New Technology Based Firms and Venture Capital policy in Nigeria*.

Adebola Daramola*

National Centre for Technology Management, Obafemi Awolowo University, Ile-Ife

(NACETEM)

This paper was prepared for presentation at the Summer School 2011 of the Research Network on Innovation –SITE Clersé , Dunkerque, France with theme: Entrepreneurship, Innovation and Sustainable Development. August 31, 2011 – September 3, 2011

Introduction

• The presence of institution such as Venture capital (VC) serves as a strong mechanism for innovation, by providing early stage equity and strategic support in form of vested interest in the success of the technology based firm ( Oyelaran-Oyeyinka and Sampath, 2007; Debbie Ariyo 2000).

• The development of high growth technology based firms (TBFs) in Silicon Valley, Israel, Bangalore and UK is attributed to Venture Capital. They helped create new industry and sectors, which in turn provides job creating opportunities for these nations. Research works in universities have been commercialized through the backing of Venture Capital fund. Novel ideas (like Facebook) from people with little or no business pedigree have known commercial success all with the support enjoyed from VCs.

Background

• With a colonial history traced to the British, we can describe the emergence of risk finance and venture capital policy in Nigeria to development financial institutions (DFIs).

• The design of private equity and venture capital firms takes a clue from the DFIs, these institutions are designed to provide medium and long term financing, with provision of technical and managerial services, in addition to monitoring effectively the progress of the investee firms.

Literature on Venture Capital Policy and Technology –

Based firms.

• Earlier research ( Donna Situ; Nef; Lefton ; Ansari & Uddin Mohd)on the role of VC firms and NTBFs; VC firms and Innovation ( Rahman, Manan, Azrai & Sanjivee (2008); Bowonder & Mani( 2002);)in different countries as a case, we have come to a better understanding of the public policies that foster the creation of new jobs, service activities and commercialization of research findings . The effect of this development has led to increasing entrepreneurship and innovation in countries around the world.

• Some people have written about the Nigerian Venture Capital Industry (Isiadinso(2002); Ariyo(2000); Agbana(2010); Dagogo & Ollor (2009), their major coverage of the subject have been any of an analysis of the market and its role in support of SMEs and business environment. We have seen little or no interest in its role in cultivating NTBFs, which is of interest to us in this paper

Research approach to NTBFs and Venture Capital Policy

• Rosiello, Teubal and Avnimelech (2008) posit that research on venture capital and New Technology Based Firms have followed two route ; firstly: finance literature where venture capital is seen as an arm of the financial system only , restrictive in approach and confines the assessment of NTBFs and VC Policy to the definition of VC as a pool of blind funds to invest in new starts up and later stage companies, the second method is the systematic evolutionary( SE) takes into cognizance the relevance of interlinked policies in achieving new start up development, a combination of all economic and Science, Technology and Innovation(STI) policy.

• The use of systematic evolutionary (SE) approach (Avnimelech and Teubal ,2002) to understanding VC Policy is rooted in a broader history of economic agents and actors activities and linkages in the creation of new startups, with due consideration to their economic outcomes and social impacts ( Gault 2010)

Policy Environment for NTBFs and Venture Capital

• With the knowledge of Innovation system approach, we are aware that policies matter. Policies play a role in setting the parameters within which actors make decision about learning, investment and innovation (Adebowale 2010). Government drives economic development through policy decisions and incentives. This takes the form of economic, institutional and regulatory frameworks through which market can channel resources to new innovative enterprises.

External factors

These are macroeconomic and other factors affecting both the supply and the demand for

venture capital.

Nature of Supply side policies Types Description

DIRECT SUPPLY OF CAPITAL Government equity investment To make direct investments in venture

capital firms or Technology –Based

firms(TBFs)

Government loans To make low-interest, long-term and/or

non-refundable loans to venture

capital firms or TBFs

FINANCIAL INCENTIVES: Tax incentives To provide tax incentives, particularly

tax credits, to those investing in small

firms or venture capital funds

Loan guarantees To guarantee a proportion of bank

loans to qualified Technology-Based

firms

Equity guarantees To guarantee a proportion of the

losses of high-risk venture capital

investment

Investor regulations: To allow institutions such as pension

funds or insurance

companies to invest in venture capital

Demand side

policies

Consideration

Major factor of

importance

Rationale/Description

Cultural

Environment

Personal

entrepreneurial

characteristics (PEC).

This refers to the underpinning characteristics of entrepreneurs in the economy, the

need for achievement, personal locus of control and risk taking propensity.

Demographics Give attention to age, gender and educational background and former work experience

as an impact on entrepreneurial intention and endeavor such as establishing TBFs

Education Structure Entrenching changes in education that encourages training in entrepreneurship and

business. Encouraging education in Science, Technology, Engineering and

Mathematics as a building block to NTBFs creation.

Infrastructure &

Support

Business Incubator

( government –funded

or private-public

partnerships)

A designated area to create and nurture SMEs with physical infrastructure and various

services such as business planning, financial advisory, management training,

advertising, secretarial , security, intellectual property protection and post incubation

support.

