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Click here to sign up. Download Free PDF. Kennedy Mulenga. A short summary of this paper. Download Download PDF. Translate PDF. However, SMEs all over the world are faced with a number of challenges that derail their expansion.
The major challenge that SMEs face is that of acquiring financing from traditional financiers such as banks and capital markets. Lack of collateral and lack of financial records characterise SMEs generally Ferrer, The inability of SMEs to raise capital from conventional financial institutions means that they have to find other sources of financing.
In many countries, the only source that is available to supply capital to unquoted companies with growth and profit prospects is venture capital VC, hereafter. Definition of Venture Capital Several scholars have defined venture capital differently. Metrick and Yasuda conclude that venture capital is a form of private equity, which is an investment that cannot be traded in public markets.
EVCA adds that VC focuses on innovative firms in early seed and start-up and expansion stages of their existence. There is a lot confusion surrounding the meanings of VC and private equity PE, hereafter.
Several authors define private equity in different ways. To avoid confusion, throughout this paper, the term VC is used to refer to seed, start-up and expansion investment in unquoted companies. This is consistent with the way the term is used in the USA. They add that in the s, VC industry in the United States saw a landmark in terms of the introduction of the limited partnerships for VC funds.
Overview of the world venture capital industry The last 30 years have witnessed the impressive expansion of the world VC industry Da Rin et al. Preqin as cited in Da Rin et al. VC is deep rooted in the industrialised countries. This is consistent with Da Rin et al. In the year , North America accounted for 77 percent of the global PE funds. The diagram below represents a venture capital model: Figure 1. In order to invest in portfolio companies VC firms who are known as general partners have to raise capital from investors such as pension funds, insurance firms, endowments and foundations and wealthy individuals Da Rin et al.
Investors also known as limited partners because they are not involved in the day to day affairs of the VC fund. On the other hand, general partners are actively involved in the management of the fund Da Rin et al. The function of active participation of VC firms in portfolio companies is at different levels in different countries. For example, Japanese and German VC firms are less active than their USA counterparts in managing the portfolio companies they have invested in.
They add that in Germany, 25 percent of VC firms are listed companies; while in the UK the most common type legal structure for VC firms is limited partnerships. However, it is important to note that about 5 percent of VC firms in the UK are organised as public corporations Mayer et al. Types of investments undertaken by VC firms Mayer et al.
Lerner and Hardymon as cited in Mayer et al. Mayer et al. Japanese VC firms have invested 24 percent abroad; while their German counterparts have invested only 15 percent Mayer et al. The VC fund After fundraising, the VC firm invests in selected entrepreneurial firms and is actively involved in daily affairs of the firms they have invested in. When the life of the VC fund comes to an end, the VC firm exits the VC fund and proceeds are distributed to the limited partners who are the investors Da Rin et al.
The VC firm is compensated in two parts. One part is called management fee and the other part is called carried interest Da Rin et al. Whereas, carried interest is variable and is 20 percent of the returns made by the fund. This is consistent with the view of CVCA Investors or limited partners get the remaining 80 percent. Da Rin et al. According to Metrick and Yasuda a VC fund has five main characteristics: 1.
A VC fund invests only in private companies. This means that once investments are made, the companies cannot immediately be traded on a public exchange. In the year , North America accounted for 77 percent of the global PE funds. The diagram below represents a venture capital model: Figure 1. In order to invest in portfolio companies VC firms who are known as general partners have to raise capital from investors such as pension funds, insurance firms, endowments and foundations and wealthy individuals Da Rin et al.
Investors also known as limited partners because they are not involved in the day to day affairs of the VC fund. On the other hand, general partners are actively involved in the management of the fund Da Rin et al. The function of active participation of VC firms in portfolio companies is at different levels in different countries. For example, Japanese and German VC firms are less active than their USA counterparts in managing the portfolio companies they have invested in.
They add that in Germany, 25 percent of VC firms are listed companies; while in the UK the most common type legal structure for VC firms is limited partnerships.
However, it is important to note that about 5 percent of VC firms in the UK are organised as public corporations Mayer et al. Types of investments undertaken by VC firms Mayer et al. Lerner and Hardymon as cited in Mayer et al.
Mayer et al. Japanese VC firms have invested 24 percent abroad; while their German counterparts have invested only 15 percent Mayer et al.
The VC fund After fundraising, the VC firm invests in selected entrepreneurial firms and is actively involved in daily affairs of the firms they have invested in. When the life of the VC fund comes to an end, the VC firm exits the VC fund and proceeds are distributed to the limited partners who are the investors Da Rin et al. The VC firm is compensated in two parts. One part is called management fee and the other part is called carried interest Da Rin et al.
Whereas, carried interest is variable and is 20 percent of the returns made by the fund. This is consistent with the view of CVCA Investors or limited partners get the remaining 80 percent. Da Rin et al. According to Metrick and Yasuda a VC fund has five main characteristics: 1.
A VC fund invests only in private companies. This means that once investments are made, the companies cannot immediately be traded on a public exchange. A VC fund takes an active role in monitoring and helping the companies in its portfolio.
A VC fund invests to fund the internal growth of companies p. Structure of venture capital funds Several authors discuss the structure of venture funds. Venture capital funds are mostly organised as limited partnerships with fixed lives Da Rin et al. Financing of venture capital funds The major sources of funds for VC are different in different countries.
For example, Fineberg as cited in Megginson, describes the Canadian VC industry as unique because it draws funds from labour unions. However, they note that pension funds provide more capital in the UK than in Germany, Israel and Japan and corporations represent a major contributor of capital in Israel than in the three countries mentioned above. In Japan, all VC firms included in the research conducted by Mayer et al. The research by Gilson and Black also indicates that in Germany, banks are the largest contributor to VC funds and while endowments and foundations provide funds to VC funds in the USA; this is not the case in Germany.
Portfolio companies Portfolio companies are firms with high growth prospects in which the general partner invests capital that has been raised from limited partners.
Portfolio companies are also known as investee companies. Conclusion Venture capital is still a new asset class in many countries including Zambia.
However, in countries like the United States of America, venture capital has contributed a great deal to the development of SMEs and capital markets. Venture capital firms provide capital to unquoted companies that would otherwise find challenges getting funding from conventional capital sources such as banks and capital markets.
In addition to capital, venture capital firms provide expertise to investee companies in form of coaching, mentoring and counseling. In Zambia, the venture capital industry is beginning to take shape.
Currently, we have a number of venture capital firms such as Kukula Capital and Aerios Capital. The Zambian venture capital industry is destined for growth as the economy is poised to grow at more than 7 percent in A growing economy leads to an increase in the demand for venture capital. It is believed that as the economy continues to grow, the rate of start-up formation will go up and this will result in high demand for venture capital.
The Internationalization of Venture capital and private equity. Retrieved June 12, , from Balboa, M. An integrative approach to the determinants of private equity fundraising. That thing venture capitalists do.
Why venture capital is essential to the Canadian economy: The impact of venture capital on the Canadian economy. A survey of venture capital research.
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