their investment
decision in an SME; 18.52% were neutral towards this variable while a similar 7.41%
proportion found the factor insignificant in determining the investment decision.
The willingness of leadership in change management was viewed a significant factor by
66.67% of the respondents; 29.63% had a neutral view towards this as 3.70% of the
respondents found this to be insignificant in determining their investment decision on an SME.
62.96% of the respondents agreed that change management recognition was a significant factor
in determining whether an investment decision will be made on an SME. 25.93% were
however neutral to this view as 11.11% disagreed on this. With respect to the evidence of
change as a variable,51.85% of the respondents agreed that this was an important metric in
considering an investment in an SME; 40.74% were however neutral towards this view
while7.41% found it insignificant as a factor in determining the investment decision.
41
The summary statistics on the variables including willingness to adopt change management,
effect of change in leadership, innovation by leadership, formation of the change management
team, change management strategy, willingness of leadership in change management, change
management recognition as well as evidence of change all had a median of 4, indicating that
these variables were significant in determining the investment decision. The standard deviation
of each of these variables were: 0.874, 0.847, 0.92, 0.984, 1.126, 0.823, 1.047 and 1.006
respectively.
Table 4.14: Leadership in the Change Management Process
Leadership in the Change Management Process
Mean Median Std.
Deviation Variance Skewness
Willingness to Adopt
Change Management 4.07 4 0.874 0.764 -0.898
Effect of Change in
Leadership 4.22 4 0.847 0.718 -1.28
Innovation by
Leadership 4 4 0.92 0.846 -1.281
Formation of the Change
Management Team 3.74 4 0.984 0.969 -0.738
Change Management
Strategy 3.96 4 1.126 1.268 -1.319
Willingness of
Leadership in Change
Management
3.7 4 0.823 0.678 -1.163
Change Management
Recognition 3.59 4 1.047 1.097 -1.024
Evidence of Change 3.63 4 1.006 1.011 -0.384
42
4.6. Transformational Leadership in the Investment Process
The variables used with regards to the role of leadership in the investment process included:
the existence of transformational leadership in the SME, evidence of misuse of power,
evidence of employee development and the evidence of leadership charisma.
Of the total respondents, 74.07% agreed that the evidence in transformational leadership in the
SME is required in the determination of the investment decision.14.81% of the respondents
were neutral regarding this variable while 11.11% viewed this as insignificant in the
investment decision making process. With regards to the evidence of misuse of power, 59.26%
of the respondents agreed this factor would influence the decision-making process for
investment in an SME. 18.52% of the respondents were neutral regarding this variable while
22.22% did not consider it a significant factor in driving their investment decision. 62.96% of
the respondents agreed that the evidence of employee development would impact their
investment decision in an SME; 11.11% were neutral towards this variable while 25.93% of
the respondents considered this factor as less significant in driving their investment decision.
The evidence of leadership charisma in the day-to-day operations was viewed as significant by
37.04% of the respondents; 37.04% were of a neutral position towards this as 25.93% of the
respondents found this to be insignificant in driving their investment decision on an SME.
The summary statistics on the existence of transformational leadership in the SME, evidence
of misuse of power and evidence of employee development, had a median of 4, indicating that
these variables were significant in determining the investment decision. The standard deviation
of each of these variables were: 1.054, 1.644 and 1.179 respectively. The evidence of
leadership charisma had a median of 3 and a standard deviation of 1.039 indicating that the
view towards this variable as a factor in determining the investment decision was that of a
neutral position.
43
Table 4.15: Summary Results – Transformational Leadership in the Investment Process
Role of Transformational Leadership in the Investment Process
Existence of
Transformational
Leadership
Evidence of
Misuse of
Power
Employee
Development
Leadership
Charisma
Mean 3.85 3.48 3.44 3.19
Median 4 4 4 3
Std. Deviation 1.027 1.282 1.086 1.039
Variance 1.054 1.644 1.179 1.08
Skewness -1.064 -0.665 -0.625 0.046
4.7. ANOVA Results on Leadership and Change Management in Successful Funding
The ANOVA analysis on the leadership and change management in successful funding of
SMEs by PE and VC firms similarly indicated that the p-value was below 0.05. This showed
that leadership and existence of change management were critical in determining whether
Private Equity and Venture Capital firms would invest SMEs or not.