Technology Parks An environment designated by government , universities or research institutions with

incentives such as access to research facilities, technology transfer and spin-off

offered to companies to relocate to catalyses the process of growing more TBFs ,

provide entrepreneurs with access to expertise, networks and business support to

make their venture successful. They have strong R&D components in their

organizational structure.

Technology Incubators A special type of business incubator that focuses on new ventures that employ

technologies, it serves as a market for commercialization and diffusion of technologies.

Clusters This could be based on factors such as natural resources or geographical advantages

.It is a critical mass of firms allowing economies of scale and scope, a strong science

and technology base, and a culture conducive to innovation and entrepreneurship.

Export Processing

Zones(EPZs)

This is a mechanism employed by economies to acquire and diffuse technology in the

local economy by permitting participating firms to acquire their imported inputs free as

long as they export 100% of their products. The focus is attracting FDI and providing

access to infrastructure and tax incentives leading to increase productivity in host

country.

Support Agencies These refers to government ministries, agencies(MDAs) and department established to

support the growth of TBFs.

Evolution of Venture Capital in Nigeria Pre 1997

1997-2002 2003-Date

Key Features of the period Preceded by the emergence of development

financial institutions (DFIs), commercials banks,

Major government investments in heavy industry

(steel, aluminum, fertilizer etc)— poorly planned

and executed

Several development plans conceived to push the

country into the frontier economy failed

Presence of White Elephant project

Inefficiency of management of DFIs investee

companies

The exit of military in the governance of

Nigeria

Deregulation

Privatization of Government –owned

Industries

Liberalization of Telecommunication sector

Continual democratic governance

Reforms-banking consolidations and pension

Privatization of Government –owned

Industries

Emergence of adoptable

Technologies/Model for inclusive

penetration of markets- MobileMoney, M-

Health

Return of Nigerian diaspora in droves to take

up management and creation of business

VC’s Presence and Funding

Focus Development financial institutions (DFIs) and

negligible number of VCs- prominent were the

National Risk Fund Plc and Venture & Trust

Company

investments in manufacturing, agro-allied, tourism

and hotel etc

More VC players

public investments in heavy industry (steel,

aluminum, fertilizer etc)

privatized companies, Telecommunication

companies; Financial Services, Oil and Gas,

FCMGs,

More VC firms, with increase in deals

VC Industry development with specialty firms

emerging

privatized companies, Telecommunication

companies; Financial Services, Oil and Gas,

Infrastructure, Technology based or

Technology Business model companies,

Power/Energy;Shipping,

Government’s Role toward VC

development and NTBFs High levels of effective protection including outright

bans on imports for domestic manufactures

Poorly designed product and location specific

incentives, including tax and import duty rebates,

and development of export processing zones.

Several of these schemes were subject to gross

abuse because of weak governance

the First National Policy on Science &Technology

was developed

National Risk Fund was introduced

Facilitated the establishment of Small and

Medium-Scale Industries Equity Investment

Scheme (SMEIS)

Initiated favorable business policies

Review of the first National S&T policy

The Investment and Securities Decree was

passed into law

Establishment of the Investment and

Securities Tribunal for speedy resolution of

disputes arising out of investment deals

Investment friendly policies leading to

enormous interest by foreigners and

confident earned from the locals

Full review of the first National S&T

policy(2003)

Introduction of a Science, Technology &

Innovation policy draft (2011)

Bank consolidation, strengthen the financial

landscape

Venture Capital Firms activities in Nigeria

• With the establishment of Small and Medium-Scale Industries Equity Investment Scheme (SMEIS) in 2001 and the liberalization of telecommunication in Nigeria, venture capital activities have expanded leading to a corresponding increase in the presence of VC firms in Nigeria or outside with focus on Nigeria (Sub-Saharan Team often based in London, South Africa or Ghana).

• The use of ICT in Nigeria is growing, with the financial services sector outside the Oil and Gas Industry, a major consumer of technology and the agriculture business sector (renewable energy, seed production) enjoying interest from the VCs.

• The interest to invest in Nigeria over the last ten years by both local and international venture capital funds is attributable to the stable macroeconomic indicators fuelled by a continual democratic governance and entrenchment of rule of law and economic policies.

New Technology Based Firms- Definition

• The origin of the term NTBFs is attributed to the Arthur D. Little Group. They defined it as” an independently owned business established for not more than 25 years and based on the exploitation of an invention or technological innovation which implies substantial technological risks.

• James Allen’s definition as quoted in the Bank of England report (1996) on “The Financing of Technology-Based Small Firms”, state that NTBFs is a business whose products or services depend to a significant extent on the application of scientific or technological skills or knowledge (whether it be novel application of advanced technology to provide a totally new product or service, or an application of existing technology in an innovative manner).

Classification of Technology Based Firms (TBFs)

• In this research, our understanding of what qualify as a technology based firms (TBFs) employ ISIC Rev.3, also known as the OECD classification of industry based on technology.

