FACTORS AFFECTING VENTURE CAPITAL AND PRIVATE

EQUITY INVESTMENT AMONG SMES IN NAIROBI,

KENYA

BY

GERMANO KIRUTHU MUTAHI

UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA

SUMMER 2020

ii

FACTORS AFFECTING VENTURE CAPITAL AND PRIVATE

EQUITY INVESTMENT AMONG SMES IN NAIROBI,

KENYA

BY

GERMANO KIRUTHU MUTAHI

A Project Report Submitted to the School of Business in Partial

Fulfilment of the Requirement for the Degree of Masters in

Business Administration (Global)

UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA

SUMMER 2020

iii

STUDENT’S DECLARATION

I, the undersigned, declare this is my original work and has not been submitted to any other

College, institution or university other than United States International University – Africa for

academic credit.

Signed: ______________________ Date: _____________________________

Germano Mutahi Kiruthu (ID 659882)

This Project has been presented for examination with my approval as the appointed

supervisor

Signed: _______________________ Date: ___________________________

Dr. Selefano F. Odoyo

Signed: ____________________________ Date: ___________________________

Dean, Chandaria School of Business

iii

COPYRIGHT

All rights reserved. No part of this proposal may be photocopied, recorded or otherwise

reproduced, stored in a retrieval system or submitted in any electronic or mechanical means

without prior permission of the copyright owner.

Germano Mutahi Kiruthu©2020

iv

ABSTRACT

The general objective of this study was to determine the requirements needed by Small and

Medium-sized Enterprises (SMEs) for private equity (PE) or venture capital (VC)

financing/investment in Kenya. This study was guided by three specific objectives. The first

objective was to determine the challenges and exposures faced by the Small and Medium Sized

Enterprises from accessing Private Equity and Venture Capital funding; the second objective

was to determine key financial performance indicators used for funding by private equity and

venture capitalists. The third objective was to determine the role of leadership in successful

funding. The significance of this study will be to first assist SMEs who are in the path of

becoming funding-ready to know of the critical success features to secure financing from VC

and PE firms. This study will help new VC firms yet to set office in the region to better

understand the critical success factors of start-up SMEs in securing funding in Kenya as well

as enable researchers borrow from the findings and discussions of this study to further the

knowledge around the financing of SMEs in the PE and VC sector.

Descriptive research design was used to obtain quantifiable data that was used in the analysis

and development of conclusions and recommendations. A questionnaire was used for data

collection. The population under study was 35 funds operating in the Venture Capital and

Private Equity space in Nairobi, Kenya. The analysis of the data was conducted using the

Statistical Package for Social Sciences (SPSS) software as well as Microsoft Excel.

The findings of this study revealed that there is a significant relationship between the

investment environment, globalisation, fund structure, SME financing and the investment

decisions that would be made by the PE and VC firms. From the ANOVA analysis, the

challenges and exposures faced by SMEs were found to be statistically significant as the p-

value was less than 0.05. In addition, all the critical success factors were considered to be

pivotal in the decision making process by the PE and VC firms. These factors comprised: the

investment process, the financial performance of the SME, SME relationship with suppliers,

firm reputation, management skillset, market potential growth / attractiveness, evidence of a

business plan, PE or VC fund restrictions as well as availability of complemetary financing. In

light of these, the ANOVA test yielded a p-value that was less than 0.05, which indicated that

v

the factors were statistically significant, in determining .The role of leadership, change

management and transformation in the firm were regarded important in the determining

whether a PE or VC firm would invest in an SME. The ANOVA analysis similaryl yielded a

p-value<0.05, showing that leadership, change management and transformational leadership

were statistically significant in determining whether PE and VC firms might invest an SME or

not.

The study concluded that SMEs need to specifically manage their business ethics, financial

performance and presentation, level of global presence as well as the level of technology used

within the organisation in order to encourage PE and VC investment. In addition, the SME

should aim for a strong financial performance, a good firm reputation and a well constituted as

well as highly skilled management. The leadership of the SME would also be expected to be

one that embraces transformation within the organisation, for them to attract such investment

in their organisation.

The study recommends that SMEs needs to manage their business ethics, financial

performance and presentation, level of global presence and technology used within the

organisation in order to overcome challenges and exposures they face from an operational as

well as reputational perspective. SMEs should also be willing to engage with PE and VC firms

that invest within their sector of operation as well as accommodate and appreciate the

investment process being used by the Private Equity or Venture Capital firm. In terms of

overall leadership, SMEs should be willing to adopt change during pre- and post-investment

phases. This is in addition to the organisation’s leadership need of embracing transformation

within the organisation with the aim for increased performance steered by stewardship and

human capital development. This study also recommends further research in other countries as

well as firms who have already gone through their first series of funding from a Private Equity

and Venture Capital perspective, in the search for new capital to scaling their businesses.

vi

ACKNOWLEDGEMENT

I would first like to thank the Almighty God for providing His grace during this research

period. I would like to also appreciate the Faculty of Chandaria Business School as well as the

Library and staff of United States International University-Africa and most specifically my

supervisor, Dr. Selefano Odoyo Fredrick who provided boundless insights and advice during

my research. I am immensely grateful to my family and colleagues, who have been with me

over the period of this project and provided the necessary moral support.

vii

DEDICATION

I dedicate this research project to my family: John, Julia, Jerioth, Felista and Kelvin, for their

undoubted love and moral support.

viii

TABLE OF CONTENTS

STUDENT’S DECLARATION ............................................................................................ iii

COPYRIGHT ......................................................................................................................... iii

ABSTRACT ............................................................................................................................ iv

ACKNOWLEDGEMENT ..................................................................................................... vi

DEDICATION....................................................................................................................... vii

LIST OF TABLES ............................................................................................................... xiii

LIST OF FIGURES ............................................................................................................. xiv

LIST OF ABBREVIATIONS .............................................................................................. xv

CHAPTER ONE ..................................................................................................................... 1

1.0 INTRODUCTION .................................................................................................... 1

1.1. Background of the Study ............................................................................................ 1

1.2. Statement of the Problem ........................................................................................... 5

1.3. General Objective of the Study .................................................................................. 6

1.4. Specific Objectives ..................................................................................................... 6

1.5. Significance of the Study ........................................................................................... 6

1.6. Scope of the Study...................................................................................................... 7

1.7. Definition of Terms .................................................................................................... 7

1.8. Chapter Summary ....................................................................................................... 8

CHAPTER TWO .................................................................................................................... 9

2.0 LITERATURE REVIEW ........................................................................................ 9

2.1 Introduction ................................................................................................................ 9

ix

2.2 Challenges and Exposures Faced by SMEs ............................................................... 9

2.2.1 Human Capital as a Driver for Investment................................................................. 9

2.2.2 Evidence of Business Development Services .......................................................... 10

2.2.3 State of the Investment Environment ....................................................................... 11

2.2.4 Level of SME Globalization .................................................................................... 11

2.2.5 Constitution of the Fund Structure ........................................................................... 12

2.2.6 Challenges Evidenced in SME Financing ................................................................ 12

2.3 Key Performance Indicators and Critical Success Factors for Funding SMEs ........ 13

2.3.1 The Investment Process ............................................................................................ 13

2.3.2 The Evaluation Criteria used for Funding ................................................................ 15

2.3.3 Other Factors to Consider ........................................................................................ 16

2.4 Leadership and Change Management in Successful Funding .................................. 17

2.4.1 Leadership in the Change Management Process ...................................................... 17

2.4.2 Role of Transformational Leadership ...................................................................... 18

2.5 Chapter Summary ..................................................................................................... 21

CHAPTER THREE .............................................................................................................. 22

3.0 RESEARCH METHODOLOGY ......................................................................... 22

3.1. Introduction .............................................................................................................. 22

3.2. Research Design ....................................................................................................... 22

3.3. Population and Sampling Design ............................................................................. 23

3.3.1. Population................................................................................................................. 23

3.3.2. Sampling Design ...................................................................................................... 23

3.3.2.1. Sampling Frame ....................................................................................................... 23

3.3.2.2. Sampling Technique ................................................................................................. 24

3.3.2.3. Sampling Size ........................................................................................................... 24

3.4. Data Collection Methods .......................................................................................... 24

x

3.5. Research Procedures ................................................................................................ 25

3.6. Data Analysis Methods ............................................................................................ 25

3.7. Chapter Summary ..................................................................................................... 26

CHAPTER FOUR ................................................................................................................. 27

4.0 RESULTS AND FINDINGS ................................................................................. 27

4.1. Introduction .............................................................................................................. 27

4.2. General Information and Response Rate .................................................................. 27

4.2.1. Response Rate .......................................................................................................... 27

4.2.2. Demographic Statistics ............................................................................................. 27

4.2.2.1. Years Spent in the Firm ........................................................................................ 28

4.2.2.2. Position in the Organisation ................................................................................. 28

4.3. Challenges and Exposures Faced by SMEs ............................................................. 29

4.3.1. Human Capital as a Driver for Investment............................................................... 29

4.3.2. Evidence of Business Development Services .......................................................... 30

4.3.3. State of the Investment Environment ....................................................................... 31

4.3.4. Level of SME Globalization .................................................................................... 32

4.3.5. Constitution of the Fund Structure ........................................................................... 33

4.3.6. Challenges Evidenced in SME Financing ................................................................ 34

4.3.7. ANOVA Results on the Challenges and Exposures Faced by SMEs ...................... 35

4.4. Critical Success Factors ........................................................................................... 35

xi

4.4.1. The Investment Process ............................................................................................ 35

4.4.2. The Evaluation Criteria used for Funding ................................................................ 36

4.4.3. Other Success Factors .............................................................................................. 38

4.4.4. ANOVA Results on the Critical Success Factors .................................................... 39

4.5. Leadership in the Change Management Process ...................................................... 39

4.6. Transformational Leadership in the Investment Process ......................................... 42

4.7. ANOVA Results on Leadership and Change Management in Successful Funding 43

4.8. Chapter Summary ..................................................................................................... 43

CHAPTER FIVE .................................................................................................................. 44

5.0 DISCUSSION, CONCLUSION AND RECOMMENDATION ......................... 44

5.1. Introduction .............................................................................................................. 44

5.2. Summary .................................................................................................................. 44

5.3. Discussions ............................................................................................................... 47

5.3.1. Challenges and Exposures Faced by SMEs from Accessing PE and VC Funding .. 47

5.3.2. Critical Success Factors Used Relied Upon by PE and VC Firms on SME

Investment ............................................................................................................................... 49

5.3.3. Role of Leadership in the Securing of PE and VC Funding .................................... 51

5.4. Recommendations .................................................................................................... 53

5.4.1. Recommendations for Improvement ........................................................................ 53

5.4.1.1. Challenges and Exposures Faced by SMEs .......................................................... 53

xii

5.4.1.2. Key Performance Indicators and Critical Success Factors for Funding in SMEs 53

5.4.1.3. Role of Leadership and Change Management in Successful Funding ................. 53

5.4.2. Recommendations for Further Research .................................................................. 54

REFERENCES ...................................................................................................................... 55

APPENDICES .......................................................................................................................... i

Appendix I: Introduction Letter ................................................................................................. i

Appendix II: Population – List of Venture Capital and Private Equity Funds ........................ iii

Appendix III: Questionnaire ................................................................................................... vii

Appendix IV: NACOSTI License ............................................................................................ vi

xiii

LIST OF TABLES

Table 4.1: Response Rate ........................................................................................................ 27

Table 4.2: Respondents Years in the Firm .............................................................................. 28

Table 4.3: Summary Results - Human Capital as a Driver for Investment ............................ 30

Table 4.4: Evidence of Business Development Services ........................................................ 31

Table 4.5: Summary Results: State of the Investment Environment ...................................... 32

Table 4.6: Summary Results: Level of SME Globalization ................................................... 33

Table 4.7: Summary Results: Constitution of the Fund Structure .......................................... 34

Table 4.8: Summary Results: Challenges Evidenced in SME Financing ............................... 35

Table 4.9: ANOVA Table - Challenges and Exposures Faced by SMEs ............................... 35

Table 4.10: Summary Results: The Investment Process as a Critical Success Factor ............ 36

Table 4.11: Summary Results: The Evaluation Criteria used for Funding ............................. 37

Table 4.12: Summary Results –Other Success Factors .......................................................... 38

Table 4.13: ANOVA Table - Critical Success Factors ........................................................... 39

Table 4.14: Leadership in the Change Management Process ................................................. 41

Table 4.15: Summary Results – Transformational Leadership in the Investment Process .... 43

Table 4.16: ANOVA Table - Leadership and Change Management in Successful Funding . 43

xiv

LIST OF FIGURES

Figure 4.1: Respondent Position in the Organisation ............................................................. 29

xv

LIST OF ABBREVIATIONS

DFI - Development Finance Institution

DUI- Doing, Using and Interacting

ICT – Information and Communication Technology

IFC – International Finance Corporation

IRR - Internal Rate of Return

KNBS – Kenya Naitonal Bureau of Statistics

OECD - Organisation for Economic Co-operation and Development

PE – Private Equity

SME – Small and Medium-sized Enterprises

SPSS - Statistical Package for Social Sciences

STI - Science, Technology and Innovation

USD – United States Dollars

VC – Venture Capital

1

CHAPTER ONE

1.0 INTRODUCTION

1.1. Background of the Study

The choice of the source of finance between debt and equity is crucial for the financial health

of an organisation as it depends on organizational factors or conditions which comprise

liquidity, leverage, organizational size, sales growth, dividend pay-outs, variability and

profitability(Salman & Munir, 2012). According to Peavler, (2019), an organizational leverage

is defined as the borrowing of debt to finance the acquisition of inventory, property, plant,

equipment as well as other assets. An organization with relatively low financial leverage when

compared to the industry average or company developed target would tend to issue more debt

than equity. Similarly, the issuance of more debt would be directly proportional to the liquidity

size, higher dividend pay-out, size of the company as well as a lower stock price. The firms

that focus in growing their profitability, anticipate increased sales growth and are in a highly

variable industry tend to issue more stock to fund for their operations Peavler, (2019).