Table 4.16: ANOVA Table - Leadership and Change Management in Successful
Funding
ANOVA Source of
Variation SS df MS F P-value F crit
Between
Groups 26.22222 11 2.38384 2.32424 0.00935 1.81941
Within Groups 320.00000 312 1.02564
Total 346.22222 323
4.8. Chapter Summary
This chapter outlined the results and findings of this study as per the specific objectives. The
findings show that there exists a significant relationship between the challenges that SMEs
face, the critical success factors that would encourage investment in SMEs by VC and PE firms
as well as the leadership exercised in the SMEs. The next chapter presents the discussion,
conclusion and recommendations based on the findings.
44
CHAPTER FIVE
5.0 DISCUSSION, CONCLUSION AND RECOMMENDATION
5.1. Introduction
This chapter presents the discussion, conclusion as well as recommendations based on the
research conducted. A summary has been provided regarding the analysis conducted in Chapter
Four. The discussion highlights the main drivers that promote PE and VC investments in
SMEs; it follows the research questions shared to all respondents.
This Chapter also constitutes the main conclusions made from the research as well as the
recommendations for further studies.
5.2. Summary
The purpose of this study was to determine the drivers that promote private equity and venture
capital investment in SMEs in Kenya. This research was guided by the following specific
objectives: To determine the role of leadership in the securing of private equity and venture
capital funding; To determine the key performance indicators used to provide financing to
SMEs by Private Equity and Venture Capital Firms; and To determine challenges and
exposures faced by SMEs from accessing Private Equity and Venture Capital funding.
The research design that was adopted in this research entailed a census population of 35
personnel working in Private Equity and Venture Capital Firms operating in Kenya. Of this
sampling frame, 77.14% (27) of the respondents took part in the study. The data was collected
in form of an online questionnaire (Google Form) which enabled easier relay of information
from the respondents. The collected data was then summarised and processed using both the
Statistical Package for Social Sciences (SPSS) as well as Microsoft Excel 2016.
The research findings showed that the factors of human capital were not significant drivers in
promoting PE and VC investments in SMEs as the median amongst the entrepreneur’s level of
education, age and experience with SME start-ups was 3, indicating a neutral position. The
factors of business development services which was supported by the level of technology used
45
during business development, the firm’s political exposure, legal exposure as well as level of
environmental constraints had a combined median of 3, similarly indicating a neutral position
from all the respondents operating in the Private Equity and Venture Capital space. The level
of technology used in business development was however an outlier as the respondents viewed
it as a significant driver in enabling them to determine their investment decision on an SME.
The p-value<0.05 also indicated that the challenges and exposures faced by SMEs were
statistically different and would individually affect the overall decision by PE and VC firms to
finance or invest in an SME.
The investment environment was supported by the industry business ethics and firm business
ethics drivers. A median of 4 was evidenced from the responses obtained during the research,
indicating that these drivers were significant in driving the investment decision by the Private
Equity or Venture Capital firm. The challenge of globalization comprised challenges within
firm marketing initiative as well as the use of technology in marketing. This driver had a
collective median value of 3.5 as per the responses obtained, indicating that these were fairly
significant in promoting the investment decision.
The drivers that fuelled PE and VC investment in SME from a PE and VC funding structure
perspective included a positive correlation between the industry in which the SME operates in
and the target industries set out by the fund, as well as the potential returns that could be
achieved are based on the risk required to be absorbed by the fund. These factors were viewed
as significant in the determination of the investment decision as it scored a median of 4 across
all the respondents of the study. The financing drivers comprised macroeconomic factors
influencing the interest and foreign exchange rates charged to the SME as well as the he
presence of credit information on the SME. This driver had a collective median value of 4 as
per the responses obtained, indicating that these were significant in promoting the investment
decision. The investment process was also considered as a critical factor influencing the
investment decision of a PE and/or VC firm on an SME as the median of the respondents was
4 while the standard deviation was 1.777.
