IMPACT OF VENTURE CAPITALIST ON SMES PERFORMANCE

(A Case of Selected SMEs)

BY

GIWA MONSURAT TUNRAYO

MATRIC

17/27EM/314

BEING A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FUFILLMENT OF

AWARD OF BACHELOR OF SCIENCE (B.Sc.) DEGREE IN BUSINESS

ADMINISTRATION OF THE DEPARTMENT OF BUSINESS AND

ENTREPRENEURSHIP, SCHOOL OF BUSINESS AND GOVERNANCE, FACULTY

OF HUMANITIES, MANAGEMENT AND SOCIAL SCIENCES, KWARA STATE
UNIVERSITY, MALETE

SUPERVISOR:

MR. HAMZAT, B.

MARCH, 2021

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 CHAPTER ONE

INTRODUCTION

1.1BACKGROUND TO THE STUDY

Small and medium enterprises growth has attracted considerable interest among
policymakers, development experts, entrepreneurs, financial institutions, venture capital firms,
and NGOs they are viewed as a trigger of innovation and economic development, which can
promote economic growth, urbanization, employment, technological innovation, social harmony,
and stability. SMEs perform a vital role in national development in the area of employment
generation and GDP growth, in both developed and developing countries. Qureshi and Herani
(2015), states that SMEs make considerable contributions toward GDP, income generation, tax
contributions, fostering innovations, job creation, increasing revenue, enhancing human capital,
alleviating poverty, and improving the living standards and quality of life in a nation. SMEs are
also significant sources of work.The word SMEs is seen as a business which is owned, led by
one or a few persons, with direct owner(s) influence in decision making, and having a relatively
small share of the market and relatively low capital requirement. The earliest manifestations of
SMEs in advanced countries were coltage industries that later transformed into industrial
complexes and tech factories. SMEs today account for the bulk of output in most countries
today. It is also a proven job creator: the share of SMEs in global productivity is over 30%
higher in some countries, but generally growing.
In a developed nation like China, SMEs employ over 50% of the workforce while in the
United States (US), SMEs account for over 50% of Gross Domestic Product
(Ehinomen&Adeleke, 2012). While in Nigeria, a developing country, SMEs employ over 60%
of the labour force both in formal and informal sectors. The need to have a regulatory body to
control the activities of SMEs in the country led to the formation of Small and Medium
Enterprises Development Agency of Nigeria (SMEDEN) in 2004 by an act of parliament
towards the realization of the goals and objectives of SMEs. Tucker and Lean (2013) have
documented that small businesses often have difficulties in obtaining funding from financial
institutions to expand on their fixed assets and working capital. Financing is necessary to help
SMEs set up and expand their operations, develop new products, and invest in new staff or

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production facilities. Many small businesses start out as an idea from one or two people, who
invest their own money and probably turn family and friends for financial help in return for a
share in the business. But if they are successful, there comes a time when they need further funds
to expand or innovate further. Some SMEs often run into problems, because they find it much
harder to obtain financing from banks, capital markets or other suppliers of credit. Almost every
company we know of began as an SME.

Recently, various funds have been setup to benefit SMEs but statistics provided by fund
managers show that a disproportionate number of applicants have not been successful at
accessing funding (Boateng, 2010). The need to explore alternative means of raising capital for
business growth cannot be over emphasized. One of the innovative ways to raise funds for the
growth of SMEs is venture capital. Venture capital is an investment in a start-up or growing
SME that is perceived to have excellent growth prospects. The volume of venture capital finance
in developing countries has followed a steeply rising trend in recent years (Iran &Hammad,
2001). Venture capital finance has a longer history in Asia, and at over $6 billion, the stock of
venture capital outstanding in developing countries in that region is more than double that in
Central and Eastern Europe (CEE). The distribution of investment is weighted toward start-up
and turnaround finance in the CEE while expansion and mezzanine financing dominate in the
developing countries. The industry distribution of venture capital is similar in both regions
however. Smith (2005), compared to venture capital funds in industrial countries, venture funds
in developing countries invest to a greater extent in private debt securities of portfolio
companies.

The experience with venture capital finance in developing countries is more limited than
in industrial countries. Nevertheless, there are probably more than 250 venture capital funds
operating in Eastern Europe and Asia and as many as 400 operating in developing countries
worldwide(Kin, Chun & Hun, 2003). The relatively short history of most venture capital
investments in developing countries and the inherent lack of documentation of private financing
arrangements means that there is little published analysis at even a basic descriptive level on the
scope of venture capital operations in developing countries.Venture capital investments provide
the needed cash in form of equity for companies to develop technologies and products which, in
turn, generate jobs and taxes that keep Nigeria competitive. The objective is to generate

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sufficient long-term capital gains from the investors and the venture capital. Venture capital
assists investors to access equity capital to finance expansion of business while maintaining
control. In venture capital financing agreement, the venture capital firm will provide financing to
enable a business to undertake a project and in return the venture capital company gets an
ownership stake in the business (Boateng, 2010) Limited data exist on venture capital as an
alternative source for funds for SMEs. As financing has been a major importance to the survival
and growth of business, this research work is being carried out with an interest to show the
effects of venture capital on the growth of SMEs in Kwara state.

1.2 STATEMENT OF THE PROBLEM

SMEs have difficulties in growth due to lack of finance. They hardly grow beyond start-up stage.
Others go out of business at a very early stage (Bronwyn, 2016). The study undertaken byIshiaq
(2014), and Mead and Liedholm (1998) reveals that access to finance is an important ingredient
to development of SME. They have few alternatives of accessing finance other than relying on
their retained earnings to finance their investments. Notwithstanding the financial difficulties
faced by SMEs, alternative sources of funds have to be sought to sustain this important sector.
Venture capital, which is quite prevalent in developed countries, has played a big role in
enhancing growth of SMEs by providing equity capital. In countries where both forms of venture
capital participate in financing SME, they are value-adding investors who bring significant
benefits of their business know. The venture capitalist firms present today in Nigeria has been
giving little or no adequate support to SMEs.