It is for the above reason that the access to equity is vital for the progress and success of

businesses which are young and have inadequate access to debt capital (Julia, 2003). In

addition to this, Janke, (2014) continues to elaborate that venture capital as well as private

equity play a dual role in the innovation process of not only providing the required equity

financing that a business might require for long term, exploratory growth, but also for the

exploitation of short term opportunities. Here in Africa, the segment of start-ups and Small and

Medium-Sized Enterprises being a fundamental part of the structure and development of the

economies within the continent (Pascale, 2011). Pascale, (2011) continues to elaborate that the

access to private equity financing plays a crucial role in meeting needs of such businesses

including, reinforcement of resources as well as instilling of improved management and

technical know-how within such organisations.

Small and Medium-sized Enterprises (SMEs) are therefore inclined to seek more of equity

financing than debt financing. This is supported by the trade-off theory which states that an

organization with a high target debt ratio would tend to enjoy high taxable income and hold

2

significant tangible assets, while less profitable and risky firms with intangible assets would

tend to lean towards equity financing (Brealey et al., 2012). According to the World Bank

Group (2018), SMEs account for over 90% of all the organisations worldwide, with the number

set between 420 and 510 million, of which 87% of this range are located in developing

countries. SMEs have also been seen to vary in size within various industries,

governments/jurisdictions and financial institutions (SEAF, n.d.), whose overall perceived

market risk as well as the growth capital available remain small and fragmented (Divakaran et

al., 2014). A case in point would be Israel, where an SME is referred to as an organisation

which has less than 100 personnel and earns revenues below USD 27 million per annum (Harel

& Kaufmann, 2016).

Divakaran et al., (2014) also explained that SMEs encompass a variety of businesses and

sectors, ranging from relatively stable businesses who seek expansion, to entities that leverage

on innovation to disrupt an existing market. In addition to this, the Organisation for Economic

Co-operation and Development (OECD)(2010) mentions that innovating SMEs are best seen

as positive economic disruptors, introducing new products and services as well as more

efficient ways of working. They underpin the adaptation of our economies and societies to new

challenges and drive economic development.

In emerging markets, Micro, Small and Mid-sized Enterprises are believed to be the engine of

growth in their economies as they employ majority of the population (IFC, 2017). The creation

of opportunities as well as support from institutions such as the World Bank Group and other

development institutions, for Micro as well as Small and Medium-sized Enterprises in

emerging markets has been a key approach for developing nations to advance economic

development and reduce poverty (IFC, 2017).

Besides the advancement of the economy and reduction of poverty of a country, the

Organisation for Economic co-operation and Development (2010) also emphasises that SMEs

have a significant role in the innovation process. Their main purpose is to basically come up

with advancements in products (goods and/or services), processes, organisational methods and

marketing techniques into the economy. This would be achieved by either making significant

breakthroughs in innovation or having incremental improvements bringing the economy into

3

a leader in technology. There are two modes of innovation which comprise: the Science,

Technology and Innovation (STI) mode, and other, Doing, Using and Interacting (DUI-mode)

which is an experienced-based mode of learning (Jensen et al., 2007). However, OECD (2010)

indicates that only 2%-8% of all SMEs are within the highly innovative and high growth

potential bracket, which cause significant impacts in their economies.

Despite the innovation that is promoted by SMEs, the issue of financing comes aboard. A

financing gap has been recognised amongst various SMEs in the world. The World Bank,

through its investment arm, the International Finance Corporation (IFC), expresses the need to

help the SMEs in bridging this gap through: the provision of investment and financial advisory

services to financial institutions who are targeting SME financing. It also expresses the

requisite to support credit bureaus and collateral registries, invest in FinTech companies as

well as promoting the sharing of knowledge in order to bridge this gap (IFC, 2017).

From a local perspective, SMEs have been categorised as businesses that have a workforce of

between 10 and 99 employees (KNBS, 2016). This report elaborates that as at 2016, there were

1.56 million that were licensed by the local county governments while 5.85 million enterprises

operated unlicensed. KNBS, (2016) also identifies that businesspeople face financing

challenges in raising funding for their entrepreneurial pursuits. The main sources of financing

have been through personal savings, loans from friends and relatives as well as informal

sources such as shylocks.

The Government of Kenya, through the Central Bank of Kenya has focused its sight on Micro,

Small and Medium-sized Enterprises through several lending and credit facilitation programs

in order to bridge the financing gap (Kenya National Bureau of Statistics (KNBS), 2016). In

addition to this, the Kenyan Government, through the Youth Enterprise Development Fund is

encouraging the Kenyan youth in securing nation building projects by assisting in providing

easy and affordable financial (loans) and business development support services, seeking to

start or expand businesses (Youth Enterprise Development Fund, 2019).

Despite the presence of support from the micro and low-level small enterprise, medium-sized

enterprises face a significant financing gap. As some have access to credit funding, others are

4

overleveraged and are unable to seek more funding through debt. As a result, they target

informal credit lenders, whose cost of debt tend to be higher than that of the local retail and

commercial banks (Kaffenberger Michelle, 2016). According to Abraham & Schmukler,

(2017), SMEs mainly fail to secure financing due to the opaqueness of the businesses as they

have less public information compared to large firms. As a result, lenders tend to trade this

lack of information with high collateral, which the SMEs would not have to provide to secure

funding.

Given the above, some SMEs purpose to explore the Private Equity and Venture Capital route

in order to fund raise for expansion and/or growth. According to Divakaran et al., (2014),

Private Equity is an asset class in which investors purchase the illiquid equity (or equity-like)

securities of operating entities/ businesses that are not publicly traded, while Venture Capital

is the type of Private Equity investment that is used in funding new or young enterprises with

innovative ideas (KOCIS et al., 2009).

Private Equity has been in existence from time immemorial, as seen from buy-outs where there

were significant transfers of ownership with cash as a consideration (Demaria, 2013). Demaria,

(2013) goes ahead to describe that there cannot be any Private Equity without entrepreneurs;

the attractiveness of Private Equity backed by the reasonable and proven prospect of achieving

a significant reward than on traditional financial markets. This high reward is a result of a

substantial risk taken up by the Private Equity fund and as a result, there are few businesses

backed by Private Equity Firms in the world.

On the other hand, Venture Capital is seen to be a new frontier to financing, more so in Sub-

Saharan Africa, where it is mainly channelled into information and communication

technology(ICT) projects and businesses, in a bid to improve IT infrastructure in Sub-Saharan

Africa nations (Hain & Jurowetzki, 2018). Hain goes further to recognize that the western

Venture Capital investments arrival in Sub-Saharan Countries such as Kenya illustrate

positivity in the Venture Capital space as companies operating in such economies yield

innovative products, services as well as business models which are even potentially suited for

international markets.

5

Venture Capital has also significantly contributed to innovation within businesses operating in

Sub-Saharan Africa by: influencing the environment by reshaping the capital markets for high

risk and high growth investments; creating value to investments through coaching and also

provide contacts from networks to the investments (Baum & Silverman, 2004). Onsomu (2015)

identified that major factors that hinder access to Venture Capital investment in Kenya

included the high-risk nature of SME start-up businesses, high fixed costs of operations,

experience of management running the business and the lack of adequate contacts for

marketing products and services.

This study seeks to determine the drivers/requirements that aid SMEs in securing financing

from Private Equity and Venture Capital funds. It will seek to identify the exposures faced by

SMEs from accessing Private Equity and Venture Capital funding from an internal

environment perspective, understand the key performance indicators used to provide financing

to SMEs by Private Equity players and Venture Capitalists and identify the critical success

factors and strategies to be employed by SMEs in order to secure private equity and venture

capital funding.

1.2. Statement of the Problem

Small and Medium-sized Enterprises have faced challenges in accessing financing to meet

their strategic initiatives as well as their operational deficits. Such businesses that operate in

developing nations have been estimated to suffer a USD 5.2 trillion finance gap annually (IFC,

2017), which is around 22% to 36% of the total credit funding gap in the world. On one hand,

financiers comprising Venture capital funds have various investment criteria which comprise

cash, target returns and time horizons to determine their asset class allocation of funds

(Ramsinghani, 2011). As a result, traditional SMEs need to source for a more sustainable

source of cash from financiers who are aligned to their investment preferences in order to

continue funding for their investments and operations. As aforementioned, with the presence

of funding support for micro enterprises, small and especially medium-sized enterprises have

a narrow funding opportunity to scale up their businesses.

6

There is the need to determine a roadmap which would be used to determine the

drivers/requirements that would not only apply to ICT firms but also traditional SMEs in

securing funding from Private Equity and Venture Capital. In addition, there is hardly any

evidence to guide SMEs operating in Kenya on the process of securing finance from venture

Capitalists and Private Equity players. There is also a shortage of literature surrounding the

role of leadership and change management in the successful funding of SMEs in Kenya. This

study therefore intends to determine the drivers which promote success of SMEs in securing

Venture Capital and Private Equity funding.

1.3. General Objective of the Study

The purpose of this study was to determine the drivers for securing private equity and venture

capital investment in SMEs in Kenya.

1.4. Specific Objectives

The specific objectives of this study comprise the following:

1.4.1. To determine challenges and exposures faced by SMEs from accessing Private Equity

and Venture Capital funding.

1.4.2. To determine the critical success factors relied upon by Private Equity and Venture

Capital Firms on SME investment.

1.4.3. To determine the role of leadership in the accessing private equity and venture capital

funding.

1.5. Significance of the Study

This research study is of importance to the following:

1.5.1. Policy Makers

This study will assist policy makers such as the Government of Kenya to understand the key

performance indicators that would enable SMEs obtain foreign funding from Private Equity

7

and Venture Capital Firms, as well as understand the challenges these SMEs would face from

accessing such financing, for planning of the economy.

1.5.2. Start-up Entrepreneurs as well as Small and Medium-sized Enterprises

This study will assist SMEs who are in the path of becoming funding-ready to know of the

critical success features to secure financing from Venture Capital and Private Equity Firms.

1.5.3. Private Equity Firms

The findings, conclusions and recommendations of this study will enable Private Equity Firms

that have set presence in Kenya and the East African Region to further understand the needs

required by SMEs in order to secure funding from their peers. In addition, they will be able to

learn about the challenges as well as the critical success factors that PE firms who have

operated for a substantial amount of years in Kenya, before they commence operations in the

country and region.

1.5.4. Venture Capital Firms

Since these are high-risk investors, this study will help new venture capital firms yet to set

office in the region to better understand the critical success factors of start-up SMEs in

securing funding in Kenya

1.5.5. Researchers

Academicians will be able to borrow from the findings and discussions of this study to further

the knowledge around the financing of SMEs in the Private Equity and Venture Capital sector.

1.6. Scope of the Study

This research project was limited to SMEs operating in Nairobi, Kenya and have been funded

through private equity and venture capital. The respondents will be representatives of Venture

Capital and Private Equity firms that would comprise investment principals, investment

officers and associates. A population of 35 Venture Capital and Private Equity Firms will be

used for this study. This research was conducted on current data on the investments that have

taken place between January 2016 and September 2019.

1.7. Definition of Terms

1.7.1. Small and Medium-sized Enterprises

Small and Medium-sized Enterprises are defined as non-subsidiary and independent

entities that employ fewer than a set population of employees, whose number would tend

8

to vary from one region to the next. The European Union set this benchmark number as

250 employees while the United States sets it at 500 employees(OECD, 2010).