The evaluation criteria using in the funding process was measured using financial performance
or success of the SME over the period of its existence; the SME’s relationship with suppliers;
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the SME’s reputation with respect to other stakeholders including, the general public, the
environmental lobby groups, the Government; the level of skills that the top management have
in running the SME; the percentage of ownership by the top management of the business; and
market factors that comprise the market potential growth/ attractiveness and barriers. The
overall median registered by the respondents was 4.5, indicating that this factor was very
significant in driving the PE and/or VC firm’s investment decision on an SME.
Other success factors which promoted investment in SMEs from Private Equity and Venture
Capital players in Kenya included the presence of a complete business plan from the SME;
restrictions on the funds’ investment profile; and the presence of alternative sources of funding
besides PE and VC. These factors were considered significant as the median scored from the
respondents was 4. In addition to the descriptive statistics on the critical success factors, the p-
value<0.05 showed that these factors were statistically significant in determining whether PE
and VC firms would fund SMEs.
The leadership in change management was supported by the following factors: the willingness
of the leadership or top management to exercise change in the management of the SME; the
willingness of the owner of the business to effect change in the leadership of the business; the
willingness of the leadership or top management to identify other opportunities in which the
business can tap or exploit in order to maximize returns; the ability of the leadership of the
SME to construct a powerful change management coalition or team; the presence of a strategy
to drive the change successfully; willingness and enthusiasm of the leadership to effect the
change of processes as well as the level of communication within the organization; ability of
the change management team to complete milestones and reward employees driving the
change; and evidence of the changes in the organization being embedded into the
organization’s culture. These factors were considered significant through the investment
process as the respondents collectively registered a median of 4.
In addition to the above, the role of transformational leadership within the SMEs, which was
supported by the existence of transformational leadership in the SME, evidence of misuse of
power, evidence of employee development and the evidence of leadership charisma, was
considered significant in the determination whether the PE or VC firm would invest in the
47
SME or not. The collective median that was registered was 4. The p-value <0.05 showed that
leadership as well as change management were statistically significant in the successful
funding of SMEs by Private Equity and Venture Capital Firms.
5.3. Discussions
This section of the chapter covers the discussions around the specific objectives of the research
based on the findings made in conjunction with the literature review.
5.3.1. Challenges and Exposures Faced by SMEs from Accessing PE and VC Funding
The research findings revealed that there are certain challenges and exposures that would
significantly impact on the investment decision made by PE and VC firms on SMEs. These
include challenges in human capital, challenges of business development services, challenges
in the investment environment, the challenge of globalization, the challenge relating to the
fund structure, as well as the challenge of the SME financing.
Talaia et al., (2016) explains that the investment decision made by PE and VC firms in funding
an SME would get depends on the level of education, age and experience the entrepreneur has
had with other SME start-ups. A neutral position was however evidenced in this regard from
the respondents of the study.
The evidence of business development services in the SME is driven by constraints related to
compatibility, limited skills and technical knowhow on technology, third party support and
data transfer from one technological environment to another (Chibelushi & Costello, 2009);
legal and environmental constraints were also viewed as challengesof the busines development
services as they span from employment laws, data protection laws, business laws, health and
safety regualtions as well as environmental regulations (Blue Ocean University, 2017).
Similarly, a neutral position was taken in relation to the significance of business development
services affecting the investment decision-making process of PE and VC firms on SMEs in
Kenya.
48
The state of the investment environment is caused by the level of business ethics and
professionalism exercised within the industry the SME operates in as well as the SME itself
(Turyahikayo, 2015). Turyahikayo, (2015) emphasizes that ethics in business is a significant
elemtne for the survival of enterprises regardless of size and its absense would lock out SMEs
in capital financing as well as deprivation of social capital. Similarly, this driver was viewed
to be significant in the investment process as it had significant consequences on the SME itself
in relation to its impact on society and reputation.