1.3 RESEARCH OBJECTIVES

The aim of this research is to identify the Impact of venture capitalist on SMEs performance
while other objectives is to;

i analyze the effect of angel investor on the Sustainability of SMEs in Kwara State.
ii examine the effect of angel investor on the market share of SMEs in Kwara State.
iii identify the level at which leasing house affects the Sustainability of SMEs in Kwara State.
iv explore the extent to which leasing house affects the Market share of SMEs in Kwara State.

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1.4 RESEARCH QUESTIONS
The following questions guide the study and some of which are .

i To what extent has angel investor affects the Sustainability of SMEs in Kwara State?

ii How has angel investor affects the market share of SMEs in Kwara State?

iii To what extent has leasing house affects the Sustainability of SMEs in Kwara State?
iv Does later leasing house has any effects on the Market share of SMEs in Kwara State?

1.5 RESEARCH HYPOTHESIS

The following research hypothesis will be formulated for the study.

H01: Angel investor has no effects on the Sustainability of SMEs in Kwara State.

H02: Angel investor has no significant effects on the market share of SMEs in Kwara State.

H03: There is no effect of leasing house on the Sustainability of SMEs in Kwara State.

H04: Leasing house has no significant effects on the Market share of SMEs in Kwara State.

1.6 SIGNIFICANCE OF THE STUDY

The study is aimed at educating the SMEs in Kwara state further on the criteria that venture
capital use when evaluating a potential venture. The research will help the:

i. Entrepreneurs
ii. SME’s
iii. Policy makers

Entrepreneurs understand what factors make a business attractive to Venture equity fund and
hence model and structure their business accordingly, it will also help them understand factors
that hinder them from accessing venture equity funds and hence improve on the same.

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SMEs to access capital which is hard to obtain from the mainstream financiers or other forms of
funding like personal savings or micro-finance institutions which is mostly never adequate. In
general the study will give the entrepreneurs more insights and understanding on how Venture
Capital operate and hence demystify the alternative source of funding.

Policy makers and regulatory bodies in the country’s financial markets and commercial sector to
create an enabling environment for both the SMEs and the Venture equity providers to operate
on.

The study will bring into the light the reasons why some viable SMEs are not willing to take up
Venture capital and possibly come up with training strategies or even improve on the way the
Venture Capital sells themselves and operate to ensure an increase in interested investees.

This research builds into the already existing research work and provides a basis on which
further research can be conducted.

1.7 SCOPE OF THE STUDY

This research work which aim is to analyzethe effect of venture capital on performance of SMEs
in Kwara state, will be focusing majorly on the effect of venture capitalist on performance of
SMEs in Kwara state. Selected SMEs like Chupex, Aramoke, Shoprite and KFC will be assessed
to know if venture capitalist financing has been their major source of finance or not. Also this
study will selectively examine SMEs financed by venture capital to ascertain whether there has
been any significant improvement in performance before and after use of this kind of finance.
This study will be covering from the past 3yeras of the SMEs to be sampled.

1.8 OUTLINE OF CHAPTERS

The major focus of this research study is to analyze the impact of venture capital on
performance of SMEs in Kwara state. To achieve this, this study is divided into five chapters.
Chapter one; dealt with the Background of the Study, Statement of the Problem, Objectives of
the Study, Questions of the study Justification of the Study, Scope of the Study, Outline of

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chapter, Operationalization and Definition of Terms. Chapter two: Literature Review,
Conceptual Clarification, Theoretical Clarification, Empirical Clarification and Gaps in
literature and Chapter three: focused in Introduction, Research Design, Population of the study,
sample size determination, Research Method, Sampling Techniques, Method of Data Collection,
Research Instruments, Validity of Research, Reliability Test, Method of Data Analysis, and
Ethical consideration.

1.9 OPERATIONALIZATION

Topic: Impact of Venture Capitalist on SMEs performance

The two construct include:

1. VENTURE CAPITAL
2. SMEs PERFORMANCE
Y=f (X)

Where Y = Dependent Construct (Variable)

Where X = Independent Construct (Variable)

Where:

X = VENTURE CAPITALIST Y = SMEs Performance

x1 = Angel Investor y1= Sustainability

x2= Lease Housing y2= Market Share

x3= Bootstrapping y3= Profitability

x4= Expansion Finance y4= Effectiveness

Selected Variables

Angel Investor Sustainability

Lease Housing Market Share

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1.10 DEFINITION OF TERMS
Venture Capital: venture capital, or sometimes simply capital, investments in companies in
exchange for an equity stake.

Small and Medium Enterprises: Small and medium enterprises or small and medium-sized
enterprises (SMEs, small and medium-sized businesses, SMBs, and variations of these terms) are
fledgling businesses that is starting their operations whose initial capital is raised by an
individual or by the founders of that start up

Startup: This is an entrepreneurial venture that is typically a newly emerged, fast-growing

business aimed at developing a viable business model around innovative product, service,
process or a platform. They are start small enterprises whose initial capital is raised by an
individual or by the founders of that start up.

Angel Investor: An angel investor (also known as a private investor,

seed investor or angel funder) is a high-net-worth individual who provides financial backing for
small startups or entrepreneurs, typically in exchange for ownership equity in the company.

Business Sustainability:Business sustainability, also known as corporate sustainability, is the

management and coordination of environmental, social and financial demands and concerns to
ensure responsible, ethical and ongoing success.

Lease Housing: A lease is a contract outlining the terms under which one party agrees to rent
property owned by another party

Market Share: This is the portion of a market controlled by a particular company or product

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 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

This chapter presents the review of some issues related to the impact of venture capitalist
on SME performance. Finance has been considered to be one of the major important factor to
successfully run a business effectively and efficiently. The first section of this chapter presents
the conceptual review, theoretical review, empirical review and gaps in literature.