1.7.2. Private Equity

Private Equity is defined as an asset class in which investors purchase the illiquid equity

(or equity-like) securities that are not publicly traded off operating entities/business

(Divakaran et al., 2014). It is also referred to as a stake which could be either large or

small in a non-traded or private company (KOCIS et al., 2009).

1.7.3. Venture Capital

Venture Capital is the type of private equity investment that is used in funding new or

young enterprises with innovative ideas (KOCIS et al., 2009).

1.7.4. Financial Performance

Financial performance is an indicator of how well a business utilizes its resources for

shareholders’ wealth maximisation and growth of company profitability (Naz et al.,

2016).

1.8. Chapter Summary

This chapter has introduced the study on the drivers for securing venture capital and private

equity investment in SMEs in Kenya. The background of this study describes the SMEs

demographics around their global composition. The statement of the problem, purpose of the

study and specific objectives which include: determining: the challenges faced by SMEs, the

critical success factors used in the funding process as well as the role of leadership and change

management in the successful securing of Private Equity or Venture Capital funding have been

included. In addition to these, the importance of the study, scope of the study and the definition

of terms were also incorporated in this chapter.

Chapter two covers the literature review of this study; it is presented with regards to the specific

objectives of the study. Chapter three presents and justifies the research methodology which

includes the research design as well as the techniques that will be used to collect the data and

analyse it. Chapter four will present the analysis and interpretation of the findings. Chapter

five will finally present the summary of the study, discussions, conclusions as well as

recommendations.

9

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

Chapter two delves into the studies done from a global perspective, as well as a regional and

local domain. The first part covers the challenges and significant exposures faced by SMEs in

accessing Private Equity and Venture Capital funding from an internal environment

perspective. The second part covers the key performance indicators used to provide financing

to SMEs by Private Equity and Venture Capital Firms, while the third part covers the critical

success factors and strategies to be employed by SMEs in order to secure private equity and

venture capital funding. A summary subsequently follows to summarise this chapter.

2.2 Challenges and Exposures Faced by SMEs

2.2.1 Human Capital as a Driver for Investment

Talaia, Pisoni, & Onetti, (2016) describe that characteristics of the human capital function of

the SME plays a vital role in the determination whether SMEs will secure funding. They

classify this challenge into three subsets: the level of education of the entrepreneur, the age of

the entrepreneur as well as the experience of the entrepreneur. Talaia et al., (2016) goes ahead

to describe that the level of education positively impacts of the magnitude of funding received

by SMEs.

The level of education possessed by the entrepreneur is considered more crucial in the

determining the finding received as he/she is able to develop and communicate the business

plan in a better manner to financiers. (Talaia et al., 2016). In addition, the previous experience

envisaged by the human capital of the SME and by this the age is also a factor taken into

consideration in determining whether an SME can be funded or not. On the other hand,

research done on Canadian start-ups in the biotechnology space showed that SMEs with

presidents/CEO who have had experiences in other SME start-ups but however not succeeded,

might negatively impact funding from Venture Capital (Baum & Silverman, 2004).

10

2.2.2 Evidence of Business Development Services

The challenge of business development services is fueled by constraints related to the

compatibility, limited skills and technical know-how on particular technology, third party

support and transferring data from one technological environment to another (Chibelushi &

Costello, 2009). A significant number of SMEs utilise Information and Commumnication

Technology (ICT) as a tool for communication, information gain as well as social networking.

However, according to Kiveu & Ofafa, (2013) a number of SMEs lack awareness of the vast

opportunities generated by the use of ICT media in access to markets by SMEs. In addition to

this, Kiveu & Ofafa, (2013) also mentions that the challenges of business development services

also include: inadequate market information of particular market segements, poor access to

premises, spaces, relations with export markets, poor advertising and promotional campaigns,

weak e-commerce infrastructure within the SME as well as narrow product diversity.

According to Issa, Chang, & Issa, (2010), the business development services can also be

described with reference to the PESTEL framework. This covers the political, economic,

social, technological, evnironemental and legal factors of the macro environment of a whereby

political factors of the macro environment focuses on the governement regulations that

organisations must adhere to. Issa et al., (2010) continues to elaborate that economic factors

relate to the cost-related matters of the organization while socio-cultural factors are concerned

with the changes to the customer awareness and attitudes as well as individual practices of the

people. The technological factors focus on how technology is used in the organisation while

the enivronmental factors relate to on the impacts of organizaitons towards environmental

issues.

Legal factors relate to activities or practices which are allowable by the locality an organization

operates in; these may span from employment laws, data protection laws, business laws, health

and safety regualtions as well as environmental regulations (Blue Ocean University, 2017).

From a global scale, the of registration of businesses such as in Oman have been viewed to be

complex in nature across various economic factions (Bilal & Al Mqbali, 2015). Bilal & Al

Mqbali,(2015) goes ahead to describe that this challenge is combated by the government’s

commitment to support SMEs around the legal and technology fronts. Nevertheless, the

11

presence of Venture Capital firms have been viewed as shapers to such environments as they

invest in significant research in various industries and economies to fund startups, which also

go a long way in lowering the costs of investors in the searching and funding of businesses

(Baum & Silverman, 2004).

2.2.3 State of the Investment Environment

According to Turyahikayo, (2015), the challenge of the investment environment is affected by

issues surrounding ethics and professionalism. These are fueled by doubius legal systems, in

addition to the unattractive tax incentives (Kauffmann, 2005).The challenges of an SME with

regards to its investment climate is usually affected by the horizontal and vertical issues faced

by that SME, horizontal issues being those that relate to the overall business and regulatory

environment while vertical issues relating to industry specific factors (Ross Herbert, n.d.).

2.2.4 Level of SME Globalization

Globalization can be easily defined as the reach of a particular resource over the entire world

(Oladimeji et al., 2017). Globalization also entails the integration of industry resources,

economies and markets as well as the formulation of policies over a wide geographical area

(Mwika et al., 2018).

According to Al Mubarak, (2016), there are four factors that affect the gloablization of SMEs,

which inlclude: technology, culture, market conditions as well as regulations. The technology

challenge is usually emphasised by the lack of information and knowledge, outdated

technology in addition to the inadequate thought leadership around vision, creativity, strategic

planning and logistics planning for products and services. The cultural factor that brings about

challenges around globalization comprise of cultural adjsutments brought about by the

progression from loacl to internaltional market level. The lack of marketing is an additional

issue towards this challenge as it is portrayed as an issue that involves a lack of knowledge

regarding the best business practices whithina foregin market. The regulations also on the other

hand may contribute towards this challenge andwould be driven by factorscomprising lack of

governemental support of the foreign market as well as lack of information regarding trading

agreements in the foreign jurisdicrition (Al Mubarak, 2016).

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2.2.5 Constitution of the Fund Structure

The fund or capital structure of an organisation has been described with several theorems; the

first being Modigliani and Miller’s Theorem of capital structure, which states that the changes

in the capital structure of an organisation cannot inlfuence the value of tha t organisation if and

only if, the capital markets are perfect, information provided to all investors in the capital

markets is the same, there’s equal access to the securities in the capital markets at exactly the

same terms and there are given investment strategies(Culp, 2011). If any of these assumptions

are not met, then the capital structure of a firm would affect its overall value.

The Trade-off Theory was developed after Modigliani and Miller’s Theorem; it states that

there is some form of optimal capital structure exists persuant to some leverage ratio that would

be exactly equivalent the marginal benefit of debt to its marginal cost (Culp, 2011). The

Pecking Order Theoy on the other hand states that there is no target capital structure and

organisations would first prefer internal financing to external finance which comprises of debt

and equity, therefore opting to acquire the cheapest form of financing first (Chen & Chen,

2011).

2.2.6 Challenges Evidenced in SME Financing

With regards to emerging markets, majority of the Venture Capital and Private Equity funding

emanate from Development Finance Institutions (DFIs) as well as impact investment firms

(Divakaran et al., 2014). Divakaran et al., (2014) goes further to elaborate that issues emanating

from DFIs mostly stem from their tendency of employing strict investment criteria while

injecting funds into PE firms; they tend to use traditional economic models and expect high

internal rate of returns (IRRs) ranging between 20% and 30%. This poses a significant

challenge for PE firms especially for investments in SMEs that carry very significant risks and

internal challenges. As a result PE and VC firms find it challenging to secure sufficient capital

to invest in high risk SMEs and thereby has a spiral effect in the funding towards the small and

medium sized enterprises. This is also explained by the fact that majority of the private eqiuty

firms of the world prefer to invest in larger companies that are highly structured and well

13

established. In addition to the above, private equity firms employ various structuring models

which are in relation to the location they are investing in.

In today’s financial markets, small and medium-sized enterprises face a significant challenge

in securing cheaper financing in form of debt from banks, as they tend to be still conservative

in their approach to providing loans to SMEs due to the fact that they prefer mainintaing lower

loan to deposit ratios (Wonglimpiyarat, 2015).In addtion, according to Miller, (2013), the

capping of interest rates is a strategy used by governements across the world for political and

most specifically for economic reason in order to support particular sectors or industries.

However, the capping to these rates have also been seen to be detrimental as wellas an

inefficient tool in the lowering the cost of debt from a long term perspective. They distort

markets and financial institutions such as banks would thus prefer lending to businesses that

possess high collateral and as a result, such businesses end up borrowing from informal lenders

at high interest rates (Koech & Moronge, 2018).

Other challenges that SMEs face with regards to financing is the lack of credit information

which financial instiutions can use to assess their creditworthiness; these also include bank

deposit information (Okoth Michael Okoth, 2013). Okoth, (2013) goes on to elaborate that

other financing challenges include lack of proper book keeping and preparation of financial

information/statements regarding the SME’s financial performance over the year(s). As a

result, majority of these SMEs look onto informal money lending schemes which charge very

high interest rates.

2.3 Key Performance Indicators and Critical Success Factors for Funding SMEs

2.3.1 The Investment Process

In order to determine the metrics used by private equity and venture capital firms in the funding

processes for SMEs, there is the need to understand the backbone of how an investment

decision is made from a Venture Capital or Private Equity perspective. There have so far been

six different processes that were used in investment decision-making. These include Wells six

step model, Tyebjee and Bruno’s four step model, Hall’s six step decision model, Fried and

14

Hisrich four step decision model, Boocock and Woods seven step decision model as well as

Gluer’s four step decision model (Narayanasamy et al., 2011).

According to Silva, (2004), the Wells model of 1974 shows that venture capital firms would

tend to use a six-step decision making process that would comprise of the investment search,

proposal screening, the proposal evaluation, meetings and follow-ups, operations handling and

cashing out processes. Tyebjee and Bruno’s four step model first focuses on the deal

origination process followed by proposal screening; proposal evaluation and finally the

structuring of the deal (Narayanasamy et al., 2011). According to AsianFA, (2012), Tyebjee

and Brunos’ first stage looks into investment case or the deal generation phase, which

comprises the establishment of a sound investment source which will produce the desired

investment returns. The second stage, otherwise known as the initial screening phase, involves

the preview process of the investment case, where major investment proposals whose business

decisions yield more favourable assessments would be selected. The third stage of the model

involves the evaluation of proposals. Otherwise known as the audit excellent investment cast,

this includes the implementation of in-depth investigation of the investment plan provided.

From here, the venture capital firm would then provide more decision-making information that

would be used as a reference for the subsequent stages. The fourth stage is the deal structuring

phase or investment agreement stage. Here, the investor decides to engage on a special

investment case and see whether they can come into an agreement with the investees.

AsianFA, (2012) expands Tyebjee and Bruno’s four step model into two further stages which

comprise, post investment stage and the investment exit stage. The post investment stage sets

in once the investment agreement is signed and the target company happens to be part of the

investor’s portfolio. Activities in the post-investment stage of which the venture capital or

private equity firm would partake in include contribution towards decision-making,

supervision and injection of additional funds raised to assist in strategic consultancy services

inclusion in the board of directors in order to steer the organization’s objectives. AsianFA,

(2012) continues to elaborate that the final stage, the investment exit stage, involves the

investor divesting from a company in order to obtain economic profits. In addition to this, the

Private Equity or Venture Capital firm play an active role in directly assisting the target

15

company and the merger transaction sales, initial public offering or other exit strategy, which

will make the venture capitalists in the initial investment to obtain a great reward.

Similarly, Guler developed a four-pronged approach in 2003 towards the investment process.

It slightly differed from Tyebjee and Bruno’s four step approach with the first and third stages

changing to;deal flow generation and conducting due diligence; the preparation of the term

sheet was similarly viewed as part of the deal structuring stage (Narayanasamy et al., 2011).

