Factors that influence venture capitalist’s decision in funding Small Medium Enterprises in Kenya
Njubi, Tabitha Waithira
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Small and medium Enterprises are a key economic growth driver in Kenya. Although many start-ups rely on founder’s savings, friends and family to raise funds, these sources are normally not sufficient to scale the business to a profitable level. The entrepreneurs are therefore forced to look for alternative sources of funding. Banks have always been a popular source of capital for business but due to the high risk levels and uncertainty associated with SMEs, the banks always put conditions which are way above the SME’s reach hence making it difficult for them to access the much required capital. Venture capital has become popular in Kenya in the past 10 years as an alternative source of funding since they are willing to take up the risks associated with SMEs. The aim of the study was to determine the factors considered by venture capitalists in evaluating SMEs in Kenya. The specific objectives were; to determine the influence of management characteristics on VCs’ consideration for funding of SMEs in Kenya, to find out the influence of entrepreneur’s characteristics on VCs consideration for funding of SMEs in Kenya, and to establish the influence of business characteristics on VCs consideration for funding of SMEs in Kenya. This study was a descriptive survey design. The target population in this study comprised of venture capital firms registered with East Africa Venture Capital Association ,Capital Markets Authority or . Primary data was collected through Self-completed Questionnaires. Self-completed Questionnaires to executives and managers of Venture capital or private equity firms in Kenya was used as the sole data collection tool. The researcher analysed data on the three objectives using factor analysis. The study findings were that three key variable viz; market factors, product factors and financial factors were the key factors considered by VCs in their consideration to fund SMEs. The study also established that each of the key variables had specific items of interest to the VCs in their evaluation of SMEs for funding. On entrepreneurship characteristics, education background of the entrepreneur and entrepreneurs past experience were the critical items of consideration by VCs, on management factors, a team with a good education background and a team with a wide industry experience would be considered. On product factors, ability to stimulate a new market and the product with a global potential are key considerations. Market factors that are critical according to the study are huge market for a product and a huge market growth potential. Key financial aspects of consideration were ability of the venture to generate sufficient operating cash flows and potentially profitable exit options. The study concluded that SMEs v seeking venture funding from VCs should pay attention to enhancing their capacities on the three key variables stated in the study as important; market factors, product factors and financial factors. The study recommended the need for venture capital firms to be encouraged to create conducive environment that will encourage business persons to share their business ideas, venture capital firms be encouraged to do thorough marketing to create awareness of their key areas of interest when evaluating SMEs for funding and the government’s involvement in venture capital is important to the venture capital market.