2.1. CONCEPTUAL REVIEW

This section review the related literature relating to the topic under conceptual review:

i. Venture capital
ii. Venture capitalist
iii. Type of venture capital investment financing
iv. Factors affecting venture capital investment decision
v. Features of venture capital
vi. Venture capital investment process
vii. Advantage of venture capital
viii. Disadvantage of venture capital
ix. Venture capital and SMEs performance

2.1.1 VENTURE CAPITAL

Venture capital is defined as “as capital provided by firms who invest alongside
management in young companies that are not quoted on the stock market. The objective is a high

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return on the investment. The young company created value in partnership with venture
capitalist’s money and professional expertise”. Also, venture capital can be defined as
professional equity that is co-invested with the entrepreneur to fund an early stage (seed and
startup) or expansion venture (Thrassou and Lijo, 2012). Offsetting the high risk, the investor
expects a higher than average return on the investment. Venture capital is a subset of private
equity. Venture Capital refers to a subset of Private Equity, which is equity investment made to
support the pre-launch, launch and early-stage development phases of business(Ueda,2014).
Private equity investments are expended in companies during the expansion phase when the
firms have established products, markets, and stable cash flows history. In contrast, venture
capital investments are expended in the earlier stages of the life-cycle of a firm when the
trustworthiness of its business model is still in the process of being acknowledged.Venture
Capital Fund usually consists of at least 10 to 20 partners, so the capital collection is a long and
difficult process (Romans, 2013). Venture capital funds operate in a cycle (Keuschnigg&
Nielsen, 2016). VCs collect private investors’ capital and invest in businesses expecting high
annual returns. When they get the returns, that capital is invested again in new businesses. The
VC context has four different attributes. First, VCs invest in newly-established companies and
these investments are highly uncertain. Second, VC firms primarily rely on applying knowledge
resources which they use to select and coach portfolio companies. Third, VCs are not necessarily
diversified, which means they are typically single unit firms. And fourth, despite the fact that the
research indicates that VCs prefer low levels of diversification in the context of uncertainty, not
much about the actual relationship between these diversification levels and performance is
known (Matusik&Fitza, 2015).

2.1.2 VENTURE CAPITALIST

Bronwyn (2015), defines venture capitalist, or sometimes simply capitalist, is a person

who makes capital investments in companies in exchange for an equity stake. The venture
capitalist is often expected to bring managerial and technical expertise, as well as capital, to their
investments. A venture capital fund refers to a pooled investment vehicle (in the United States,
often an LP or LLC) that primarily invests the financial capital of third-party investors in
enterprises that are too risky for the standard capital markets or bank loans. These funds are
typically managed by a venture capital firm, which often employs individuals with technology

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backgrounds (scientists, researchers), business training and/or deep industry experience. A core
skill within VC is the ability to identify novel or disruptive technologies that have the potential to
generate high commercial returns at an early stage. By definition, VCs also take a role in
managing entrepreneurial companies at an early stage, thus adding skills as well as capital,
thereby differentiating VC from buy-out private equity, which typically invest in companies with
proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in
realizing abnormally high rates of returns is the risk of losing all of one's investment in a given
startup company (Gakure., Gakure & Karanja, 2012). As a consequence, most venture capital
investments are done in a pool format, where several investors combine their investments into
one large fund that invests in many different startup companies. By investing in the pool format,
the investors are spreading out their risk to many different investments instead of taking the
chance of putting all of their money in one start up firm.

2.1.3 TYPES OF VENTURE CAPITAL INVESTMENT FINANCING

As cited by Christian (2018), venture capital firms finance both early and later stage investments
to maintain a balance between risk and profitability.” Venture capital firms usually recognize the
following two main stages when the investment could be made in a venture namely Early stage
and later stage;

2.1.3.1 Early Stage Financing

This stage includes the following:

Seed Capital and R & D Projects:

Venture capital are more often interested in providing seed finance i.e. making provision of very
small amounts for finance needed to turn into a business. Research and development activities
are required to be undertaken before a product is to be launched. External finance is often
required by the entrepreneur during the development of the product (Bronwyn, 2015. The
financial risk increases progressively as the research phase moves into the development phase,
where a sample of the product is tested before it is finally commercialized “venture capital/
firms/ funds are always ready to undertake risks and make investments in such R & D projects
promising higher returns in future.
Start Ups:

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The most risky aspect of venture capital is the launch of a new business after the Research and
development activities are over. At this stage, the entrepreneur and his products or services are as
yet untried. The finance required usually falls short of his own resources. Start-ups may include
new industries / businesses set up by the experienced persons in the area in which they have
knowledge. Others may result from the research bodies or large corporations, where a venture
capitalist joins with an industrially experienced or corporate partner. Still other start-ups occur
when a new company with inadequate financial resources to commercialize new technology is
promoted by an existing company.

Second Round Financing:

It refers to the stage when product has already been launched in the market but has not earned
enough profits to attract new investors. Additional funds are needed at this stage to meet the
growing needs of business. Venture Capital Institutions (VCIs) provide larger funds at this stage
than at other early stage financing in the form of debt. The time scale of investment is usually
three to seven years.

2.1.3.2 Later Stage Financing

Those established businesses which require additional financial support but cannot raise capital
through public issue approach venture capital funds for financing expansion, buyouts and
turnarounds or for development capital.

Development Capital:
It refers to the financing of an enterprise which has overcome the highly risky stage and have
recorded profits but cannot go public, thus needs financial support. Funds are needed for the
purchase of new equipment/ plant, expansion of marketing and distributing facilities, launching
of product into new regions and so on. The time scale of investment is usually one to three years
and falls in medium risk category.
Expansion Finance:
Venture capital perceive low risk in ventures requiring finance for expansion purposes either by
growth implying bigger factory, large warehouse, new factories, new products or new markets or