The level of globalization done was fueled by the level of marketing that could be done by the
SME on a global scale, level of technology used as well as the market conditions where the
SME operates in (Al Mubarak, 2016). Al Mubarak, (2016) further explains lack information
and knowledge, outdated technology, presence of cultural legal and economic differences, lack
of government support and proper commiunication between the businesses and governement
as well as poor makreting initiatives would challenge the success of SMEs becoming
globalised. The analysis conducted in the study yielded that the globalisation driver was fairly
significant in determining whether the SME would be investment ready from a PE and VC
perspective. This is because it had an impact on the scalability of the SME’s business in the
long run.
The constitution of the funding structure was inspired be the strict investment criteria the
development finance institutions (DFIs) and other investors would employ while injecting
funds to the PE firms as well as the expected returns from the investments that would be made
by the PE firms (Divakaran et al., 2014). Divakaran et al., (2014) continue to explain that the
the presence of insufficient capital to fund operations would cause PE and VC firms to
strguggle establishing local presence abnd buidl networks and relationships which would drive
pipelines and investment quality. This driver was viewed to be significant in the determination
on whether to invest in the target SME or not, as the breach of such terms would be detrimental
to the future of the investment firm in terms of investor backing, as seen from Abraaj’s fall due
to breach of terms in its healthcare fund (Kerr & Sender, 2018).
The availability of SMEs obtaining cheaper financing has been affected by economic factors
such as interest and foreign exchange rates (Miller, 2013) as well as the availability of credit
49
information on the SME, brought about by a lack of proper book keeping and financial
statement preparation (Okoth Michael Okoth, 2013). This driver was viewed as significant in
the determination of whether an SME is investment ready by PE and VC firms, as this would
impact future funding ambitions in relation to the availability of other funding and cost of
funding.
5.3.2. Critical Success Factors Used Relied Upon by PE and VC Firms on SME
Investment
The type investment process used by the investment committee, for the screening and selecting
an SME for equity funding would drive the decision on whether the SME would be viable for
investment or not. According to Dhochak & Sharma, (2016), most venture capital firms tend
to use the Wells model six-step decision making process that would comprise the investment
search, proposal screening, the proposal evaluation, meetings and follow-ups, operations
handling and cashing out processes. Another venture capital investment process that is adopted
includes deal origination, initial screening, first phase due diligence and internal feedback,
preapproval completion, second phase due diligence and internal approvals, deal completion,
deal monitoring and lastly exit (Klonowski, 2010). From the results of the study, the type of
investment process used was realised to be a significant determinant in the investment process
on an SME by a PE or VC firm due to the requirement to comply with the necessary investment
policies set in place for the PE or VC firm.
The private equity and venture capital firms also follow investment criteria in the funding
process of an SME. These criteria first includes the entrepreneur’s characteristics based on
personality, management skills and possessed experience, the stake owned by the management
in the firm, the personal motivation of the entrepreneur to seek Venture Capital or Private
Equity funding as well as the quality of the venture team who have been tasked to apply for
such funding (Hudson, 2005). The other drivers include the features of products’ or services’
rendered by the SMEs, the characteristics of the market as well as the financial considerations
(MacMillan, Siegel, & Narasimha, 1985). The entrepreneur’s characteristics, the stake owned
by the management of the firm, personal motivation of the entrepreneur to seek VC or PE
funding as well as the quality of the venture team were all considered very significant in the
50
determination of the choice of whether to invest in a targeted SME or not by both PE and VC
firms. This was because of the need of PE and VC firms of creating value in their investments
besides earning financial returns over a period of time.
Other factors that were considered in this study comprised the presence of a business plan
documenting the strategies and business forecasts of the SME’s future, restrictions placed by
the PE and VC firms’ partners on the fund as well as the availability of complementary
financing besides that provided by the Private Equity or Venture Capital Firm. The presence
of a business plan for the SME was considered imperative in driving the investment decision,
as this would enable the PE and VC firms determine whether their investment would create
the necessary value in an SME’s strategy for it to achieve its set objectives and mission.