On the other hand, Hall’s decision model describes the investment process into the deal flow

generation, proposal screening, proposal assessment, evaluation of the project, conducting due

diligence, deal structuring, venture operations and then cashing out (Hall & Hofer, 1993).

Narayanasamy et al., (2011) also explained the Fried and Hisrich four step decision model of

1994 as the management process that involves origination of the deal; firm-specific screening;

generic screening; first phase evaluation; second phase evaluation and finally closing the deal.

Boocock and Woods later proposed in 1997 that the decision model to have a seven-step

process: deal flow generation, initial screening, first investor meeting, second investor meeting,

board presentation, conducting due diligence on the target and finally deal structuring.

2.3.2 The Evaluation Criteria used for Funding

MacMillan, Siegel, & Narasimha, (1985) analysis on the commonly used evaluation criteria

used for the financing of SMEs is based on four factions that comprise: the entrepreneur’s

characteristics, the products’ or service’s characteristics, the characteristics of the market as

well as the financial considerations. The entrepreneur’s characteristics would be supported by

the entrepreneur’s personality, management skills as well as possessed experience, the stake

owned by the management in the firm, the personal motivation of the entrepreneur to seek

Venture Capital or Private Equity funding as well as the quality of the venture team who have

been tasked to apply for such funding (Hudson, 2005). Hudson, (2005) continues to define the

product or service characteristics as those that comprise the attributes, differentiation,

intellectual property status, growth and market potential as well as proof of concept towards

new products. Tyebjee & Bruno, (1984) described the evaluation criteria on the market in

which a corporate applicant operates to be supported by the features comprising, market size,

market attractiveness, market barriers to entry resistance to economic cycles as well as the

16

potential towards market growth. Tyebjee & Bruno, (1984) further described financial

characteristics as those that would be evaluated using the profit margins, potential for the

applicant to merge or get acquired, tax benefits, hedging process against current investments

as well as the investment exit opportunities available.

According to Ng, Kee, & Ramayah, (2016), enterprise success is a relevant variable concerned

with firm performance. Despite this relevance, there is hardly a consensus about its definition,

dimensionality and measurement. In this research, enterprise success is defined as an

achievement accomplished in both financial performance and non-financial performance,

which is reflected in growth-orientated SME owner-managers’ perceived satisfaction (Ahmad

et al., 2011). In this study, firm performance is conceptualised as a multidimensional construct

where financial performance includes profitability, sales, sales growth, return on investment,

cash flow and market share, while non-financial performance covers autonomy, customer

retention, ability to balance family and work, relationship with suppliers, business image and

relationship among employees in the company. Revisiting the results of the initial survey, the

results identified three crucial factors as antecedents to enterprise success: transformational

leadership, entrepreneurial competence, and technical competence. Six hypotheses are posted

to examine and explain the role of these constructs in influencing the enterprise success of

SMEs.

2.3.3 Other Factors to Consider

Despite having an elaborate process for investment, it is not guaranteed that an investment

proposal would be accepted by the Venture Capital or Private Equity Firm past the investor

screening stage. Boocock & Woods, (1997) elaborates that the main purpose of Venture

Capital and Private Equity firms rejecting investment proposals is the fact that potential

investees would have an incomplete plan, where key data was omitted from the original

submission and the investment proposal was unacceptable for consideration to the next

investment stage. Unfavorable market characteristics which would comprise narrow markets,

contracting markets, saturation, and insufficient growth potential may be reasons as to

discouraging private equity and venture capital firms from continuing with the investor

screening. Additionally, there are restrictions towards the investments made by the funds. Due

17

to the requirement of spreading the investment risk, applications that required a large

investment size would be foregone. Another major reason as to the discontinuance of

investment screening as per Boocock & Woods, (1997) would be the withdrawal of the

application by the applicant/investee/target company. This withdrawal would be mainly

because of the unwillingness of the applicant to comply with the due diligence findings.

Other reasons as to why the investment would not go through include: financial factors

comprising the lack of complementary financing outside the Private Equity or Venture Capital

funding, excessive risks around the business conducted by the applicant, lack of seriousness

from management towards the investment process set out by the Venture Capital and Private

Equity firms as well as a lack of response towards the queries brought forward from the due

diligence exercise conducted (Hudson, 2005).

2.4 Leadership and Change Management in Successful Funding

2.4.1 Leadership in the Change Management Process

In the event of an acquisition, the aspect of change is inevitable in an organization. The role of

leadership in change management is also required in order to meet the set objectives of the

change. There is a disparity between what leaders view as success in the change process and

the resultant effect of the change to the overall business (Deshler, 2016). Deshler, (2016)

continues to elaborate that around 55% of leaders whose organizations have been part of a

change process felt that those changes met their purpose, yet in the long run they were only

25% of the time successful.

For an SME to experience an effective change management process, Kotter & Bourner, (1998)

developed an eight stage action plan which could be used to ensure organizations experience

an efficient and effective change process. The first action plan involved the establishing of the

sense of urgency; this involves the identification and examination of the market and

competitive realisms which would include: opportunities, crises which are currently faced and

those that could occur. The second action point would be developing a powerful change

management coalition or team, which would lead the change process. The leader of the

organization would also need to display enthusiasm and commitment to help the right team

18

members to effect the change as well as model the trust and teamwork needed in the group

(Reyerson, 2011). The third stage would be to develop an appropriate strategy as well as the

vision for the change through providing specific goals as well as providing effective direction.

The fourth action plan wold involve the frequent and simple communication of the change

vision across the whole firm, followed by the action empowerment stage. Reyerson, (2011)

described that the latter stage involves the use of individuals who have experience in change

management to influence employees towards accepting the change process as well as the use

of systems that inspire, promote optimism with respect to the change being adopted in the

organisation.

The sixth action plan involves the generation of short-term wins; this would be achieved

through rewarding individuals who conform to the changes. In the event of generating short-

term wins, the guiding team should consolidate the gains already made within the organisation

and thereby bolster the process by introducing more projects and change agents. Last, the

change management process should complete with the integrating change into the

organization’s culture(Kotter & Bourner, 1998).

The anchoring of the change towards the organization’s culture is significant especially in the

event of a corporate acquisition. However, this change can be effectively integrated into the

corporate culture in two approaches which include task integration and human integration

(Lund & Whitt, 2017). Lund & Whitt, (2017) also explains that the task integration as the type

of integration which involves the identification and realization of operational synergies in an

organization. It focuses on the technical aspect of the change process and it targets towards

shaping operations of both the investor and investee. Notwithstanding, the human integration

approach focuses on the development of positive attitudes towards the integration amongst the

employees working under the investor and investee with the aim of building on trust and

respect.

2.4.2 Role of Transformational Leadership

Transformational leadership is defined as the leadership approach that seeks to change the

status quo of an organization by articulating to followers the problems of the current system

19

and a compelling vision to which a revamped organization could be (Achua & Lussier, 2013).

In the event of a business acquisition, it is mandatory that management and employees have to

adapt these changes. Martin, (2015) elaborates that leaders need to challenge the company style

and allow followers to decide on unchallengeable values from the historical procedures they

need to undertake.

With regards to the drivers of success of an organisation, transformational leadership could

affect the performance of such an organisation from both a financial and non-financial

perspective (Ng et al., 2016). Transformation management criticizes multiple variables that

include the leader’s personality, clarity as well as complication. The main criticism within

transformational leadership is that it possess a high likelihood of energy abuse (Antonakis &

Day, 2017). This energy abuse relates to the management of morality, as a transformative

leader affects the emotional viewpoint of his follower. The impact would be bad if the direction

or route tends to be in the wrong path. Lee, (2014), additionally informs that the quality of the

acquisition and balancing the relevant interests and variables is lacking in transformation

leadership that could promote the avoidance of dictatorship and the repression of minorities.

Additionally, Mhatre & Riggio, (2014) furthers the argument that transformational

management focuses more on creating an individual personality characteristic than a behaviour

that can instruct individuals. Because management of transformation is a mixture of multiple

management models, understanding the concept and teaching is more complicated. The leader

is seen as a visionary idol in a transformative management and the leader and his supporters

are engaged in the business process. This creates a dilemma when viewing leadership from a

point of perspective of the characteristic.

Reviewing the arguments of the critique, a question emerges as to whether an organization

could follow the transformation management to operate effectively. Criticism reviews morality

through transformative management and false authority. McCleskey, (2014) describes the

classification of transformation management as socialized and personalized features. The

leaders who use their ability to inspire and lead their supporters to an incorrect route are called

pseudo leaders of transformation. They have characteristics comparable to those of

transformative rulers, but the motivation would be personal and exploitative. To determine or

choose their motivation and path, it depends on the individual characteristics; transformational

20

leadership concept cannot be blamed. Transformational leadership focuses on creating

individual personality trait. The important characteristic of transformative leadership is that it

concentrates followers' development and attempts to enrich their personality. It encourages and

needs inspiring followers to engage with the organization's shared vision and goal. A

transformative leader promotes others to take the lead; as a consequence, people with effective

leadership characteristics will fill the entire organisation McCleskey, (2014). In addition to

this, McKinnon-Russell, (2015) elaborate the development of followers also through training

which was also a key component in the improvement of the employee performance.

The transformative leader also motivates his supporters to be innovative in solving issues and

developing the leadership characteristics of supporters through training, mentoring, and

challenging and support. This leads to cooperation within a leader and follower, where the

follower develops his leadership characteristics and the leader becomes a moral agent.

Transformative leadership therefore needs to be founded on moral foundations McKinnon-

Russell, (2015).

In addition, it is notable that transformative leadership has characteristics that are relatable to

charismatic leadership characteristics. Charisma is an element of the transformative leader; it

is considered an idealized effect correlating. It is generally categorized as categories that are

socialized and personalized. Authentic charismatic or transformative leaders must be

socialized leaders for an organization to perform better (Mhatre & Riggio, 2014). Four

essential organizational operations are carried out under transformative management, making

a compelling case for change to increase the sensitivity of followers to organizational change,

inspiring shared vision for a new and better future, bringing about and embedding new

changes. Some critics consider transformative management to be discriminatory and autocratic

and a questionnaire to be a directive or participatory. The aspect of leadership in the

determination of success of funding was also examined by McKinnon-Russell, (2015) where

the aspect of proper managerial skills form part of the evaluation criteria of the entrepreneurs

characteristics. In the context of entrepreneurship, transformational leadership practices would

comprise of relay of the organization’s vision to their employees as well as instilling the values

and beliefs of their enterprise (Paladan, 2015).

21

2.5 Chapter Summary

This chapter reviewed literature in the challenges faced by SMEs, key performance indicators

and critical success factors that promote PE and VC funding, as well as the role of leadership

and change management in successful funding of SMEs. The literature reviewed comprised

journals, company reports, as well as thesis and dissertations prepared around SMEs. It was

however noted that there is little literature around private equity and venture capital covering

the African continent in general. The following chapter covered the research methodology to

be adopted for this project. This included the research design, tool of data collection as well as

the method used for data analysis. Chapter four provided results and findings while Chapter

five covered the summary, discussion, conclusion and recommendations.

22

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1. Introduction

Chapter three outlines the research methodology used in this study. It explains the research

design, identifies the population and sampling design, explains data collection method used,

research procedures followed as well as data analysis methods utilised.

3.2. Research Design

Research design is described as the tool from which the work plan used to complete a research

project is derived; it is used to ensure that the evidence gathered enables the research to

determine the general objective of the project in an unambiguous manner (De Vaus & de Vaus,

2001). According to Cooper & Schindler, (2014), the research design could be described as an

activity and time based plan that is based on the general objective and contains a guide and

framework for selecting source and kinds of information as well as specifying the relationships

among variables. It also contains a stepwise outline for every research activity that will be

conducted.

The research design contains clear objectives from which the general objective is derived,

specification of resources from which data is meant to be collected, the proposed manner of

collecting and analysing it. In addition, it contains discussions around the ethical issues and

constraints that could be faced by the researcher while collecting the data(Saunders et al.,

2016).Saunders et al., (2016) continues to elaborate that the research design can be developed

using threw methodologies: the quantitative, qualitative and mixed methods. The quantitative

methodology is used in the event when and where there is predetermined and highly structured

data collection techniques and where the research is based on a deductive approach and

variables measured numerically as well as analysed using statistical and graphical tools. For

this study, the descriptive research design was used in order to obtain quantifiable data in form

of characteristics and trends in which the respondents provided with regards to the drivers that

23

promote PE and VC funding in SMEs. The data obtained was then used to analyse and form

conclusions and recommendations.