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through purchase of existing businesses. The time frame of investment is usually from one to
three years. It represents the last round of financing before a planned exit.
Buy Outs:
It refers to the transfer of management control by creating a separate business by separating it
from their existing owners. It may be of two types.
i. Management Buyouts (MBOs): In Management Buyouts (MBOs) venture capital
institutions provide funds to enable the current operating management/ investors to
acquire an existing product line/business. They represent an important part of the
activity of VCIs.
ii. Management Buyins (MBIs): Management Buy-ins are funds provided to enable an
outside group of manager(s) to buy an existing company. It involves three parties: a
management team, a target company and an investor (i.e. Venture capital institution).
MBIs are more risky than MBOs and hence are less popular because it is difficult for
new management to assess the actual potential of the target company Usually, MBIs
are able to target the weaker or under-performing companies.
iii. Replacement Capital-V CIs another aspect of financing is to provide funds for the
purchase of existing shares of owners. This may be due to a variety of reasons
including personal need of finance, conflict in the family, or need for association of a
well-known name. The time scale of investment is one to three years and involve low
risk.
iv. Turnarounds-Such form of venture capital financing involves medium to high risk and
a time scale of three to five years. It involves buying the control of a sick company
which requires very specialized skills. It may require rescheduling of all the
company’s borrowings, change in management or even a change in ownership. A very
active “hands on” approach is required in the initial crisis period where the venture
capital may appoint its own chairman or nominate its directors on the board.
In nutshell, venture capital firms finance both early and later stage investments to maintain a
balance between risk and profitability. Venture capital evaluate technology and study potential
markets besides considering the capability of the promoter to implement the project while

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undertaking early stage investments. In later stage investments, new markets and track record of
the business/entrepreneur is closely examined.

2.1.4 FACTORS AFFECTING VENTURE CAPITAL INVESTMENT DECISIONS

Matusik & Fitza (2012), outlined the factors affecting ventue capital investment decision. The
venture capital usually take into account the following factors while making investments:

2.1.4.1 Strong Management Team:

Venture capital firms ascertain the strength of the management team in terms of adequacy of
level of skills, commitment and motivation that creates a balance between members in area such
as marketing, finance and operations, research and development, general management, personal
management and legal and tax issues. Track record of promoters is also taken into account.

2.1.4.2 A Viable Idea:

Before taking investment decision, venture capital firms consider the viability of project or the
idea. Because a viable idea establishes the market for the product or service. Why the customers
will purchase the product, who the ultimate users are, who the competition is with and the
projected growth of the industry.
2.1.4.3 Business Plan:
The business plan should concisely describe the nature of the business, the qualifications of the
members of the management team, how well; the business has performed, and business
projections and forecasts. The promoters experience in the proposed or related businesses is an
important consideration. The business plan should also meet the investment objective of the
venture capitalist.
2.1.4.4 Project Cost and Returns:
A. VCI would like to undertake investment in a venture only if future cash inflows are likely to
be more than the present cash outflows. While calculating the Internal Rate of Return (IRR) the
risk associated with the business proposal, the length of time his money will be tied up are taken
into consideration. Project cost, scheme of financing, sources of finance, cash inflows for next
five years are closely studied.

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2.1.5 FEATURES OF VENTURE CAPITAL
Venture capital combines the qualities of a banker, stock market investor and entrepreneur in one
The main features of venture capital can be summarized as follows:
2.1.5.1 High Degrees of Risk:
Venture capital represents financial investment in a highly risky project with the objective of
earning a high rate of return.

2.1.5.2 Equity Participation:

Venture capital financing. is, invariably, an actual or potential equity participation wherein the
objective of venture capitalist is to make capital gain by selling the shares once the firm becomes
profitable.
2.1.5.3 Long Term Investment:
Venture capital financing is a long term investment. It generally takes a long period to encash the
investment in securities made by the venture capital.
2.1.5.4 Participation in Management:
In addition to providing capital, venture capital funds take an active interest in the management
of the assisted firms. Thus, the approach of venture capital firms is different from that of a
traditional lender or banker. It is also different from that of a ordinary
stock market investor who merely trades in the shares of a company without participating in their
management. It has been rightly said, “venture capital combines the qualities of banker, stock
market investor and entrepreneur in one”.

2.1.5.5 Achieve Social Objectives:

It is different from the development capital provided by several central and state level
government bodies in that the profit objective is the motive behind the financing. But venture
capital projects generate employment, and balanced regional growth
indirectly due to setting up of successful new business.

2.1.5.6 Investment is liquid:

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A venture capital is not subject to repayment on demand as with an overdraft or following a loan
repayment schedule. The investment is realised only when the company is sold or achieves a
stock market listing. It is lost when the company goes into liquidation.

2.1.6 VENTURE CAPITAL INVESTMENT PROCESS

The venture capital follow a clearly defined procedure (Tyebjee& Bruno, 2017) in investing their
funds in SMEs as given below

2.1.6.1 Deal origination:

Venture capital require a flow of deal, which may originate in various ways like referral system,
active search and intermediaries.
2.1.6.2 Screening:
Initial screening of all projects on the basis of some broad criteria is carried out. Venture capital
obviously seek to attract desirable propositions yet many unwanted proposals are received; these
have to be weeded out as quickly as possible. There is broad agreement that proposals are
assessed first in relation of the quality of their business plans and the basic concept of the project
and personality and track record of the entrepreneur and/or management team is vital, however
venture capital are more concerned with market acceptance.
2.1.6.3 Due diligence:
one’s a proposal has gone through initial screening; it is subjected to detailed evaluation or due
diligence process. The aim of this part of the investment cycle is to minimize investment risk by
conducting a thorough investigation of the information presented in the business plan, with
special attention usually paid to the qualities of the entrepreneur or management team. The
quality of an entrepreneur is evaluated before appraising the characteristics of the product,
market or technology. Most venture capital ask for business plan to make an assessment of the
possible risk and return on the venture. The final decision is taken in terms of the expected risk-
return trade-off.
2.1.6.4 Deal structuring:
once the venture has been evaluated as viable, the terms of the deal are negotiated, in terms of
amount, form and price of the investment. The agreements also include the protective covenants,

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and earn-out arrangements. Venture capital generally negotiate deals to ensure protection of their
investment.
2.1.6.5 Post investment activities:
Ones the deal has been structured and agreement finalized, the venture capital assumes the role
of a partner and collaborator. The capitalist gets involved in shaping the direction of the venture.
2.1.6.6 Exit:
venturecapital aim at making medium to long-term capital gain within a period of five to ten
years and then exit. A venture may exit in any of the following ways; initial public offering,
acquisition by another company, purchase of the venture capital’ shares by promoter and
purchase of venture capital’ shares by outsider.