Klonowski, (2010) further explains that the business plan is a critical element in the deal
generation stage of the investment process, as it unavailability would elongate the entire
process by six to eight weeks for one to be developed. The business plan also needs to be
complete as one that is incomplete where key data is omitted would be deemed unacceptable
and have the investment proposal rejected by the PE and VC Firm (Boocock & Woods, 1997).
Restrictions placed by the PE and VC firms’ partners on the fund comprising, the industry in
which an SME operating as well as the permitted number of investments played a significant
role in determining whether the SME would be eligible for investments from those firms. This
response also supported Boocock & Woods, (1997) research which stated that the restrictions
imposed on funds’ investments would be limited to the fund size and permitted number of
funds allowed to be made based on a particular sector.
According to Klonowski, (2010), the investment process comprises two main stages in which
due diligence will be conducted; the first phase of the due diligence with internal feedback.
This due diligence phase would comprise business valuation and financial forecasting that
includes forecasting and analysis of the SME’s revenue, costs, cash flows, balance sheet and
financial ratios. The second due diligence phase which also goes in tandem with internal
approvals may include the hiring of external advisors who would advise the fund in the
financial liability or exposures of the screened investment (Klonowski, 2010). The results of
the study determined that the cooperation of the SMEs management to these due diligence
phases as well as the SME’s willingness to comply with the due diligence findings of are also
51
significant factors in determining whether a PE and VC firm would invest or not. This is
because of the level of financial exposure or financial liability the PE and VC firms are exposed
to and would require to manage in respect to their investment policies as well as the cost of
their funds.
5.3.3. Role of Leadership in the Securing of PE and VC Funding
The role of leadership in change management is also required in the SME’s investment process
in order to meet the set objectives of the change (Deshler, 2016). In addition to this, Klonowski,
(2010) further explains that the main categories of responsibilities for venture capital firms on
their portfolio investments include oversight, review, compliance and leadership. Leadership
involves the establishment of policies and procedures for different business scenarios, hence
the need to exercise change management in the SME. Leadership also plays a critical role on
the change anchored towards the organization’s culture especially in the event of a corporate
acquisition. According to Lund & Whitt, (2017), this change can be effectively integrated into
the corporate culture in two approaches which include task integration and human integration.
The result of the study indicated that leadership in change management was a critical driver in
determining the choice of investing in an SME by PE and VC firms.
Leadership in change management was supported by Kotter & Bourner's, (1998) eight-stage
process that comprises: the willingness of the SME’s leadership and owners to exercise change,
willingness of the leadership or top management to identify other opportunities in which the
business can tap or exploit in order to maximize returns, ability of the leadership of the SME
to construct a powerful change management coalition or team, presence of a strategy to drive
the change successfully, willingness and enthusiasm of the leadership to effect the change of
processes as well as the level of communication within the organization, ability of the change
management team to complete milestones and reward employees driving the change and
evidence of the changes in the organization being embedded into the organization’s culture.
The element of leadership in change management being critical in the investment decision of
PE and VC firms is also supported by Management’s attitude towards competitive advantage.
Doval, (2016) further explains that companies do not focus on protecting their competitive
52
advantage via old strengths but through innovation, accumulation of knowledge and
experiences as well as discovery of new resources and capabilities. The element of seeking
competitive advantage by the SME is a metric observed by funds during the due diligence
phases in order to preserve and actualize their returns (Klonowski, 2010). The sustainability of
competitive advantage would thus require effective change management and a degree of
flexibility within the organisation.
The results of the study indicated that private equity and venture capital firms viewed these
metrics as significant elements in the investment choice made on the SME, as such PE and VC
firms require to realise certain financial returns which comprise favourable internal rate of
returns on their investments, which may range between 20% and 30% (Divakaran et al., 2014).
These results were also supported by the need for change in the developing competitive
strategies for the firm which would improve its competitive position and effectively, its market
share investment (Klonowski, 2010).