• It is a division of industries into high-technology, medium-high-technology, medium –low-technology and low-technology groups, it includes a new division of services classified according to their “knowledge-intensity. This enables knowledge based services such as Finance, Insurance, business services, Telecommunication, Education and Health.

Nature of New Technology Based Firm (NTBF) in Nigeria

• NTBFs in Nigeria are enterprises across industries which utilize technological innovation or exploit an invention; the common driver has been ICT. They fall within the medium –low-technology; low-technology and Knowledge Intensity services groups.

Industry Description of Technology or

Invention

Technology Innovation

(tick off)

Exploitation of

Invention

(tick off)

Examples of TBFs in Nigeria

Education E-learning, On-line

Registration/Examination √ National Open University of Nigeria, JAMB,

Medicine TeleMedicine, Assisted

Reproductive Technology, √ √ NAFDAC,

Telecommunication GSM, BroadBand Technology, ICT √ MTN, Etisalat, Aitel, Globacom, V isafone

Financial Services ATM, Online Banking, e-commerce √ Commercial Banks, Etransact, Interswitch,

Agriculture Seed production, mechanization

farming, Animal Production, √ √ Obasanjo’s Farm, Animal Farm

Oil and Gas Refinery, Oil Drilling, √ √ Shell, Oando,

ICT Computers, Software √ √ Resourcery, Omatek, Zinox, Chams,

Logistics &Transportation Online Reservation √ Arik, Dana, ABC Transport,

Mass Communication broadcast, electronics and print

media √ Silverbird, ePunch, FM radion stations

Defense Intelligence Gathering, Artillery

Manufacturing √ √ Armed Forces

Government Election registration √ INEC, FGN MDAs

Entertainment Movies, Music, Video √ Silverbird, StormRecords,

Manufacturing FCMG, Paints, Wire & Cable √ √ Promasidor, Ayoola Foods,

Nigerian experience of NTBFs and VC Policy

Policies and programs VC-directed policy

(tick off)

VC –related policy

(tick off)

Financial incentives(Tax ) √

Venture Capital (Incentives) Decree No .89 1993 Act. √

the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) 2001 √

Science, Technology & Innovation policy draft (2011) √

Entrepreneurship Development syllabus introduced into Primary, Secondary,

University (2006) √

Technology Incubation Centres √

Clusters( Otigba, Nnewi) √

Support Agencies( SMEDAN, BOI, NOTAP, √

Establishment of Intellectual Property and Technology Transfer Offices √

Stable macroeconomic environment (1999-Date) √

Export Processing Zones(EPZs √

Educational and Research Organisations √

Entrepreneurial characteristics of the diverse tribe in the country √

Research Methodology

• Relied on secondary source material as well as conducted open (unstructured) questions interviews of selected members of the Venture Capital Association of Nigeria (VCAN) and executives in technology-based firms( Vassilev ,2005).

• For the secondary source material, data were collected from several sources: electronic searches were performed to identify previous research on the topic: venture capital policy and NTBFs, Venture Capital in Nigeria and the classification of technology based firms (TBFs).

• Research report of leading consulting firm, Private Equity firm and Africa Venture Capital Association were scanned for relevant data. Nigerian based and focused Venture Capital firm website was visited to compile useful information for the study. Company press announcements and Industry leader’s presentation were equally scanned.

Data Analysis and Presentation of Results

• At this level of presentation, the research is exploratory with reliance on secondary source material and opportunity to gather more data. So far, interviews were conducted with five (5) members of the Venture Capital Association of Nigeria (VCAN), with between 9-25 years work experience in the Nigerian Financial Industry, particularly Venture Capital firms. They were Senior Investment Analyst (2), Investment Principal (2) and Regional CEO/Partner (1). Further face-to-face interviews scheduled with executives in technology –based firms could not be held, but the researcher took time to interview about six (6) executives and professional services consultant over the phone. Each interview with the total eleven (11) individuals lasted no less than one hour.

Findings

• Insight from the interviews was the need for demand side policy changes to encourage an upsurge of entrepreneurial and inventive discovery in the country, with proper framework such as intellectual property to support the growth of TBFs. This should take emphasizes on Sciences, Technology, Engineering and Mathematics (STEM) education above the Management Sciences education as we currently have.

• Infrastructure supports to foster NTBFs are misplaced with continuous reliance on technology transfer above creative creation within the economy.

• Also government incentives targeted toward TBFs are minimal or non-existent which invariably affects the level of VC investments in Nigeria

Conclusion

• With this exploratory research, we have extended knowledge about New Technology Based firm and Venture Capital policy in Nigeria (Andreas Pfeil,2000) using the Systemic Evolutionary (SE) perspective (Rosiello, Teubal and Avnimelech ,2008; Avnimelech and Teubal ,2002 ).

• There is room for indepth data gathering and collection across all actors of the Innovation ecosystem beyond the members of the Venture Capital Association of Nigeria (VCAN) and some executives in technology-based firms to assess VC Policy in support of NTBFs creation

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