2.1.7 ADVANTAGES OF VENTURE CAPITAL

Raising venture capitalhas many advantages, and it may be the only option for fast-growing
startups wanting to scale quickly. Besides money, venture capital firms also provide input and
make introductions for potential partners, team members, and future rounds of funding. It can
also make hiring easier and reduce your overall risk.

2.1.7.1 Help Managing Risk Is Provided

Bringing on venture capital helps startup founders manage the risk inherent in most startups. By
having an experienced team oversee growth and operations, startups are more likely to avoid
major issues. The rate of failure for startups is still 20% in the first year, but having someone to
turn to for advice when a complex situation arises can improve the odds of making a good
decision.

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2.1.7.2 Monthly Payments Are Not Required
When a venture capital firm invests in your business, it will do so for equity in the company.
This means that unlike small business and personal loans, there are no regular payments for your
business to make. This frees up capital for your business, allowing you to reinvest by improving
products, hiring a larger team, or further expanding operations instead of making interest
payments.

2.1.7.3 Personal Assets Don’t Need to Be Pledged

In most cases, you will not have to contribute additional personal assets to the growth of your
business. While many startup funding options will require founders to pledge their homes as
collateral or use their 401(k) for startup costs, most venture capital agreements will leave the
founder’s personal assets outside of the discussion

2.1.7.4 Experienced Leadership & Advice Is Available:

Many successful startup founders become partners at venture capital firms after they exit their
businesses. They often have experience scaling a company, solving day-to-day and larger
problems, and monitoring financial performance. Even if they don’t have a startup background,
they are often experienced at assisting startups and sit on the boards of as many as ten at a time.
This can make them valuable leadership resources for the companies in which they are invested.

2.1.7.5 Networking Opportunities Are Provided:

When you’re focused on your business, there often isn’t time to network with people who can
help your business grow. Partners at a venture capital spend as much as 50% of their time
building their network to assist the companies they invest in. Having access to this network can
help you forge new partnerships, build out your clients, hire key employees, and raise future
rounds of funding.

2.1.7.6 Collaboration Opportunities with Industry Experts & Other Startups Are Available
When you get venture capital funding, you are getting what is often referred to as smart money.
This means the money you get comes with the added bene t of the expertise the venture capital
firm can offer. You will often work with partners from the firm, other startup founders who have

17
received funding, and experts from both of their networks to get your company on the right path
to growth and success.

2.1.7.7 Assistance with Hiring & Building a Team Is Available

The team you need to start a company and the team you need to scale are not the same, and
venture capital firms can help get key people in place at the company to help you grow. Also,
many potential employees may consider a venture-backed startup less risky than a traditional
startup with no funding, making it easier to recruit a talented and well-rounded team. Losing
complete control over your company is difficult, but this is part of raising venture capital. It also
isn’t easy to get funding. Besides maintaining growth, you will need to pass a due diligence
process and have someone from the venture capital firm sit on your board of directors to oversee
your actions.

2.1.8 DISADVANTAGES OF VENTURE CAPITALIST

2.1.8.1 Founder Ownership Is Reduced
When raising a funding round, you will need to dilute your equity to issue new shares to your
investors. Many companies outgrow their initial funding and have to raise additional rounds from
venture capital firms. This process results in founders losing the majority ownership in their
company and with it, the control and decision-making power that comes with being a majority
shareholder. Founders can mitigate this risk by only raising the amount that’s necessary.

2.1.8.2 Finding Investors Can Be Distracting for Founders:

Startups decide it’s time to raise venture capital when other funding sources have been exhausted
and the money is necessary for growth. However, fundraising can take several months and
shouldn’t come at the cost of managing the company. By starting the process before funding is
critical, founders give themselves enough time to both continue to grow the company and raise
enough money to keep growing.

2.1.8.3 Overall Cost of Financing Is Expensive

Giving up equity in your company may seem inexpensive compared to taking out a loan.
However, the cost of equity is only realized when the business is sold. Venture capital provides

18
much more than capital, like advice and introductions. However, the decision should not be
made lightly, especially if there are other funding alternatives.

2.1.8.4 Extensive Due Diligence Is Required

Venture capital partners need to screen startups because they are investing money that belongs to
outside contributors. This happens in two stages. In the initial stage, your technology and
business fundamentals are evaluated to determine if the market exists and if the business can be
scaled. In the second stage, they conduct a more thorough review of your teams’ background and
the startups financial and legal position. Although this process can take several months, it is
beneficial for the startups that go through it. By identifying problems and addressing them early
in the startups’ development, it is much easier to correct them. Future rounds of funding become
simpler too, because many issues have already been reviewed and corrected.

2.1.8.5 Business Is Expected to Scale & Grow Rapidly

To get a return on their investment, venture capital firms need your startup to appreciate in value
on its way to being either acquired or listed on a public stock exchange. Knowing the business
needs to get there can often increase the already high pressure that founders experience.
However, there are ways founders can manage this stress. By communicating with other
founders and their investors, founders can ensure that they are aligned on goals and can learn
from the wisdom of others. Founders should also be cognizant of reducing their workload by
delegating when appropriate to allow them to focus their time and energy on critical components
of the business.

2.1.8.6 Funds Are Released on a Performance Schedule

Funds raised from venture capital firms are released gradually as the startup hits certain
milestones. These are special to the business but include revenue goals, customer acquisition,
and other metrics determined by the venture capital rm. These goals and any conflicts should
raise discussion with the board. It can distract founders if the targets are the only things being
chased, but it also leads to greater business success.