3.3. Population and Sampling Design

3.3.1. Population

According to Saunders et al., (2016) a population is referred to as the full set of individuals

from which the sample is derived as well as which results can be obtained. A population may

also be referred as the elements about which some inferences would like to be made (Cooper

& Schindler, 2014).The population size for this study was of 35 Venture Capital and Private

Equity funds operating in Kenya and have target deals of less than USD 10 million. Cooper

& Schindler, (2014) continues to describe a population element as an individual participant

or object in which a measurement is taken.

3.3.2. Sampling Design

Sampling design is described as the method used to find a sample from a specific population

and as such it is the procedure that a researcher uses while selecting items for the study’s

sample (Cooper & Schindler, 2014). Cooper & Schindler, (2014) summed up sampling

design as the determination of the target population, parameters of interest, sampling frame,

sampling method and sample size as outlined.

3.3.2.1.Sampling Frame

The sampling frame is defined as the list of every member of the population (Donald, 2011).

Donald, (2011) goes further to describe that a sampling frame comes about from the

determination of a complete list of a population and the common sources of a sampling frame

may comprise electronic registers, list of stakeholders, account holders, registered users,

website addresses as well as credit rating agencies. For the purpose of this study the sampling

frame was derived from the 35 management personnel drawn from the listed private equity

and venture capital firms with presence in Kenya.

24

3.3.2.2.Sampling Technique

This study will adopt the census technique. Cooper & Schindler, (2014) defined a census as a

count of all the elements within a given population. The census technique was used in this

study due to the nature of the industry the Venture Capital and Private Equity funds operate

in; a highly closed and confidential industry.

3.3.2.3.Sampling Size

According to Onwuegbuzie & Collins, (2007), the sample size is defined as the number of

participants selected from a population determined in a qualitative and quantitative studies.

The sample size is determined by the optimum number necessary to enable a valid reference

to be made about the population(Marshall, 1996). Marshall, (1996) continues to describe that

the sample size that is most optimal will depend on the parameters of the study. A large sample

size will tend to have a low sampling error. On the other hand, ABS, (2013) describes a census

as a study of every unit in a population. Therefore, a census of 35 funds was determined based

on their criteria of investment in target deals that are below USD 10million, since the size of

the population was low. The table comprising the funds was shown under Appendix II.

3.4. Data Collection Methods

According to Cooper & Schindler, (2014), data is described as the information that comprises

of attitudes, behaviour, motivations as well as attributes collected form participants,

observations made in the environment or secondary sources. This study used primary data

which was obtained using a questionnaire that was delivered to the participants via personal

means and completed by them.

The questionnaire was the most appropriate data collection tool for this study because of the

bulky data that was sourced from the sample size. It was divided into four sections comprising:

the background information of the participant, followed by the challenges facing SMEs from

Venture Capital and Private Equity funding. The third section dealt with the key financial

performance indicators and critical success factors used for funding by Private Equity and

25

Venture Capitalists while the last section covered the role of leadership and change

management in successful funding.

3.5. Research Procedures

After the submission and successful approval of the proposal, a letter of authorization was

sought from the University to seek permission to carry out the data collection process from

each of the funds in the sample size. This letter was accompanied by the questionnaire that was

drafted and successfully approved by the Supervisor to the intended respondents.

Questionnaires were shared personally as well as via email in order to ensure fluid and quick

collection of data. A reminder was sent every three days to have the respondents facilitate

completion of the questionnaires. The questionnaires that were retuned were reviewed to

ensure that they were complete and any missing information was sought from the respondents.

The questionnaire responses then underwent a coding process and were keyed into the

Statistical Package for Social Sciences (SPSS) program for analysis to come up with a

quantitative inferences, conclusions and recommendations. A research authorization letter was

sought from the National Commission for Science, Technology and Innovation (NACOSTI)

for the collection of data from respondents of the 35 funds.

3.6. Data Analysis Methods

The data analysis methods involved establishing a correlation between the challenges faced by

SMEs, the key performance indicators and critical success factors for funding SMEs as well

as leadership and change management in the successful funding of SMEs through Venture

Capital and Private Equity. Factor analysis was utilised in order to determine the correlation

between the independent variables and the dependent variable. ANOVA analysis was adopted

to determine the latter. According to Clayton-Soh, (2016), ANOVA analysis involves the

assessment of potential statistical differences between the means of two or more independent

or unrelated groups, in order to determine whether the explained variance in a particular set of

data is significantly greater than the unexplained variance.

26

The data analysis was in the form of descriptive statistics from which the research findings

were obtained. The data analysis involved the use of both Statistical Package for Social

Sciences (SPSS) as well as Microsoft Excel 2016. The findings were then presented visually

in the form of tabular formats or frequency tables, charts and graphs to establish whether the

information obtained represents the entire population of the study or were in any way biased

towards the various sections of the population such as that from the SMEs that have secured

Venture Capital or Private Equity funding.

3.7. Chapter Summary

This chapter delved into the components of the research methodology that will be used in this

study. The main methods of data collection used will be questionnaires and interview guides,

to obtain necessary data for the specific objectives. It also outlined the population and sampling

design, explains data collection method used, research procedures followed as well as data

analysis methods utilised. A population as well as a sample size of 35 funds with target deals

below USD 10 million will be used for this research project. A sampling frame of 35

management personnel will also be employed in obtaining this data, while the sampling

technique used will be judgement sampling. The data obtained from the population will

collected using a questionnaire which will be shared personally and on email. Data analysis

will be conducted using both Statistical Package for Social Sciences (SPSS) and Microsoft

Excel 2016 and visually represented in both graphical and tabular formats. Chapter four covers

the results and findings of the data collected from the field work while Chapter five includes

the summary, discussion, conclusion and recommendation.

27

CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1. Introduction

This chapter covers the results as well as findings from the data collection exercise that was

conducted as well as the analysis that was performed. This chapter has been guided by the

questionnaire that provided responses to the challenges and exposures faced by SMEs, the key

performance indicators and critical success factors that promote funding of SMEs; and the role

of leadership and change management that promotes successful funding from PE and VC

Firms. Descriptive analysis was performed, and the findings were presented in both Tables and

Figures.

4.2. General Information and Response Rate

4.2.1. Response Rate

A population of thirty-five people from various Private Equity and Venture Capital Firms

operating in Kenya were targeted and approached to fill in the questionnaire electronically

during the data collection stage. The respondents ranged from firm partners, directors,

investment principals; investment officers as well as investment associates. The response rate

was 77.14%, as 27 of these respondents were able to provide answers to the questionnaire.

Table 4.1: Response Rate

Category Frequency Percentage

Responded 27 77.14%

Not Responded 8 22.86%

Total 35 100.00%

4.2.2. Demographic Statistics

The respondents’ demographics that were captured comprised the years spent in the firm as

well as the position of the respondent within the organisation.

28

4.2.2.1.Years Spent in the Firm

The distribution regarding the years of experience of which the respondents had in their firms

was positively skewed, as 81.5% of the respondents had been in their respective firms between

zero and seven years.

Table 4.2: Respondents Years in the Firm

Number of Years in the Firm

Frequency Percent Cumulative

Percent

0 - 3 Years 11 40.7% 40.7%

4 - 7 Years 11 40.7% 81.5%

8 - 11 Years 4 14.8% 96.3%

12 years and Above 1 3.7% 100.0%

Total 27 100.0%

4.2.2.2.Position in the Organisation

When asked to indicate the position in their organisation, 48.1% of the respondents indicated

that they were of the Investment Associate level. The Partner, Portfolio, Manager and Director

positions had an equal number of respondents, each repressing 14.8% of the total respondents.

29

Figure 4.1: Respondent Position in the Organisation

4.3. Challenges and Exposures Faced by SMEs

This section of the questionnaire used a Likert scale which had the options: 1 = Less

Significant, 2 = Partially Significant, 3 = Neutral, 4 = Significant and 5= Most Significant.

Overall, the respondents viewed that the challenges evidenced in an SME with regards to their

human capital, business development services, investments environment, globalization and

access to finance were critical in determining whether an SME would pass the investment

screening stage. In addition, the fund structure of the PE and VC firm is a significant factor in

determining whether an SME qualifies for screening because of the regulations set by the

partners providing the funds for investment.

4.3.1. Human Capital as a Driver for Investment

The human capital variable was measured using the level of education of the entrepreneur, the

age of the entrepreneur and the level of experience with regards to other SME start-ups. Of the

total respondents, 40.74% agreed that the entrepreneur’s level of education is significant in

determining whether to invest in the business. A similar frequency distribution disagreed with

this notion while 18.52% of the respondents are neutral. With regards to the age of the

entrepreneur, 59.26% of the respondents agreed that this was not significant in determining

3.7% 3.7%

14.8%

48.1%

14.8% 14.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Chief

Executive

Country

Manger

Director Investment

Associate

Partner Portfolio

Manager

Fre

quen

cy

Position

Respondent Position

Chief Executive Country Manger DirectorInvestment Associate Partner Portfolio Manager

30

whether to invest in the SME. 29.63% were neutral while 11.11% viewed this metric as a

significant factor in the investment process. 48.15% of the respondents agreed that the

experience that an entrepreneur has had with other start-ups is a significant factor in

determining whether to invest in the SME or not. However, 29.3% of the respondents disagreed

with this while 22.22% were neutral.

The summary statistics on the entrepreneurs’ level of education indicated a median of 3 and a

standard deviation of 1.311, indicating that the approach towards this metric was neutral. The

median of the responses regarding the entrepreneurs age was 2 while the standard deviation

was 0.953; this indicated that the age was not a significant metric in determining whether to

invest in the SME or not. The responses regarding the entrepreneurs’ experience with other

SME start-ups yielded a median of 3 and a standard deviation of 1.137; this indicated that there

was a neutral approach towards requiring this factor as a determinant in the investment process.

Table 4.3: Summary Results - Human Capital as a Driver for Investment

Challenge of Human Capital

Entrepreneurs Level of

Education Entrepreneurs Age

Experience with SME

Startups

Mean 2.78 2.3 3.3

Median 3 2 3

Std.

Deviation 1.311 0.953 1.137

Variance 1.718 0.909 1.293

Skewness -0.22 0.206 -0.13

4.3.2. Evidence of Business Development Services

The evidence of business development services as a driver for Private Equity and Venture

Capital investment was measured using the level of ICT infrastructure in the organisation, the

level of political exposure the organization experiences, the legal constraints faced by the SME

and the level of environmental constraints in the industry the SME operates in. 59.26% of the

respondents agreed that the level of ICT infrastructure in the organisation is significant in

determining the investment in the SME. 25.93% of the 27 respondents were neutral towards

this metric while 14.81% found it not a significant factor in the investment process. The level

31

of political exposure the organization experiences was similarly significant, as 40.74% of the

respondents agreed that it was an important metric in the investment process. 33.33% of the

respondents however disagreed with this while 25.93% were neutral regarding this metric in

the investment process. 48.15% of the respondents agreed that the legal constraints faced in

the SME were significant in the determining whether to invest in the SME or not; 37.40% of

the respondents did not agree with this factor being a significant factor while 14.81% were

neutral. The level of environmental constraints was determined as a significant metric as a

result of 44.44% agreeing to this; 25.93% did not find this metric as significant while 29.63%

were neutral.

The summary statistics on the level of technology used indicated a median of 4 and a standard

deviation of 0.975, indicating that the approach towards this metric was significant. The

median of the responses regarding the firm political exposure was 3 while the standard

deviation was 1.299; this indicated that this metric was neutral in determining whether to invest

in the SME or not. The responses regarding the firm legal exposure and level of environmental

constraints both yielded a median of 3; the standard deviations were 1.34 and 1.027

respectively. This indicated that there was a neutral approach towards requiring this factor as

a determinant in the investment process.

Table 4.4: Evidence of Business Development Services

Level of

Technology Used

Firm Political

Exposure

Firm Legal

Exposure

Level of

Environmental

Constraints

Mean 3.52 3.07 3.11 3.15

Median 4 3 3 3

Std.

Deviation 0.975 1.299 1.34 1.027

Variance 0.952 1.687 1.795 1.054

Skewness -0.727 -0.147 -0.218 -0.548

4.3.3. State of the Investment Environment

The state of the investment environment as a driver was measured using the level of business

ethics practised in the industry the SME operates in as well as the firm’s business ethics.

32

77.78% of the respondents agreed that the presence of business ethics in the industry was a

significant factor in determining whether to invest in the SME or not.14.81% of the

respondents were neutral towards this view while 7.41% disagreed to this factor being a

significant driver in promoting SME investment. With regards to the firm business ethics,

59.26% of the respondents confirmed that this factor was significant in determining SME

investment; 14.81% were neutral while 25.93% indicated that this metric was insignificant in

investing in the SME.

The summary statistics on level of business ethics practised in the industry the SME operates

in and the firm’s business ethics both had a median of 4 and standard deviations of 1.091 and

1.341 respectively, indicating that the approach towards these metrics were significant.

