An assessment into the effect of venture capital financing on the profitability of sme in nigeria.

Thesis Overview

<p> <b></b></p><p><b><b>1.0 &nbsp; &nbsp; &nbsp;</b><b>INTRODUCTION</b></b></p><p><b><b></b></b></p><b><b><p><b>1.1 &nbsp; BACKGROUND OF STUDY</b></p><p><b></b></p><b><p>Small<br>and medium-sized enterprises (SMEs) play a pivotal role in the national<br>economies of countries around the world. This is especially true of emerging<br>markets. They are considered to be an engine for growth in both developed and<br>developing countries; the benefits of a vibrant SME sector include: the<br>creation of employment opportunities; the strengthening of industrial linkages;<br>the promotion of flexibility and innovation; and the generation of export<br>revenues (Lerner, 2002; Rangamohan et al, 2007).</p><p>In<br>SA, for instance, eight out of 10 jobs that are created occur in the SME sector<br>(Karungu et al, 2000). In the US, Japan and Germany, small business contributes<br>more than half of the gross domestic product (GDP) in each of those economies.<br>Though SMEs have been the engine for growth in various developed and developing<br>economies, they have always faced problems in accessing finance.</p><p>Without<br>proper finance, SMEs can neither expand to compete globally nor can they<br>acquire technology or meet their fixed and working capital requirements<br>(Wanjohi and Mugure, 2008). SMEs face significant challenges, which include<br>access to finance (Iwisi et al, 2003) and financial management skills and<br>support (Gem Report, 2003). This contributes to slow development and high mortality<br>rates of small businesses in Nigeria.</p><p>Access<br>to finance is particularly relevant for previously disadvantaged entrepreneurs<br>who do not have access to collateral and the networks of wealthy individuals<br>who could provide angel financing. Financing is necessary to help SMEs set up<br>and expand their operations, develop new products, and invest in new staff or<br>production facilities. Many small businesses start out as an idea from one or<br>two people, who invest their own money and probably turn to family and friends<br>for financial help in return for a share in the business.</p><p>But<br>if they are successful, there comes a time when they need further funds to<br>expand or innovate further. Some SMEs often run into problems, because they<br>find it much harder to obtain financing from banks, capital markets or other<br>suppliers of credit (Afua, 2011).</p><p>Almost<br>every company we know of began as an SME. Vodafone as we know it today was once<br>a little spin-off from Racal; Hewlett-Packard started in a little wood shack;<br>Google was begun by a couple of young kids who thought they had a good idea;<br>even Volkswagen at one point was just a little car maker in Germany (as opposed<br>to being a giant small car maker globally) (Lukacs, 2005). Microsoft may be a<br>software giant today, but it started off in typical SME fashion, as a dream<br>developed by a young student with the help of family and friends.</p><p>Only<br>when Bill Gates and his colleagues had a saleable product was they able to take<br>it to the marketplace and look for investment from more traditional sources<br>Amissah 2009). The growth of SMEs has been hampered by the lack of adequate<br>knowledge and a well structured financial market for the mobilization of<br>capital. The role of finance has been viewed as a critical element for the<br>development of SMEs Cook and Nixson, (2000).</p><p>However,<br>venture capital has had a significant impact on Small and Medium Enterprises<br>(SME) in the developed countries; small businesses have been and are the<br>stepping stone of industrialization in these countries.