In the event of a business acquisition, it is mandatory that management and employees have to
adapt these changes. Martin, (2015) elaborates that leaders need to challenge the company style
and allow followers to decide on unchallengeable values from the historical procedures they
need to undertake. In addition to the above, transformational leadership plays a pivotal role in
driving the performance of the SME from both a financial and non-financial perspective (Ng
et al., 2016). The evidence of transformational leadership in the SME, which also focuses on
development of the human capital skills and personality with the aim to achieve the
organisation’s visions and objectives, was considered significant in determining whether an
SME was investment ready. This is because the PE and VC firms rely on the leadership skills
of the owners as well as management of the SME to direct the vision, objectives and instil
values and beliefs of the enterprise that would steer the business to growth and success
(Paladan, 2015).
Charisma amongst leaders of SMEs was also considered a fairly significant element for Private
Equity and Venture Capital firms to determine whether to invest in the SME or not. This was
supported by Mhatre & Riggio, (2014) elaboration of charisma being an element of a
transformative leader which is generally categorized as a trait that is both socialized and
53
personalized. Authentic charismatic or transformative leaders must be socialized leaders for
an organization to perform better by increasing the sensitivity of followers to organizational
change, inspiring shared vision for a new and better future and bringing about as well as
embedding new changes.
5.4. Recommendations
5.4.1. Recommendations for Improvement
5.4.1.1.Challenges and Exposures Faced by SMEs
This study has highlighted the various challenges and exposures faced by SMEs comprising:
the investment environment, globalisation, fund structure and SME financing are significant
in determining the choice PE and VC firms would make in investing in the SME. The study
recommends that SMEs need to specifically manage their business ethics, financial
performance and presentation, level of global presence as well as the level of technology used
within the organisation.
5.4.1.2.Key Performance Indicators and Critical Success Factors for Funding in SMEs
The study has also indicated the key performance indicators and critical success factors are
critical for PE and VC firms in determining whether to invest in an SME or not. The study
recommends that the SMEs should be willing to engage with PE and VC firms that invest
within their sector of operation as well as accommodate and appreciate the investment process
being used by the private equity or venture capital firm. In addition, the SME should aim for a
strong financial performance, a good firm reputation and a well constituted as well as highly
skilled management. These would promote PE and VC investment in the SME.
5.4.1.3.Role of Leadership and Change Management in Successful Funding
The study has highlighted leadership in change management is pivotal in PE and VC firms
investing in the SME. The leadership in the SME should ensure they are willing to adopt
change in the SME during pre- and post-investment phases. The leadership of the SME would
also be expected to be one that embraces transformation within the organisation as this
promotes increased performance due to stewardship and human capital development.
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5.4.2. Recommendations for Further Research
The findings obtained from this research represent the views taken PE and VC firms in
investing in SMEs operating in Kenya. Further research could be conducted in other countries
as well as firms who have already gone through their first series of funding from a Private
Equity and Venture Capital perspective, in the search for new capital to scaling their
businesses.
55
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APPENDICES
Appendix I: Introduction Letter
23 July 2019
To Whom It May Concern
Dear Sir / Madam
RE: Facilitation of Research – Germano Kiruthu Mutahi ID No. 659882
The bearer of this letter is a persuant of the the Degree of Global Masters in Business
Administration (GMBA) from the United States International University – Africa (USIU –
Africa).
As per the requirements of this course, the student is required to carry out a research study
on: the “Drivers Promoting Venture Capital and Private Equity Investment in SMEs in
Kenya” and requires him to collect necessary data for successful completion.
Kindly note that the information share by you is treated hgihly confidential and shall be only
used for academic purposes.
Should you have any queries pertaining this, feel free to contact me with the details
underpinned.
Yours Sincerely,
ii
Prof. Amos Njuguna
Professor of Finance and Dean - School of Graduate Studies USIU-Africa
Mobile: +254 730 116 442
Email: [email protected]
iii
Appendix II: Population – List of Venture Capital and Private Equity Funds
Venture Capital
and PE Funds
Industry of Focus Target Deal Size
(USDm)
Population
1 88mph Web and Mobile
Startups.
