Small and medium Enterprises are vital for economic growth especially in the developing countries. However, empirical evidence shows that most of these enterprises fail due to poor/lack of access to finance. Access to venture capital by the small and medium enterprises could be a plausible alternative but unfortunately research has pointed out that majority of the enterprises do not access venture capital financing, which is considered an important option for small and medium enterprises trying to grow. This study therefore sought to investigate the effect of entrepreneurial and firm characteristics on access to venture capital by small and medium enterprises in Kenya. The study was guided by the following specific objectives; To determine the effect of entrepreneur‟s innovativeness on access to venture capital, to establish the effect of entrepreneur‟s managerial competency on access to venture capital, to determine the effect of firm‟s age on access to venture capital, to establish the effect of firm‟s sector of operation on access to venture capital, to determine the mediating effect of firms performance on the relationship between entrepreneurial and firm characteristic and access to venture capital and lastly to determine the moderating effect of risk reduction strategies on the relationship between entrepreneurial and firm characteristics on access to venture capital by Small and medium size enterprises in Kenya. Agency theory underpinned the study. The study adopted the explanatory non-experimental research design and positivism philosophy guided the study. Target population of the study was 334 Small and medium size enterprises ranked by KPMG between 2008 and 2017 in their annual survey. Proportionate random sampling technique was used to select the firms. Primary data was collected by semi structured questionnaire, using drop and pick method. Both descriptive statistics and inferential statistics were used to analyze the data. Nested multinomial logit model was used to establish the effect of entrepreneurial and firm characteristic on access to venture capital financing. The results reveal that; the influence of an entrepreneur‟s innovativeness on access to venture capital financing is statistically significant. Secondly, managerial competency had positive influence and was statistically significant to access to venture capital financing among SMEs. Third, the results show that SMEs in the service industry benefits more from venture capital as opposed to those in the non-service industry. Fourthly, the results show that a firm‟s age has a positive though statistically insignificant influence on access to venture capital financing. Fifth, there is no mediating relationship between a firm‟s performance on the relationship between entrepreneurial and firm characteristic and access to venture capital financing. Finally, there exists a moderating relationship between entrepreneurial and firm characteristic on access to venture capital financing. From the findings, a number of recommendations can be made. First, SMEs should continue investing in enhancing entrepreneurial innovativeness as it increases the propensity of their enterprises from accessing venture capital financing. Secondly, given that managerial competency positively affects SMEs access of venture capital financing, firms should invest in human capital of their management through various strategies. For instance, investing in training gives employees the opportunity to develop new skills and accumulate the knowledge they need in order to achieve specific organizational and personal goals with the priority being to train managers so that they can be able to cope with the challenges which hinder business success.
CHAPTER ONE INTRODUCTION
Background of the Study
Small and Medium Enterprises (SMEs) are important in any economy for they have potential to develop into larger productive units, they can adopt new technologies, and they have ability to adapt to new economic conditions(Katua, 2014). Financial constraints can however ruin a good SMEs business idea, lead to the business failure, or hinder its growth and development (Ayyagari, Demirguc-Kunt & Maksimovic, 2011).
According to Abdullah, Khadijah, and Manan (2010), inaccessibility and insufficiency of funds is the major barrier to the growth and performance of SMEs in both developed and developing countries. SME Baseline Survey (2009) shows that the sector is not only a provider of goods and services but also a driver in promoting competition, innovation and enhancing the enterprise culture. The SME sector effectively responds to challenges of creating sustainable employment opportunities, promoting economic growth and poverty reduction in a country(Abdullah et al., 2010).