Table 4.5: Summary Results: State of the Investment Environment

State of the Investment Environment

Industry Business Ethics Firm Business Ethics

Mean 3.96 3.48

Median 4.00 4.00

Std. Deviation 1.091 1.341

Variance 1.191 1.798

Skewness -1.456 -.578

4.3.4. Level of SME Globalization

This driver for PE and VC investment was measured using the level of marketing done by the

SME for promotion of its goods / services and the use of technology in the marketing initiatives

for the SME. 51.85% of the respondents agreed that marketing of goods/services by the SME

is a significant factor in the investment process.25.93% of the respondents were neutral

towards this metric, while 22.22% did not find this metric significant in promoting SME

investment. With regards to the use of technology in the marketing initiatives of the SME,

40.74% of the respondents confirmed that this factor was significant in determining SME

33

investment; 33.33% were neutral while 25.93% indicated that this metric was insignificant in

investing in the SME.

The summary statistics on the level of marketing initiatives conducted by the SME had a

median of 4 and a standard deviation of 1.068. This indicated that the respondents treated this

factor as a significant metric in promoting investment in SMEs. The use of technology in the

SME marketing initiatives had a median of 3 and a standard deviation of 1.013, indicating that

a neutral approach towards this factor driver.

Table 4.6: Summary Results: Level of SME Globalization

Challenge of Globalization

Firm Marketing Initiatives Use of Technology in Marketing

Mean 3.3 3.11

Median 4 3

Std. Deviation 1.068 1.013

Variance 1.14 1.026

Skewness -0.65 -0.477

4.3.5. Constitution of the Fund Structure

The constitution of the fund structure was supported by the positive correlation between the

fund and industry the SME operates in as well as the potential returns to the fund. With regards

to the correlation between the industry in which the SME operates in and the target industries

set out by the fund, 55.56% of the respondents confirmed that this factor was significant in

determining SME investment; 14.81% were neutral while 29.63% indicated that this metric

was insignificant in investing in the SME. 70.37% of the respondents agreed the potential

returns based on the allowable risk of the fund was a significant factor in promoting investment

in the SME. 25.93% of the respondents were neutral towards this metric while 3.70% viewed

this driver as partially significant.

34

The summary statistics on the fund correlation and potential returns both had a median of 4

and standard deviations of 1.334 and 0.877 respectively, indicating that the approach towards

these metrics were significant.

Table 4.7: Summary Results: Constitution of the Fund Structure

Challenge of the Fund Structure

Fund Correlation Potential Investment Return

Mean 3.37 4

Median 4 4

Std. Deviation 1.334 0.877

Variance 1.781 0.769

Skewness -0.434 -0.369

4.3.6. Challenges Evidenced in SME Financing

This driver was supported by two factors: the macroeconomic factors influencing the interest

and foreign exchange rates charged to the SME; and the presence of credit information on the

SME. 81.48% of the respondents agreed that the macroeconomic factors influencing interest

and foreign exchange rates charged were significant drivers which would either promote or

discourage investment in SMEs. 11.11% were neutral in view while 7.41% of the respondents

did not find this factor significant in determination of investment.

With regards to the presence of credit information on the SME, 70.37% of the respondents

confirmed that this factor was significant in determining SME investment; 18.52%% were

neutral while 11.11% indicated that this metric was insignificant in investing in the SME.

The summary statistics on the fund correlation and potential returns both had a median of 4

and standard deviations of 0.917 and 1.115 respectively, indicating that the approach towards

these metrics were significant.

35

Table 4.8: Summary Results: Challenges Evidenced in SME Financing

Challenge of SME Financing

Macroeconomic Exposures Firm Credit Profile

Mean 3.93 3.63

Median 4 4

Std. Deviation 0.917 1.115

Variance 0.84 1.242

Skewness -1.463 -1.342

4.3.7. ANOVA Results on the Challenges and Exposures Faced by SMEs

The result of the ANOVA analysis indicated that the p-value was below 0.05, indicating that

the challenges and exposures faced by SMEs were significant in determining whether Private

Equity and Venture Capital firms would invest in them or not.

Table 4.9: ANOVA Table - Challenges and Exposures Faced by SMEs

ANOVA Table

Source of

Variation

Sum of

Squares df MS F P-value F crit

Between

Groups 78.96296 14 5.64021 4.40785 2.46362E-07 1.71720

Within

Groups 499.03704 390 1.27958

Total 578.00000 404

4.4. Critical Success Factors

4.4.1. The Investment Process

This driver was measured by level of significance the respondents viewed regarding the type

of investment process used by the investment committee for screening and selection of an SME

for funding. 55.56% of the respondents agreed that the type of investment process used by the

investment committee for screening and selection of an SME for funding was a significant

driver which would promote investment in SMEs. 33.33% were neutral in view while 11.11%

of the respondents did not find this factor significant in determination of investment. This

36

metric had a median of 4 and standard deviations of 1.177, indicating that the approach towards

these metrics were significant.

Table 4.10: Summary Results: The Investment Process as a Critical Success Factor

Type of Investment Process

Mean Median Std. Deviation Variance Skewness

3.67 4 1.177 1.385 -0.663

4.4.2. The Evaluation Criteria used for Funding

The evaluation criteria success factor was measured by: financial performance or success of

the SME over the period of its existence; the SME’s relationship with suppliers; the SME’s

reputation with respect to other stakeholders including, the general public, the environmental

lobby groups, the Government; the level of skills that the top management have in running the

SME; the percentage of ownership by the top management of the business; and market factors

that comprise the market potential growth/ attractiveness and barriers.

96.30% of the respondents agreed that the financial performance of the SME over its existence

period was very significant in determining investment in the SME; 3.70% however viewed this

factor as partially significant in their investment process. The respondents who viewed the

factor of the SME relationship with suppliers as significant were 55.56%; 29.63% were neutral

while 14.81% did not view this factor as significant. 66.67% of the respondents also identified

that the SME’s reputation with respect to other stakeholders mentioned above as significant in

the investment decision; 25.93% had a neutral view while 7.41% view this factor as a partially

significant one in their investment decision.

The skillset of top management was viewed to be significant with 88.89% of the respondents

supporting this. The remaining 11.11% had a neutral view towards this factor. The percentage

ownership by top management had varied views: 40.74% of the respondents viewed this factor

as a significant determinant in the investment decision, 29.63% were neutral while a similar

number viewed it as insignificant in determining their investment decision in an SME.

37

With regards to external market factors, 92.59% of the respondents considered this success

factor as critical in their investment decision. 3.70% were neutral towards this factor while a

similar proportion viewed it as a partially significant success factor.

The financial performance metric had a median of 5 and standard deviation of 0.7, indicating

that this was a very significant success factor in determining the investment decision. The SME

relationship with suppliers’ metric yielded a median of 4 and standard deviation of 0.975. This

indicated that this metric was fairly significant in the investment decision process.

The firm reputation with respect to other stakeholders mentioned above yielded a median of

4 and standard deviation of 0.958, indicating significance in determining the investment

decision in SMEs that are being screened. The management skillset was a critical success factor

with a median of 5 and standard deviation of 0.7, indicating high significance in the

determination of the investment decision on an SME. The level of ownership by top

management yielded a median of 3 and standard deviation of 1.134; this indicated that there

was a neutral view from the PE and VC respondents towards this factor being a driver

promoting investment in SMEs.

Table 4.11: Summary Results: The Evaluation Criteria used for Funding

Evaluation Criteria used for Funding

Mean Median Std.

Deviation Variance Skewness

Firm

Financial

Performance

4.48 5 0.7 0.49 -1.746

SME

Relationship

with

Suppliers

3.48 4 0.975 0.952 -0.615

Firm

Reputation 3.93 4 0.958 0.917 -0.411

Management

Skillset 4.52 5 0.7 0.49 -1.16

Top

Management

Ownership

3.15 3 1.134 1.285 -0.141

38

4.4.3. Other Success Factors

These included the presence of a complete business plan from the SME; restrictions on the

funds’ investment profile; and the presence of alternative sources of funding besides PE and

VC. Of the total respondents, 81.48% agreed that a business plan is required in the

determination of the investment decision.11.1% of the respondents were neutral regarding this

variable while 7.41% view is a partially significant in the investment process. With regards to

the restrictions placed in the funds’ investment profile, 62.96% of the respondents agreed that

the investment profile would influence the decision that would be made with respect to

investing in an SME. 29.63% of the respondents were neutral regarding this variable while

7.41% view it as insignificant in determining their investment decision.62.96% of the

respondents also agreed that the presence of alternative source of finance would impact their

investment decision in an SME; 18.52% were neutral towards this variable while a similar

18.52% proportion found the factor insignificant in determining the investment decision.

The summary statistics on the existence of a business plan indicated a median of 5 and a

standard deviation of 0.953, indicating that the approach towards this metric was very

significant in determining the investment decision. The median of the responses regarding the

fund restrictions was 4 while the standard deviation was 1.013; this indicated that this factor

was significant in determining whether to invest in the SME or not. The responses regarding

the presence of alternative sources of funding besides PE and VC yielded a median of 4 and a

standard deviation of 1.083; this indicated that this factor was significant in determining the

investment decision in an SME.

Table 4.12: Summary Results –Other Success Factors

Other Success Factors

Existence of a Business

Plan Fund Restrictions

Other Funding

Channels

Mean 4.3 3.78 3.59

Median 5 4 4

Std. Deviation 0.953 1.013 1.083

Variance 0.909 1.026 1.174

Skewness -1.232 -0.717 -0.649

39

4.4.4. ANOVA Results on the Critical Success Factors

The result of the ANOVA analysis on the critical success factors that determine whether PE

and VC firms would invest in an SME, indicated that the p-value was below 0.05. This

indicated that the critical success factors which comprised: the fund’s investment process, the

evaluation criteria used for funding and other success factors, were statistically significant in

determining whether Private Equity and Venture Capital firms would invest in them or not.

Table 4.13: ANOVA Table - Critical Success Factors

ANOVA Source of

Variation

Sum of

Squares df MS F P-value F crit

Between

Groups 56.89259 9 6.32140 6.87577 7.05598E-09 1.91599

Within

Groups 239.03704 260 0.91937

Total 295.92963 269

4.5. Leadership in the Change Management Process

The respondents of the study had a uniform view that their firms tend to backstop and fund

SMEs who have a tried and tested leadership who would be able to provide the required change

that would be used to expand and create new growth avenues in the SME once the funding has

been provided. The need for PE and VC firms to institute change in overall management of the

SME during the screening is viewed as a significant red flag that would deter them from

investing.

The variables used with regards to the leadership in the change management process

comprised: the willingness of the leadership or top management to exercise change in the

management of the SME; the willingness of the owner of the business to effect change in the

leadership of the business; the willingness of the leadership or top management to identify

other opportunities in which the business can tap or exploit in order to maximize returns; the

ability of the leadership of the SME to construct a powerful change management coalition or

40

team; the presence of a strategy to drive the change successfully; willingness and enthusiasm

of the leadership to effect the change of processes as well as the level of communication within

the organization; ability of the change management team to complete milestones and reward

employees driving the change; and evidence of the changes in the organization being

embedded into the organization’s culture.

Of the total respondents, 81.48% agreed that the willingness to adopt change management is

required in the determination of the investment decision.11.11% of the respondents were

neutral regarding this variable while 7.41% viewed it as partially significant in the investment

process. With regards to the effect of change in leadership, 88.89% of the respondents agreed

that the willingness of the owner to effect change in the leadership would influence the decision

that would be made with respect to investing in an SME. 3.70% of the respondents were neutral

regarding this variable while 7.41% viewed it as partially significant in determining their

investment decision. 77.78% of the respondents also agreed that the innovation by leadership

would impact their investment decision in an SME; 18.52% were neutral towards this variable

while a 3.70% proportion found the factor insignificant in determining the investment decision.

The formation of the change management team was found to be significant with 62.96% of the

team agreeing to variable being critical in the investment decision making process. 29.63% of

the respondents took neutral position while 7.41% did not find this variable significant. 74.07%

of the respondents agreed that the change management strategy would impact their investment

decision in an SME; 18.52% were neutral towards this variable while a similar 7.41%

proportion found the factor insignificant in determining the investment decision.

The willingness of leadership in change management was viewed a significant factor by

66.67% of the respondents; 29.63% had a neutral view towards this as 3.70% of the

respondents found this to be insignificant in determining their investment decision on an SME.

62.96% of the respondents agreed that change management recognition was a significant factor

in determining whether an investment decision will be made on an SME. 25.93% were

however neutral to this view as 11.11% disagreed on this. With respect to the evidence of

change as a variable,51.85% of the respondents agreed that this was an important metric in

considering an investment in an SME; 40.74% were however neutral towards this view

while7.41% found it insignificant as a factor in determining the investment decision.