2.1.9 VENTURE CAPITAL AND SMES PERFORMANCE

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 Venture capital is non-bank financing for small-sized and start-up businesses and is
common in developed financial markets (Freear&Sohi, 1994). According to Gompers and Lerner
(1998), VC is a professionally managed pool of money raised for the sole motive of active
management of direct equity investments in fast-growing private businesses. This form of
finance is regarded as a modern entrepreneurial financial innovation. Obtaining VC is crucial for
commencing a new venture for countries that hope to connect to highly developed economies.
Venture capital (VCs) provide financial support for doubtful business proposals by SMEs which
show potential but unproven designs. If the VCs are persuaded that a business model shows
potential, they would invest in the business and provide the required funds while partaking in the
risk. In industrialized countries where venture capital has played an immense role in supporting
SMEs, the sector is so widely developed that it has formal and informal venture capital referred
to as business angels (Freear, 2003). According to Memba (2014) the dominance of venture
capital, in advanced countries has performed a critical role in improving SMEs’ growth through
the provision of equity capital.
Freear, Sohl& Wetzel (1994) provided two primary methods of outside equity capital for
entrepreneurs: venture capital and business angels. The VC market is made-up of professional
funds and the informal VC market consists of a varied and widespread population of high net
worth individuals. In nations where both kinds of VC take part in funding small businesses, they
are professional investors who contribute their business expertise, industry experience, and links
to a business project (Sohl, 2003). VC is a method of funding planned to offer equity or quasi-
equity financing to small businesses, with the primary return to investors as capital gains or share
gains, rather than from dividends. VCs are vigorously involved in the tactical manoeuvres and
running of small businesses to help achieve investment objectives and provide positive support
by adding value. Investors are fascinated by VC investments because of the possibility of
massive gains from later sales of the company’s shares, and therefore are eager to receive the
higher risks entailed, as compared to conventional loans. Indeed, a typical PE investor’s portfolio
usually comprises a variation of investee firms, of which some will fail, some will yield adequate
returns and a handful will be highly advantageous (Freeman, 2015). Venture capital funds are
mostly invested in small businesses with high growth potential. On the other hand, they might
take part in take-overs of more reputable firms. The participation period of a venture capitalist is
usually two to five years, after which they will trade the shares of the business on a stock market

20
through an initial public offering (IPO), trade sale, management buyout or sale of total shares in
the business to a reputable competitor or other VCs.

2.2 THEORETICAL REVIEW

This section review the related literature relating the topic under theoretical review:

Trade-off theory, The economic theory of the entrepreneur, Modern portfolio theory

2.2.1 Trade-Off Theory

The trade-off theory of capital structure refers to the idea that a firms chooses how much debt
finance and how much equity finance to use by balancing the costs and benefits. This theory goes
back to Kraus and Litzenberger (1973) who considered a balance between the deadweight costs
of bankruptcy and the tax saving benefits of debt. The theory posits that there is an advantage to
financing with debt, the tax benefits of debt and there is a cost of financing with debt, the costs of
financial distress including bankruptcy costs of debt and non-bankruptcy costs e.g. staff leaving,
suppliers demanding disadvantageous payment terms, bondholder or stockholder infighting, etc.
(Frank & Goyal, 2007). The marginal benefit in debt declines as debt increases, while the
marginal cost increases, so that a firm that is optimizing its overall value will focus on this trade-
off when choosing how much debt and equity to use for financing. According to Myers and
Majluf (1984), a firm that follows the trade-off theory sets a target debt-to-value ratio and then
gradually moves towards the target. The target is determined by balancing debt tax shields
against costs of bankruptcy. The trade-off theory postulated that there is a limit to debt financing
and the target debt may vary from one SME’s to another depending on profitability, among other
factors referring to microfinance. This allows profitable SME’s, which have lot of tangible asset
that can be offered as collateral for debt, may have a higher target debt ratio (Byers, 1997). The
alternative theory of capital structure is known as ‘pecking order’ theory, the origin of which is
asymmetric information where managers know more about a firm’s prospect than the outside
investors. According to Myers (1984), the theory is based on the premise that successful zero
debt firms with high and consistent profitability rarely uses debt financing. The theory suggest
that in avoiding controversy the management may wish to finance project by internal fund

21
generation, such as by retained earnings. Hence, the financing order goes in this way, first-
retained earnings, then-debt and finally, equity when debt capacity gets exhausted, and explains
why profitable firms use less debt (Heilman, 1998)

2.2.2 The Economic Theory of the Entrepreneur

While seeking to understand the very nature of commerce, Cantillon (1955) wrote his seminal
work on the entrepreneur as a person willing to take risks and able to manage uncertainty. He
defined an entrepreneur as non-fixed income earners who take risks in committing themselves
firmly, without guarantee as to the solvency of his client or his backers. Entrepreneurship is often
categorized as the entrepreneurial factor, the entrepreneurial function, entrepreneurial initiative,
and entrepreneurial behavior and is even referred to as the entrepreneurial “spirit. The
entrepreneurial function can be conceptualized as the discovery of opportunities and the
subsequent creation of new economic activity, often via the creation of a new organization
(Reynolds, 2005). The entrepreneurial factor is understood to be a new factor in production that
is different to the classic ideas of earth, work and capital, which must be explained via
remuneration through income for the entrepreneur along with the shortage of people with
entrepreneurial capabilities. Its consideration as an entrepreneurial function refers to the
discovery and exploitation of opportunities or to the creation of enterprise (Byers, 1997). This
theory shows the motivations for additional financing in an SME is expansion of operations of
entrepreneurs by venture capital. Thus, venture capital assume some levels of risk when
financing startups to expand the activities of an SME in return for higher returns. Startups are
vital for economic growth and development in both industrialized and developing countries, by
playing a key role in creating new jobs. According to Ngigi (1997), Financing is necessary to
help them set up and expand their operations, develop new products, and invest in new staff or
production facilities.