0.1-2 1
2 Acorn Private
Equity
Agri-Services, Food and
Health, Industrial,
Utilities
3-7 1
3 Actis Real Estate,
Automotive,
Construction
Above 10 1
4 AfricInvest Financial Services,
Energy, and Transport
and Logistics, and
Healthcare.
20-100 1
5 Ascent Capital Diversified 2-15 1
6 Business Partners
International(BPI)
East Africa
Diversified 0.05-1 1
7 Catalyst Principal
Partners
Retail (Consumer
goods), Financial
Services, Industrials,
Manufacturing,
Telecommunications.
5-20 1
8 Cauris
Management
Leisure, Consumer
(Retail),
Telecommunications,
Pharmaceutical,
Financial Services
3-5 1
iv
9 Centum
Investments
Company plc
Real estate, Education,
IT, and Hospitality.
1-10 1
10 East Africa
Capital Partners
Technology, Media and
Telecommunications.
Below 10 1
11 Emerging Capital
Partners
Diversified 1-10 1
12 Evercare Health
Fund
Healthcare 1-20 1
13 Evolution II
(Mauritius) LP
Renewable energy
generating assets and
energy efficiency
projects.
5-20 1
14 Fanisi Capital
Ltd.
Agribusiness,
Pharmaceuticals, and
Education.
1-5 1
15 Funguo
Investments
Limited
Diversified Above 1 1
16 Fusion Capital
Limited
Real Estate and
Construction.
0.25-5 1
17 Helios Investment
Partners LLP
Diversified Above 10 1
18 Incofin
Investment
Management
Diversified Below 10 1
19 International
Finance
Corporation
Diversified 1-30 1
v
20 Keynes Private
Equity
Healthcare 1-10 1
21 Kibo Capital
Partners
Financial Services,
FMCG, Education, and
Healthcare.
1-20 1
22 Kinyeti Venture
Capital Limited
Industrials, Tourism,
and Healthcare.
0.05-1.5 1
23 Kleoss Capital
The Value of
Valour
Sector, manufacturing 4--13 1
24 Kuramo Capital
Management
Financial Services,
Energy, and Transport
and Logistics, and
Healthcare.
1-20 1
25 LeapFrog
Investments
Financial Services and
Healthcare
Around 10 1
26 Msingi East
Africa Limited
Focus on single
industry (In 2016
Aquaculture was
selected, 2017/18
selection unannounced)
Below 10 1
27 Norfund Diversified 2-15 1
28 Okavango Capital
Partners
Diversified Above 0.1 1
29 Partech Africa
Fund
Diversified 1-10 1
30 Progression
Capital Africa Ltd
Financial Services and
Fintech.
2-8 1
31 Privilege Fund Diversified Below 1 1
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32 Stichting DOB
Equity
Agribusiness, Logistics,
Off-grid Renewable
Energy.
0.25-2.5 1
33 Summit Africa Education, Healthcare,
ICT, Financial Services
Below 10 1
34 TBL Mirror Fund
BV
Healthcare (focusing on
pharmaceuticals), ICT
(focusing on software),
and FMCG.
1-5 1
35 Zephyr Acron
(Zephyr
Management,
L.P.)
Fintech, Business
Services, and IT.
0.5-10*** 1
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Appendix III: Questionnaire
Introduction
This questoinnaire seeks to collect relevant data that will aid in the successful completion of
the study as to the Drivers Promoting Venture Capital and Private Equity Investment in
SMEs in Kenya. Kindly respond to the questions below candidly and objectively.
Kindly note that the information shared in this questionnaire is treated with strict
confidentiality and shall only be used for the purpose of this study. No reference shall be
made on any individual.
Section A: Background Information
1. Kindly indicate the name of your organization
2. Kindly indicate your position within your Organization
Partner [ ]
Director / Investment Principal [ ]
Investment Officer [ ]
Portfolio Manager [ ]
Investment Analyst / Associate [ ]
Other (specify). . . .