</p><p><b>1.2 &nbsp; STATEMENT OF THE PROBLEM</b></p><p><b></b></p><b><p>Arguably,<br>SMEs have an important role in the development of an economy, as they<br>contribute to the economic development of developing and developed countries. SMEs<br>also contribute in the creation of employment and breeding ground for<br>entrepreneurs, as well as a centre to investment generation and technological<br>development. SMEs are also the sources of domestic and international trade. A weak<br>business environment, lack of managerial or technical capacity and Lack of<br>finance could be regarded as major problems contributing to slow development<br>and high mortality rates of small businesses in Nigeria. Finally, several researches<br>has been carried out on the impact of venture capital financing on SMEs but not<br>even a single research has been carried out on an assessment into the effect of<br>venture capital financing on the profitability of SMEs in Nigeria.</p><p><b>1.3 &nbsp; AIMS AND OBJECTIVES OF STUDY</b></p><p><b></b></p><b><p>The main aim of the<br>study is to assess the effect of venture capital financing on the profitability<br>of SMEs in Nigeria. Other specific objectives of the study include:</p><p>1. &nbsp; &nbsp; &nbsp; &nbsp; <br>to determine the extent to which venture<br>capital financing affects profitability of SMEs in Nigeria.</p><p>2. &nbsp; &nbsp; &nbsp; &nbsp; <br>to determine the factors affecting venture<br>capital financing of small and medium scale enterprises in Nigeria.</p><p>3. &nbsp; &nbsp; &nbsp; &nbsp; <br>to examine the awareness of the SMEs<br>towards venture capital as a significant source of financing.</p><p>4. &nbsp; &nbsp; &nbsp; &nbsp; <br>to proffer possible solutions to the<br>problems.</p><p><b>1.4 &nbsp; RESEARCH<br>QUESTIONS</b></p><p><b></b></p><b><p>1. &nbsp; &nbsp; &nbsp; &nbsp; <br>What is the extent to which venture<br>capital financing affects profitability of SMEs in Nigeria?</p><p>2. &nbsp; &nbsp; &nbsp; &nbsp; <br>What are the factors affecting venture<br>capital financing of small and medium scale enterprises in Nigeria?</p><p>3. &nbsp; &nbsp; &nbsp; &nbsp; <br>What is the awareness of the SMEs<br>towards venture capital as a significant source of financing?</p><p>4. &nbsp; &nbsp; &nbsp; &nbsp; <br>What are the possible solutions to the<br>problems?</p><p><b>1.5 &nbsp; STATEMENT OF RESEARCH HYPOTHESIS</b></p><p><b></b></p><b><p>H0: &nbsp; Venture capital financing has no significant<br>effect on the profitability of an SME in Nigeria.</p><p>H1:<br>Venture capital financing has a significant effect on the profitability of an<br>SME in Nigeria.</p><p><b>1.6 &nbsp; SIGNIFICANCE OF STUDY</b></p><p><b></b></p><b><p>The<br>study on an assessment into the effect of venture capital financing on the<br>profitability of SMEs will be of immense benefit to the entire SMEs in Nigeria<br>in the sense that it will enable the government to gain an understanding of the<br>role played by both formal and informal venture capital markets so as to<br>provide a suitable environment for their operations especially to formulate<br>policies that will support the entrepreneurs. The study will also enable the venture<br>capitalists to review the need to provide seed financing which will lead to<br>establishment of many such businesses. These financers can also review their<br>stringent requirements to accommodate more users of their fund. Finally, the<br>study will contribute to the body of existing literature and knowledge to this<br>field of studies and basis for further research.</p><p><b>1.7 &nbsp; SCOPE OF STUDY</b></p><p><b></b></p><b><p>The<br>study on the assessment into the effect of venture capital financing on the<br>profitability of an SME is limited to Nigeria.</p><p><b>1.8 &nbsp; LIMITATION OF STUDY</b></p><p><b></b></p><b><p><b>Financial constraint</b>–<br>Insufficient fund tends to impede the efficiency of the researcher in sourcing<br>for the relevant materials, literature or information and in the process of<br>data collection (internet, questionnaire and interview).<b></b></p><b><p><b></b></p><b><p><b>Time constraint</b>– The researcher will<br>simultaneously engage in this study with other academic work. This consequently<br>will cut down on the time devoted for the research work.</p></b></b></b></b></b></b></b></b></b></b></b></b> <br><p></p>