2.2.3 Modern Portfolio Theory

Modern Portfolio Theory (MPT), a hypothesis put forth by Harry Markowitz in his paper
"Portfolio Selection," (published in 1952 by the Journal of Finance) is an investment theory
based on the idea that risk-averse investors can construct portfolios to optimize or maximize
expected return based on a given level of market risk, emphasizing that risk is an inherent part of
higher reward. It is one of the most important and influential economic theories dealing with

22
finance and investment (Kaplan & Schoar, 2005). Also called "portfolio management theory,"
MPT suggests that it is possible to construct an "efficient frontier" of optimal portfolios, offering
the maximum possible expected return for a given level of risk. It suggests that it is not enough
to look at the expected risk and return of one particular stock. By investing in more than one
stock, an investor can reap the benefits of diversification, particularly a reduction in the riskiness
of the portfolio. Venture capital play a very important role as financial intermediary bridging the
gap between demand and supply of capital by entrepreneurs and investors. MPT on the other
hand quantifies the benefits of diversification (Kaplan and Schoar, 2005). The theoretical
rationale for investing in an alternative asset class such as private equity is to improve the risk
and reward characteristics of an investment portfolio, with the expectation that the asset will
offer a higher absolute return whilst improving portfolio diversification.

2.3 EMPIRICAL REVIEW

There are many evidence related to the topic at hand for instance:
In a research study conducted by Thokozani, (2011), which was directed to analyse the effect of
venture capitalist finance and investment behaviour in the small and medium enterprise practices
was able to find out that government has reinforced these positive economic externalities through
policy programmes and designated support structures. Venture capital organizations often
galvanize innovative knowledge by entrenching and sustaining nascent businesses through value-
creating funding behaviours.
Memba, Gakure and Karanja (2012), Venture Capital (VC) Its Impact on Growth of
Small and Medium Enterprises in Kenya. The study found that venture capital has a significant
impact on Small and Medium Enterprises (SME) in the developed countries. Small businesses
have been and are the stepping stone of industrialization in these countries. Among the
developing countries and especially Kenya venture capital has been present since independence
yet industrialization is slow.

23
 Boadu (2014), in his study, venture capital financing: An opportunity for SMEs in Ghana,
found a positive impact of VC financing on SMEs’ growth. They manifested this in the
remarkable growth and expansion of VC-backed companies that recorded 16.7% overall growth.
Jobs increased by 33.3%, consistent with the economic indicators of the business sector. Suweiba
and Haibo (2019) examined 100 VC-backed companies in Ghana to determine if they registered
growth post-VC investment. The findings confirmed a positive and significant relationship
between the growth of VC-backed firms and VC instruments. These studies show varied results,
yet they were conducted in the same country, Ghana. Therefore, it is challenging to conclude that
the findings from Uganda might be the same as Ghana’s because of the countries’ economic
differences and regulatory policies.

Furthermore, Hain, Johan and Wang (2016) explored VC financing and its subsequent
effect on SMEs’ growth in the United States of America. They used panel data from the major
commercial databases for the first quarter of 2011 and updated data from the second quarter of
2015. Their empirical Page 4 of 11 Original Research http://www.sajesbm.co.za Open Access
evidence suggests that VC-backed companies outperform public markets. Despite the appealing
results, the commercial databases on which the authors relied could provide conflicting results
attributable to data protection and privacy of private equity firms. Further research conducted in
an emerging economy, such as Uganda, is desirable, where little or no empirical research is done
to provide empirical data to benchmark future research.
Herciu (2017) through his research study titled financing small businesses: from venture
capital to crowdfunding startups was able to find out that small businesses are facing many
challenges in terms of financing their activities. These types of companies do not have the
possibility to access capital market or to make IPO or to borrow money from banks like big,
mature or well-known companies.
Irena, Svetlana and Boris (2017) find out that entrepreneurs as well as SMEs, regularly
face the problem concerning access to finance through their research study titled the role of
venture capital in the development of the SME sector also, they were able to find out that
entrepreneurial firms face major problems.
In another study by Christian (2018) which purpose of study was to analyse the impact of
venture capital development in Ghana. The study finds out that SMEs play a significant role in
the economic development of both developed and developing countries.
24
 Mboto, Amenawo and Udoka (2018) used non-probability sampling by the Yamane
formula, and a sample of 40 SMEs from the cross-river state in Nigeria was selected. They found
that firms receiving VC funding increased their opportunity to access other sources of funding,
and there were positive sales growth and an increase in net assets. However, the method used for
non-probability sampling could lead to biased results because it creates an equal opportunity for
each SME in the region to be selected. Such drawbacks in the available literature necessitate
more research in the field of VC finance to provide a clear understanding of its impact on SME
performance, specifically in Uganda.

In another study by Junjuan and Zheng (2020), whose objective of study was to analyse
the impact of venture capital on the growth of small- and medium-sized enterprises in agriculture
was able to find out that small- and medium-sized enterprises (SMEs) are considered to have
potential innovation capabilities and can create new market opportunities. Venture capital can
financially support entrepreneurial activities for economic growth and governs and nurtures the
growth of the SMEs. Based on the enterprise growth theory, this study constructed an evaluation
model, consisting of technological innovation, profitability, development capability, and
solvency, to examine the effect of venture capital on the growth of agricultural SMEs. Using data
of 40 agricultural SEMs from the SME and ChiNext boards in China, the empirical analysis has
been conducted with the multivariate regression analysis method. The results show that the
venture capital can significantly improve the technology innovation, profitability, and growth
ability of SMEs. For the solvency of SMEs, the promoting role of venture capital is not obvious.
Finally, the practical implications of this study for venture capital, entrepreneurs, and regulators
are discussed.

2.4 GAPS IN LITERATURE

In regards to past literatures on the impact of venture capitalist on performance of SMEs, base on
the literature reviewed from different academic scholar’s little amount of discussion have been
made on venture capitalist and SMEs performance. Clarification has been made that 70 of the
literature reviewed made use of interview and experimental method of research, this can be
identified through the works of (Baodu, 2014; Hain, Joan & Wang 2016; Irena, Svetlana &

25
Boris, 2017 and Junjuan & Zheng, 2020). This research work is laid upon the questionnaire
method as it seeks to identify other available means of getting data from its respondents.

It tends to cover other variable gaps which fails to be identify in the empirical reviewed which
include angel investors, leasing house, bootstrapping, sustainability, market share and SMEs
profitability. At the end of this research work, it shall tends to find possible solutions to the issue
of lack of effective implementation of venture capitalist support on SMEs with a major focus to
SMEs in Kwara State.

