Staged Capital and Financial Performance of Venture Capital Firms in Kenya
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Date
2021
Authors
Waithiegeni, Nderitu Mary
Journal Title
Journal ISSN
Volume Title
Publisher
Kenya University
Abstract
Venture capital industry in Kenya is still in its nascent stage lagging behind both supply and
demand side. Since inception of the venture capital industry in Kenya in 1970s several venture
capital firms have collapsed and others exited the market due to poor financial performance. The
rule of thumb in venture capital industry suggests that out of ten investments only one or two are
successful. This makes venture capital industry an extremely high risk investment sector with a
high probability of failure. This is painful to venture capitalist since they invest their resources
with expectation of high returns from the invested project. To solve the problem of
underperformance and huge losses in case of project failure, over 90% venture capital firms
stage their financing rather than upfront financing. It gives an option of abandoning poorly
performing projects before injecting more capital in subsequent rounds. Existing literature often
act a source of knowledge when making critical decisions like staged capital financing.
Nevertheless, different scholars have different opinions on effect of staging on financial
performance of venture capital firms. These studies have concentrated on developed nations but
not as much in developing ones leaving venture capitalist in these nation’s with limited reference
in their context. This study therefore sought to fill this gap in knowledge by looking at staged
capital on financial performance of venture capital firms in Kenya to act as a basis for decision
making for venture capital firms in Kenya and developing nations. The study objectives were; to
determine effect of early stage venture capital financing on financial performance of venture
capital firms in Kenya, to establish the effect of growth stage venture capital financing on
financial performance of venture capital firms in Kenya, to establish the effect of growth stage
venture capital financing on financial performance of venture capital firms in Kenya. The study
was anchored on agency, transactional cost and control theories. Descriptive research design was
employed. The study targeted 50 venture capital firms operating in Kenya during the period
(2014-2019) as per Kenya treasury report (2019) and EAVCA (2019). A census of the fifty
venture capital firms was utilized in the study. Self-administered questionnaires were used to
collect primary data from venture capital firms fund managers. Secondary data on financials was
collected using a data collection sheet. The study had a response rate of 93% of the target
population. Multiple regression analysis was used to analyze collected data with the help of
SPSS computer package. Means and percentages were also used. Analyzed data was presented in
form multiple regression equation and tables of regression coefficients. The study found out that
staging of capital positively affects financial performance of venture capital firms in Kenya. The
study found out that return on investment is highest on late stage, followed by growth stage and
early stage financing in that order. Finding from this study would help venture capital investors
make informed decision when using stage financing as a financing option in their investment.
Policy maker will use findings of this study to develop policy to ensure venture capital industry
growth and especially staged financing. In additions findings from this study will add to existing
literature and elicit the urge for further studies on venture capital industry from scholars and
academicians. The study recommend that venture capital firms should stage their financing with
more of the investment in late, growth and early stage in that order to enhance return on
investment. Further research can be done on effect of stage capital financing on exit strategies
adopted by venture capital firms in Kenya. In addition, a study on effect of staged capital
financing on financial of venture capital backed SMEs in Kenya can be done.
Description
A Research Project Submitted in Partial Fulfillment of the Requirement for the Award of the Degree of Master of Business Administration (Finance Option), School of Business, Kenyatta University, May 2021
Keywords
Staged Capital, Financial Performance, Venture Capital Firms, Kenya