In many countries, SME sector is a major source of employment, and also important to national growth. For instance, in 2011 the SMEs sector in Poland generated almost fifty percent of the Gross Domestic Product. Additionally, the sector in 2011 employed 6.3 million people out of the total of 9.0 million of the labor employed in private sector (United Nation, 2011). Nyang‟ori, (2010) points out that in European economy, SMEs represent 99 percent of enterprises and they are major source of entrepreneurial skills, innovation and employment and that in the European Union of 25 countries, some 23 million SMEs provide around 75 million jobs. Additionally,
according to the Department for Business, Enterprise and Regulatory Reform (BERR)‟s Enterprise Directorate Analytical Unit, the United Kingdom economy in 2008 had 99 percent SMEs, employing 14.23 million people, out of a working population of approximately 30 million. Moreover, in terms of UK turnover and Gross Domestic Product (GDP), UK SMEs account for 1.48 British Pounds (Rowe, 2012).
In Africa, promotion of SMEs and particularly those in informal sector is a viable development. Okafor (2011) affirms that SMEs are the main source of employment in developed and developing countries alike, comprising over ninety percent of African business operations and contributing to over fifty percent of African employment and GDP. In Kenya, for instance, SMEs output was estimated at Kes.3369.1billion against a national output of Kes.9971.4 representing a contribution of 33.79percent in 2015(Kenya National Bureau of Statistics, 2016). Despite SMEs significance, statistics indicate that 29.6 percent of the 2.2 million enterprises closed in the past 5years; the year 2016 included, and most was as the result of shortage of operating funds.
There are arguments that SMEs in most cases are unable to access finance from financial institution due to their inability to meet requirements by the financial institution (Calice, Chando, & Sekioua, 2012). Further, more financial institutions often see SMEs as a risk-prone sector because of poor guarantees and lack of information about their ability to repay loans (Olando, Mbewa, & Jagongo, 2012). It is also argued that many SMEs have little access to many sources of finance due to legal and regulatory framework that do not recognize innovative strategies for lending to the SMEs(Sigara &Memba, 2011). This lack of sufficient capital and credit is often a major handicap to the development of SMEs particularly in their early stages(Lemuel, 2009). Additionally, entrepreneurial firms characterized by significant intangible assets, negative
earnings in their early development, or unproven products makes it unlikely to access bank loans or other debt financing, and therefore struggle to attract equity financing (Tedesco, 2014).
Venture capital is risk finance in form of equity which gives the business funds based on their potential and their interest as perceived by the investor (Mckaskill, 2009). Venture capital is generally considered to be the most appropriate financial resources for the small and Medium enterprises (Diaconu, 2012).Venture capitalists bridge the financing gap caused by information asymmetry for new and innovative firms (Burżacka & Gąsiorowska 2016). According to (Hickey, 2013), Venture Capital firms invest funds on business with a professional outlook. Under venture capital financing agreement, the venture capital firm provides finance to enable a business undertake a project and in return the venture capitalist gets an ownership stake in the business (Nunkoo & Boateng, 2010).
However, venture capital firms have reputations for being highly selective in funding SMEs, so the receipt of venture capital funding often strengthens a startup‟s reputation among stakeholders(Graham & Sichelman, 2010). At least one of the members of a venture capitalist does sit on the board of directors, or in a similar position of control, which provides structure and management to the fledgling company(Gompers & Lerner, 2001). This shows how important entrepreneur skills or expertise is to venture capital financiers (Hickey, 2013).
As indicated by Rypestøl and Aarstad (2018), in an era of tight competition today firms faced with the choice of innovative or die, therefore to sustain the survival of the firms, the company should chose to innovate Innovation plays a key role as a main driving force in economic development, and in the context of the company is considered as a vital source of innovation for strategic change by the which a firm generates positive outcomes, including a sustained
competitive advantage (Gunday, Ulusoy, Kilic & Alpkan, 2011). Sinha, Steel, Saunders and Dewald (2019) considers that entrepreneur‟s innovativeness reflects the tendency of firms to implement and support new ideas, novelty, experimentation, and creative processes that producing the products, services, or processes of new technologies. On the other hand, Hånell, Nordman, Tolstoy and Sharma (2018) affirms that entrepreneur‟s innovativeness is the tendency of openness to new ideas as an aspect of organizational culture, which resulted in the innovation capacity of a firm’s ability to adopt or implement ideas, processes, and new products successfully.