41

The summary statistics on the variables including willingness to adopt change management,

effect of change in leadership, innovation by leadership, formation of the change management

team, change management strategy, willingness of leadership in change management, change

management recognition as well as evidence of change all had a median of 4, indicating that

these variables were significant in determining the investment decision. The standard deviation

of each of these variables were: 0.874, 0.847, 0.92, 0.984, 1.126, 0.823, 1.047 and 1.006

respectively.

Table 4.14: Leadership in the Change Management Process

Leadership in the Change Management Process

Mean Median Std.

Deviation Variance Skewness

Willingness to Adopt

Change Management 4.07 4 0.874 0.764 -0.898

Effect of Change in

Leadership 4.22 4 0.847 0.718 -1.28

Innovation by

Leadership 4 4 0.92 0.846 -1.281

Formation of the Change

Management Team 3.74 4 0.984 0.969 -0.738

Change Management

Strategy 3.96 4 1.126 1.268 -1.319

Willingness of

Leadership in Change

Management

3.7 4 0.823 0.678 -1.163

Change Management

Recognition 3.59 4 1.047 1.097 -1.024

Evidence of Change 3.63 4 1.006 1.011 -0.384

42

4.6. Transformational Leadership in the Investment Process

The variables used with regards to the role of leadership in the investment process included:

the existence of transformational leadership in the SME, evidence of misuse of power,

evidence of employee development and the evidence of leadership charisma.

Of the total respondents, 74.07% agreed that the evidence in transformational leadership in the

SME is required in the determination of the investment decision.14.81% of the respondents

were neutral regarding this variable while 11.11% viewed this as insignificant in the

investment decision making process. With regards to the evidence of misuse of power, 59.26%

of the respondents agreed this factor would influence the decision-making process for

investment in an SME. 18.52% of the respondents were neutral regarding this variable while

22.22% did not consider it a significant factor in driving their investment decision. 62.96% of

the respondents agreed that the evidence of employee development would impact their

investment decision in an SME; 11.11% were neutral towards this variable while 25.93% of

the respondents considered this factor as less significant in driving their investment decision.

The evidence of leadership charisma in the day-to-day operations was viewed as significant by

37.04% of the respondents; 37.04% were of a neutral position towards this as 25.93% of the

respondents found this to be insignificant in driving their investment decision on an SME.

The summary statistics on the existence of transformational leadership in the SME, evidence

of misuse of power and evidence of employee development, had a median of 4, indicating that

these variables were significant in determining the investment decision. The standard deviation

of each of these variables were: 1.054, 1.644 and 1.179 respectively. The evidence of

leadership charisma had a median of 3 and a standard deviation of 1.039 indicating that the

view towards this variable as a factor in determining the investment decision was that of a

neutral position.

43

Table 4.15: Summary Results – Transformational Leadership in the Investment Process

Role of Transformational Leadership in the Investment Process

Existence of

Transformational

Leadership

Evidence of

Misuse of

Power

Employee

Development

Leadership

Charisma

Mean 3.85 3.48 3.44 3.19

Median 4 4 4 3

Std. Deviation 1.027 1.282 1.086 1.039

Variance 1.054 1.644 1.179 1.08

Skewness -1.064 -0.665 -0.625 0.046

4.7. ANOVA Results on Leadership and Change Management in Successful Funding

The ANOVA analysis on the leadership and change management in successful funding of

SMEs by PE and VC firms similarly indicated that the p-value was below 0.05. This showed

that leadership and existence of change management were critical in determining whether

Private Equity and Venture Capital firms would invest SMEs or not.

Table 4.16: ANOVA Table - Leadership and Change Management in Successful

Funding

ANOVA Source of

Variation SS df MS F P-value F crit

Between

Groups 26.22222 11 2.38384 2.32424 0.00935 1.81941

Within Groups 320.00000 312 1.02564

Total 346.22222 323

4.8. Chapter Summary

This chapter outlined the results and findings of this study as per the specific objectives. The

findings show that there exists a significant relationship between the challenges that SMEs

face, the critical success factors that would encourage investment in SMEs by VC and PE firms

as well as the leadership exercised in the SMEs. The next chapter presents the discussion,

conclusion and recommendations based on the findings.

44

CHAPTER FIVE

5.0 DISCUSSION, CONCLUSION AND RECOMMENDATION

5.1. Introduction

This chapter presents the discussion, conclusion as well as recommendations based on the

research conducted. A summary has been provided regarding the analysis conducted in Chapter

Four. The discussion highlights the main drivers that promote PE and VC investments in

SMEs; it follows the research questions shared to all respondents.

This Chapter also constitutes the main conclusions made from the research as well as the

recommendations for further studies.

5.2. Summary

The purpose of this study was to determine the drivers that promote private equity and venture

capital investment in SMEs in Kenya. This research was guided by the following specific

objectives: To determine the role of leadership in the securing of private equity and venture

capital funding; To determine the key performance indicators used to provide financing to

SMEs by Private Equity and Venture Capital Firms; and To determine challenges and

exposures faced by SMEs from accessing Private Equity and Venture Capital funding.

The research design that was adopted in this research entailed a census population of 35

personnel working in Private Equity and Venture Capital Firms operating in Kenya. Of this

sampling frame, 77.14% (27) of the respondents took part in the study. The data was collected

in form of an online questionnaire (Google Form) which enabled easier relay of information

from the respondents. The collected data was then summarised and processed using both the

Statistical Package for Social Sciences (SPSS) as well as Microsoft Excel 2016.

The research findings showed that the factors of human capital were not significant drivers in

promoting PE and VC investments in SMEs as the median amongst the entrepreneur’s level of

education, age and experience with SME start-ups was 3, indicating a neutral position. The

factors of business development services which was supported by the level of technology used

45

during business development, the firm’s political exposure, legal exposure as well as level of

environmental constraints had a combined median of 3, similarly indicating a neutral position

from all the respondents operating in the Private Equity and Venture Capital space. The level

of technology used in business development was however an outlier as the respondents viewed

it as a significant driver in enabling them to determine their investment decision on an SME.

The p-value<0.05 also indicated that the challenges and exposures faced by SMEs were

statistically different and would individually affect the overall decision by PE and VC firms to

finance or invest in an SME.

The investment environment was supported by the industry business ethics and firm business

ethics drivers. A median of 4 was evidenced from the responses obtained during the research,

indicating that these drivers were significant in driving the investment decision by the Private

Equity or Venture Capital firm. The challenge of globalization comprised challenges within

firm marketing initiative as well as the use of technology in marketing. This driver had a

collective median value of 3.5 as per the responses obtained, indicating that these were fairly

significant in promoting the investment decision.

The drivers that fuelled PE and VC investment in SME from a PE and VC funding structure

perspective included a positive correlation between the industry in which the SME operates in

and the target industries set out by the fund, as well as the potential returns that could be

achieved are based on the risk required to be absorbed by the fund. These factors were viewed

as significant in the determination of the investment decision as it scored a median of 4 across

all the respondents of the study. The financing drivers comprised macroeconomic factors

influencing the interest and foreign exchange rates charged to the SME as well as the he

presence of credit information on the SME. This driver had a collective median value of 4 as

per the responses obtained, indicating that these were significant in promoting the investment

decision. The investment process was also considered as a critical factor influencing the

investment decision of a PE and/or VC firm on an SME as the median of the respondents was

4 while the standard deviation was 1.777.

The evaluation criteria using in the funding process was measured using financial performance

or success of the SME over the period of its existence; the SME’s relationship with suppliers;

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the SME’s reputation with respect to other stakeholders including, the general public, the

environmental lobby groups, the Government; the level of skills that the top management have

in running the SME; the percentage of ownership by the top management of the business; and

market factors that comprise the market potential growth/ attractiveness and barriers. The

overall median registered by the respondents was 4.5, indicating that this factor was very

significant in driving the PE and/or VC firm’s investment decision on an SME.

Other success factors which promoted investment in SMEs from Private Equity and Venture

Capital players in Kenya included the presence of a complete business plan from the SME;

restrictions on the funds’ investment profile; and the presence of alternative sources of funding

besides PE and VC. These factors were considered significant as the median scored from the

respondents was 4. In addition to the descriptive statistics on the critical success factors, the p-

value<0.05 showed that these factors were statistically significant in determining whether PE

and VC firms would fund SMEs.

The leadership in change management was supported by the following factors: the willingness

of the leadership or top management to exercise change in the management of the SME; the

willingness of the owner of the business to effect change in the leadership of the business; the

willingness of the leadership or top management to identify other opportunities in which the

business can tap or exploit in order to maximize returns; the ability of the leadership of the

SME to construct a powerful change management coalition or team; the presence of a strategy

to drive the change successfully; willingness and enthusiasm of the leadership to effect the

change of processes as well as the level of communication within the organization; ability of

the change management team to complete milestones and reward employees driving the

change; and evidence of the changes in the organization being embedded into the

organization’s culture. These factors were considered significant through the investment

process as the respondents collectively registered a median of 4.

In addition to the above, the role of transformational leadership within the SMEs, which was

supported by the existence of transformational leadership in the SME, evidence of misuse of

power, evidence of employee development and the evidence of leadership charisma, was

considered significant in the determination whether the PE or VC firm would invest in the

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SME or not. The collective median that was registered was 4. The p-value <0.05 showed that

leadership as well as change management were statistically significant in the successful

funding of SMEs by Private Equity and Venture Capital Firms.

5.3. Discussions

This section of the chapter covers the discussions around the specific objectives of the research

based on the findings made in conjunction with the literature review.

5.3.1. Challenges and Exposures Faced by SMEs from Accessing PE and VC Funding

The research findings revealed that there are certain challenges and exposures that would

significantly impact on the investment decision made by PE and VC firms on SMEs. These

include challenges in human capital, challenges of business development services, challenges

in the investment environment, the challenge of globalization, the challenge relating to the

fund structure, as well as the challenge of the SME financing.

Talaia et al., (2016) explains that the investment decision made by PE and VC firms in funding

an SME would get depends on the level of education, age and experience the entrepreneur has

had with other SME start-ups. A neutral position was however evidenced in this regard from

the respondents of the study.

The evidence of business development services in the SME is driven by constraints related to

compatibility, limited skills and technical knowhow on technology, third party support and

data transfer from one technological environment to another (Chibelushi & Costello, 2009);

legal and environmental constraints were also viewed as challengesof the busines development

services as they span from employment laws, data protection laws, business laws, health and

safety regualtions as well as environmental regulations (Blue Ocean University, 2017).

Similarly, a neutral position was taken in relation to the significance of business development

services affecting the investment decision-making process of PE and VC firms on SMEs in

Kenya.

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The state of the investment environment is caused by the level of business ethics and

professionalism exercised within the industry the SME operates in as well as the SME itself

(Turyahikayo, 2015). Turyahikayo, (2015) emphasizes that ethics in business is a significant

elemtne for the survival of enterprises regardless of size and its absense would lock out SMEs

in capital financing as well as deprivation of social capital. Similarly, this driver was viewed

to be significant in the investment process as it had significant consequences on the SME itself

in relation to its impact on society and reputation.

The level of globalization done was fueled by the level of marketing that could be done by the

SME on a global scale, level of technology used as well as the market conditions where the

SME operates in (Al Mubarak, 2016). Al Mubarak, (2016) further explains lack information

and knowledge, outdated technology, presence of cultural legal and economic differences, lack

of government support and proper commiunication between the businesses and governement

as well as poor makreting initiatives would challenge the success of SMEs becoming

globalised. The analysis conducted in the study yielded that the globalisation driver was fairly

significant in determining whether the SME would be investment ready from a PE and VC

perspective. This is because it had an impact on the scalability of the SME’s business in the

long run.

The constitution of the funding structure was inspired be the strict investment criteria the

development finance institutions (DFIs) and other investors would employ while injecting

funds to the PE firms as well as the expected returns from the investments that would be made

by the PE firms (Divakaran et al., 2014). Divakaran et al., (2014) continue to explain that the

the presence of insufficient capital to fund operations would cause PE and VC firms to

strguggle establishing local presence abnd buidl networks and relationships which would drive

pipelines and investment quality. This driver was viewed to be significant in the determination

on whether to invest in the target SME or not, as the breach of such terms would be detrimental

to the future of the investment firm in terms of investor backing, as seen from Abraaj’s fall due

to breach of terms in its healthcare fund (Kerr & Sender, 2018).