3. Kindly indicate the how long you have worked in your Organization
0 – 3 years [ ]
4 – 7 years [ ]
8 – 11 years [ ]
12 years and Above [ ]
Section B
4. On a sclae of 1-5, where, 1 – least significant; 2 – partially significant; 3- neutral; 4 –
significant; and 5 – most significant; please classify the issues / challenges that you have
envisaged that are mainly faced by SMEs that seek funding from your firm.
Challenge / Issue Faced 1 2 3 4 5
ii
a. Challenge of Human Capital
i. The level of education of the entrepreneur on the
industry his / her business operates in.
ii. The age of the entrepreneur.
iii. Level of experience with regards to other SME
star-ups.
b. Challenge of Business Development Services
i. Level of technology ICT infrastructure in the
organisation.
ii. Level of political exposure the organization
experiences.
iii. Legal constraints faced by the SME.
iv. Level of environmental constraints in the industry
the SME operates in.
c. Challenge of the Investment Environment
i. Business ethics and professionalism in the
environment in which the SME operates in.
ii. Business ethics and professionalism exercised
within the organisation.
d. Challenge of Globalization
i. The level of marketing done by the SME for
promotion of its goods / services.
ii. The use of technology in the marketing initaitives
for the SME.
e. Challenge Relating to the Fund Structure
i. The corelation between the industry in which the
SME operates in and the target industries set out by
the fund.
ii. The potential returns that could be achieved are
iii
based on the risk required to be absorbed by the
fund.
f. Challenge of the Financing
i. The macroeconomic factors influencing the interest
and foreign exchange rates charged to the SME.
ii. The presence of credit information on the SME.
5. On a sclae of 1-5, where, 1 – least significant; 2 – partially significant; 3- neutral; 4 –
significant; and 5 – most significant; please rate the significance of the Critical Success
Factors in determining whether to fund an SME or not.
Critical Success Factors 1 2 3 4 5
a. The Investment Process
i. The type of investment process used by the
investment committee for screening and selection
of an SME for funding.
b. The Evaluation Criteria used for Funding
i. The financial performance or success of the SME
over the period of its existence.
ii. The SME’s relationship with suppliers.
iii. The SME’s reputation with respect to other
stakeholders including, the general public, the
environmental lobby groups, the Government
(taxman and other governement institutions).
iv. The level of skills that the top management have in
running the SME.
v. The percentage of ownership by the top
management of the business.
vi. The market factors that comprise the market
potential growth/ attractiveness and barriers.
iv
c. Other Success Factors to Consider
i. The presence of a complete business plan with
business forecasts and documented strategies for
the SME’s future.
ii. The restrictions placed by the partners of the fund
on the investment profile.
iii. The availability of complementaty financing
besides that provided by the Private Equity or
Venture Capital Firm.
6. On a sclae of 1-5, where, 1 – least significant; 2 – partially significant; 3- neutral; 4 –
significant; and 5 – most significant; please rate the significance of the leadership and
change management required in determining whether to fund an SME or not.
Role of Leadership and Change Management 1 2 3 4 5
a. Leadership in the Change Management Process
i. The willingness of the leadership or top
management to exercise change in the
management of the SME.
ii. The willingness of the owner of the business to
effect change in the leadership of the business.
iii. The willingness of the leadership or top
management to identify other opportunities in
which the business can tap or exploit in order to
maximize returns.
iv. The ability of the leadership of the SME to
construct a powerful change management coalition
or team.
v. The presence of a strategy to drive the change
successfully.
v
vi. The willingness and enthusiasm of the leadership
to effect the change of processes as well as the
level of communication wihtin the organization.
vii. The ability of the change management team to
complete milestones and reward employees
driving the change.
viii. Evidence of the changes in the organization being
embedded into the organization’s culture.
b. Role of Transformational Leadership
i. Evidence of leadership exercising transformational
leadership within the business in the past and
present.
ii. Evidence of misuse of power in the process of
gaining competitive advantage within and outside
the organization.
iii. Evidence that leadership focuses on the
employees’ development in terms of skills as well
as personality with the aim of achieving the
organization’s vision and objectives.
iv. Evidence of the top leadership exercising charisma
in their day-to-day operations.
vi
Appendix IV: NACOSTI License