CHAPTER THREE

METHODOLOGY

3.0 INTRODUCTION

This chapter examines the methods adopt for this study, on the Impact of venture capitalist on
SMEs performance. It focuses on research philosophy, research approach, research methods,
research design, sources of data collection, population of the study, sample frame, sample size
determination, sampling techniques and procedure method of data analysis, validity and
reliability of research instrument and ethical consideration.

3.1 RESEARCH PHILOSOPHY

26
Three research designs have been identified by Sunder, Thornhill and Lewis, (2009) and Otokiti,
(2010) as axiology, ontology and epistemology. However, in this research work epistemology
will be adopted as it constitutes acceptable knowledge in the field of study (Otokiti, 2010).

3.2 RESEARCH APPROACH

The research approach has been identified to be inductive and deductive approaches.
However, for the purpose of this research, deductive approach will deployed, as deductive is
concern with testing and confirming of hypotheses (Trochim, 2006).

3.3 RESEARCH METHOD

Research method concerns the tactic and plan of action that gives direction to research
effort and enable systematic conduct of the research. The research methods are of several types
comprises of the survey, observation, action-research, experiment, archival, case study among
others. Existing literature show that surveys are commonly used in this area of research. For
instance Farid El Sahn et al., (2013) made use of survey method. Therefore, in this study, case
study and survey method will be adopted. Case study will be adopt because it gives an in-depth
and a better understanding of the unit under study while survey method is adopt because of it
involvement on extensive study of a particular phenomenon and it enables data to be collected
through the administration of questionnaire which is a major source of primary data for this
study (Otokiti S.O, 2010).

3.4 RESEARCH DESIGN

In order to achieve the set objectives of this study a plan will be drawn up towards
collecting statistical and other relevant data from the field with the use of case study, because it
allows flexible data collection for illuminating a phenomenon within its contested backdrop
(Hentz, 2007). In accordance with the objective of this research study, the research design used
will be explanatory as it establishes causal relationship variables (Otokiti, 2010)

This research shall adopts quantitative approach and cross-sectional design in order to
obtain the relevant information. Two reference period which are retrospective and prospective
which explain the past as well as leverage on the present situation to predict the future. Likert-

27
 scale questionnaire which ranges from Strongly Agree (SA) to Disagree (D) will used to gather
information from the respondents.

3.5 Population of the Study

Population can be referred to as a full set of case from which a sample is taken from. The
entire study population is limited to selected SMEs in Ilorin which includes Femtech I.T, Afatech
I.T, Chupet, Hairsense and Captain Cook Bakery, during the course of research the population of
study comprises of 340.
Source: Researcher’s Field work (2021)

3.6 Sample size Determination

Ndagi (1999) is of the opinion that sample is the limited number of elements selected
from a population that will be the representative of that population. There are various opinions
by different scholars as to the issue of determination of samples. Henry (1990) believed that
when the samples sixe is less than 50, we are to sample all, while Stutely (2003) is of the opinion
that when the sample size is less than 30, we are to study all. For the purpose of this study, the
stately opinion will adopt. Therefore as propounded by Bartlett, Kotrilik and Higgins (2001) and
Otokiti (2010) in their work, sample size of this study is determined from the population using
Minimum Returned Sample Size table for Continuous and categorical data. The report gotten
from the anticipated figure expected from the organization shall be worked 340 on and sample
size shall be decided then using the Yoro Yamane formula. The equation is illustrated below;

340
n=
2
1 x 340 ( 0.05 )

Where:
‘n’ = sample size
‘N’ = population size
’e’ = level of precision (0.05)

n = 340

28
 1 + 340 (0.05)²
n = 340
1 + 340 (0.0025)

n = 340
1 + 0.85

n= 340 = 183.78 n = 184

1.85

3.7 SOURCES OF DATA COLLECTION

Otokiti, (2010), said the most distinguished characteristic of a research is data collection.
In conducting this research relevant data will be gathered from one major source: the primary
source

3.8 METHOD OF DATA COLLECTION

Specifically, open ended and close questionnaire of data collection were selected. The
questionnaire will be divided into two sections (A & B). The open ended and close ended
questionnaire were used in the Section A which contains information about the respondent bio-
data, while close ended questionnaire is the section B which contains strategic questions relating
to the impact of employees turnover on organization performance.

3.9 METHOD OF DATA ANALYSIS

The result gotten from the research field work shall be analyzed using frequency
distribution table to displaying the percentage of the demographic date and to show the level of
agreement and disagreement to the research statements in the closed ended questionnaire with
the help of Statistical Package for Social Sciences (SPSS) of version 20.

29
In addition, Regression and Correlation analysis shall be adopt to test the impact of the
independent variables (i.e. Venture Capitalist) on the dependent variables (i.e. SMEs
performance) as asked in the hypotheses stated in previous section.

3.10 VALIDITY OF RESEARCH INSTRUMENT

There are four methods of measuring validity are face validity, content validity, and criterion
validity and construct validity. However, for the purpose of this study the measure instrument
were subjected to face and content validity, showing whether it test what it meant to test and the
extent to which a test measures a representative of the sample (Otokiti, 2010).

3.11 RELIABILITY OF RESEARCH INSTRUMENTS

Reliability refers to the extent to which result are consistent over time (Otokiti, 2010). It simply
means that if the second researcher were to conduct the same case study, he will still arrive at the
same findings. Therefore, in order to ensure the reliability of the data collected, the researcher
used test-re-test method by administering the same questionnaire twice to the same group of
people under the same or identical variable and it is also known as coefficient stability.

3.12 ETHICAL CONSIDERATION

In conducting this research the issue of ethic was highly followed. Confidentiality was
maintained throughout the research and data obtained for the purpose of this study will used only
for the purpose of this study. Furthermore, high moral and ethical values were ensured; thus
ensuring protection of the right of individuals in particular and that of the organization under
study as whole. The enrolment of respondents was done on a voluntary basis; thus, this ensures
respondents were not pressurized and their privacy is not to be intruded upon.

30
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