The availability of SMEs obtaining cheaper financing has been affected by economic factors

such as interest and foreign exchange rates (Miller, 2013) as well as the availability of credit

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information on the SME, brought about by a lack of proper book keeping and financial

statement preparation (Okoth Michael Okoth, 2013). This driver was viewed as significant in

the determination of whether an SME is investment ready by PE and VC firms, as this would

impact future funding ambitions in relation to the availability of other funding and cost of

funding.

5.3.2. Critical Success Factors Used Relied Upon by PE and VC Firms on SME

Investment

The type investment process used by the investment committee, for the screening and selecting

an SME for equity funding would drive the decision on whether the SME would be viable for

investment or not. According to Dhochak & Sharma, (2016), most venture capital firms tend

to use the Wells model six-step decision making process that would comprise the investment

search, proposal screening, the proposal evaluation, meetings and follow-ups, operations

handling and cashing out processes. Another venture capital investment process that is adopted

includes deal origination, initial screening, first phase due diligence and internal feedback,

preapproval completion, second phase due diligence and internal approvals, deal completion,

deal monitoring and lastly exit (Klonowski, 2010). From the results of the study, the type of

investment process used was realised to be a significant determinant in the investment process

on an SME by a PE or VC firm due to the requirement to comply with the necessary investment

policies set in place for the PE or VC firm.

The private equity and venture capital firms also follow investment criteria in the funding

process of an SME. These criteria first includes the entrepreneur’s characteristics based on

personality, management skills and possessed experience, the stake owned by the management

in the firm, the personal motivation of the entrepreneur to seek Venture Capital or Private

Equity funding as well as the quality of the venture team who have been tasked to apply for

such funding (Hudson, 2005). The other drivers include the features of products’ or services’

rendered by the SMEs, the characteristics of the market as well as the financial considerations

(MacMillan, Siegel, & Narasimha, 1985). The entrepreneur’s characteristics, the stake owned

by the management of the firm, personal motivation of the entrepreneur to seek VC or PE

funding as well as the quality of the venture team were all considered very significant in the

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determination of the choice of whether to invest in a targeted SME or not by both PE and VC

firms. This was because of the need of PE and VC firms of creating value in their investments

besides earning financial returns over a period of time.

Other factors that were considered in this study comprised the presence of a business plan

documenting the strategies and business forecasts of the SME’s future, restrictions placed by

the PE and VC firms’ partners on the fund as well as the availability of complementary

financing besides that provided by the Private Equity or Venture Capital Firm. The presence

of a business plan for the SME was considered imperative in driving the investment decision,

as this would enable the PE and VC firms determine whether their investment would create

the necessary value in an SME’s strategy for it to achieve its set objectives and mission.

Klonowski, (2010) further explains that the business plan is a critical element in the deal

generation stage of the investment process, as it unavailability would elongate the entire

process by six to eight weeks for one to be developed. The business plan also needs to be

complete as one that is incomplete where key data is omitted would be deemed unacceptable

and have the investment proposal rejected by the PE and VC Firm (Boocock & Woods, 1997).

Restrictions placed by the PE and VC firms’ partners on the fund comprising, the industry in

which an SME operating as well as the permitted number of investments played a significant

role in determining whether the SME would be eligible for investments from those firms. This

response also supported Boocock & Woods, (1997) research which stated that the restrictions

imposed on funds’ investments would be limited to the fund size and permitted number of

funds allowed to be made based on a particular sector.

According to Klonowski, (2010), the investment process comprises two main stages in which

due diligence will be conducted; the first phase of the due diligence with internal feedback.

This due diligence phase would comprise business valuation and financial forecasting that

includes forecasting and analysis of the SME’s revenue, costs, cash flows, balance sheet and

financial ratios. The second due diligence phase which also goes in tandem with internal

approvals may include the hiring of external advisors who would advise the fund in the

financial liability or exposures of the screened investment (Klonowski, 2010). The results of

the study determined that the cooperation of the SMEs management to these due diligence

phases as well as the SME’s willingness to comply with the due diligence findings of are also

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significant factors in determining whether a PE and VC firm would invest or not. This is

because of the level of financial exposure or financial liability the PE and VC firms are exposed

to and would require to manage in respect to their investment policies as well as the cost of

their funds.

5.3.3. Role of Leadership in the Securing of PE and VC Funding

The role of leadership in change management is also required in the SME’s investment process

in order to meet the set objectives of the change (Deshler, 2016). In addition to this, Klonowski,

(2010) further explains that the main categories of responsibilities for venture capital firms on

their portfolio investments include oversight, review, compliance and leadership. Leadership

involves the establishment of policies and procedures for different business scenarios, hence

the need to exercise change management in the SME. Leadership also plays a critical role on

the change anchored towards the organization’s culture especially in the event of a corporate

acquisition. According to Lund & Whitt, (2017), this change can be effectively integrated into

the corporate culture in two approaches which include task integration and human integration.

The result of the study indicated that leadership in change management was a critical driver in

determining the choice of investing in an SME by PE and VC firms.

Leadership in change management was supported by Kotter & Bourner's, (1998) eight-stage

process that comprises: the willingness of the SME’s leadership and owners to exercise change,

willingness of the leadership or top management to identify other opportunities in which the

business can tap or exploit in order to maximize returns, ability of the leadership of the SME

to construct a powerful change management coalition or team, presence of a strategy to drive

the change successfully, willingness and enthusiasm of the leadership to effect the change of

processes as well as the level of communication within the organization, ability of the change

management team to complete milestones and reward employees driving the change and

evidence of the changes in the organization being embedded into the organization’s culture.

The element of leadership in change management being critical in the investment decision of

PE and VC firms is also supported by Management’s attitude towards competitive advantage.

Doval, (2016) further explains that companies do not focus on protecting their competitive

52

advantage via old strengths but through innovation, accumulation of knowledge and

experiences as well as discovery of new resources and capabilities. The element of seeking

competitive advantage by the SME is a metric observed by funds during the due diligence

phases in order to preserve and actualize their returns (Klonowski, 2010). The sustainability of

competitive advantage would thus require effective change management and a degree of

flexibility within the organisation.

The results of the study indicated that private equity and venture capital firms viewed these

metrics as significant elements in the investment choice made on the SME, as such PE and VC

firms require to realise certain financial returns which comprise favourable internal rate of

returns on their investments, which may range between 20% and 30% (Divakaran et al., 2014).

These results were also supported by the need for change in the developing competitive

strategies for the firm which would improve its competitive position and effectively, its market

share investment (Klonowski, 2010).

In the event of a business acquisition, it is mandatory that management and employees have to

adapt these changes. Martin, (2015) elaborates that leaders need to challenge the company style

and allow followers to decide on unchallengeable values from the historical procedures they

need to undertake. In addition to the above, transformational leadership plays a pivotal role in

driving the performance of the SME from both a financial and non-financial perspective (Ng

et al., 2016). The evidence of transformational leadership in the SME, which also focuses on

development of the human capital skills and personality with the aim to achieve the

organisation’s visions and objectives, was considered significant in determining whether an

SME was investment ready. This is because the PE and VC firms rely on the leadership skills

of the owners as well as management of the SME to direct the vision, objectives and instil

values and beliefs of the enterprise that would steer the business to growth and success

(Paladan, 2015).

Charisma amongst leaders of SMEs was also considered a fairly significant element for Private

Equity and Venture Capital firms to determine whether to invest in the SME or not. This was

supported by Mhatre & Riggio, (2014) elaboration of charisma being an element of a

transformative leader which is generally categorized as a trait that is both socialized and

53

personalized. Authentic charismatic or transformative leaders must be socialized leaders for

an organization to perform better by increasing the sensitivity of followers to organizational

change, inspiring shared vision for a new and better future and bringing about as well as

embedding new changes.

5.4. Recommendations

5.4.1. Recommendations for Improvement

5.4.1.1.Challenges and Exposures Faced by SMEs

This study has highlighted the various challenges and exposures faced by SMEs comprising:

the investment environment, globalisation, fund structure and SME financing are significant

in determining the choice PE and VC firms would make in investing in the SME. The study

recommends that SMEs need to specifically manage their business ethics, financial

performance and presentation, level of global presence as well as the level of technology used

within the organisation.

5.4.1.2.Key Performance Indicators and Critical Success Factors for Funding in SMEs

The study has also indicated the key performance indicators and critical success factors are

critical for PE and VC firms in determining whether to invest in an SME or not. The study

recommends that the SMEs should be willing to engage with PE and VC firms that invest

within their sector of operation as well as accommodate and appreciate the investment process

being used by the private equity or venture capital firm. In addition, the SME should aim for a

strong financial performance, a good firm reputation and a well constituted as well as highly

skilled management. These would promote PE and VC investment in the SME.

5.4.1.3.Role of Leadership and Change Management in Successful Funding

The study has highlighted leadership in change management is pivotal in PE and VC firms

investing in the SME. The leadership in the SME should ensure they are willing to adopt

change in the SME during pre- and post-investment phases. The leadership of the SME would

also be expected to be one that embraces transformation within the organisation as this

promotes increased performance due to stewardship and human capital development.

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5.4.2. Recommendations for Further Research

The findings obtained from this research represent the views taken PE and VC firms in

investing in SMEs operating in Kenya. Further research could be conducted in other countries

as well as firms who have already gone through their first series of funding from a Private

Equity and Venture Capital perspective, in the search for new capital to scaling their

businesses.

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APPENDICES

Appendix I: Introduction Letter

23 July 2019

To Whom It May Concern

Dear Sir / Madam

RE: Facilitation of Research – Germano Kiruthu Mutahi ID No. 659882

The bearer of this letter is a persuant of the the Degree of Global Masters in Business

Administration (GMBA) from the United States International University – Africa (USIU –

Africa).

As per the requirements of this course, the student is required to carry out a research study

on: the “Drivers Promoting Venture Capital and Private Equity Investment in SMEs in

Kenya” and requires him to collect necessary data for successful completion.

Kindly note that the information share by you is treated hgihly confidential and shall be only

used for academic purposes.

Should you have any queries pertaining this, feel free to contact me with the details

underpinned.

Yours Sincerely,

ii

Prof. Amos Njuguna

Professor of Finance and Dean - School of Graduate Studies USIU-Africa

Mobile: +254 730 116 442

Email: amnjuguna@usiu.ac.ke

iii

Appendix II: Population – List of Venture Capital and Private Equity Funds

Venture Capital

and PE Funds

Industry of Focus Target Deal Size

(USDm)

Population

1 88mph Web and Mobile

Startups.

0.1-2 1

2 Acorn Private

Equity

Agri-Services, Food and

Health, Industrial,

Utilities

3-7 1

3 Actis Real Estate,

Automotive,

Construction

Above 10 1

4 AfricInvest Financial Services,

Energy, and Transport

and Logistics, and

Healthcare.

20-100 1

5 Ascent Capital Diversified 2-15 1

6 Business Partners

International(BPI)

East Africa

Diversified 0.05-1 1

7 Catalyst Principal

Partners

Retail (Consumer

goods), Financial

Services, Industrials,

Manufacturing,

Telecommunications.

5-20 1

8 Cauris

Management

Leisure, Consumer

(Retail),

Telecommunications,

Pharmaceutical,

Financial Services

3-5 1

iv

9 Centum

Investments

Company plc

Real estate, Education,

IT, and Hospitality.

1-10 1

10 East Africa

Capital Partners

Technology, Media and

Telecommunications.

Below 10 1

11 Emerging Capital

Partners

Diversified 1-10 1

12 Evercare Health

Fund

Healthcare 1-20 1

13 Evolution II

(Mauritius) LP

Renewable energy

generating assets and

energy efficiency

projects.

5-20 1

14 Fanisi Capital

Ltd.

Agribusiness,

Pharmaceuticals, and

Education.

1-5 1

15 Funguo

Investments

Limited

Diversified Above 1 1

16 Fusion Capital

Limited

Real Estate and

Construction.

0.25-5 1

17 Helios Investment

Partners LLP

Diversified Above 10 1

18 Incofin

Investment

Management

Diversified Below 10 1

19 International

Finance

Corporation

Diversified 1-30 1

v

20 Keynes Private

Equity

Healthcare 1-10 1

21 Kibo Capital

Partners

Financial Services,

FMCG, Education, and

Healthcare.

1-20 1

22 Kinyeti Venture

Capital Limited

Industrials, Tourism,

and Healthcare.

0.05-1.5 1

23 Kleoss Capital

The Value of

Valour

Sector, manufacturing 4--13 1

24 Kuramo Capital

Management

Financial Services,

Energy, and Transport

and Logistics, and

Healthcare.

1-20 1

25 LeapFrog

Investments

Financial Services and

Healthcare

Around 10 1

26 Msingi East

Africa Limited

Focus on single

industry (In 2016

Aquaculture was

selected, 2017/18

selection unannounced)

Below 10 1

27 Norfund Diversified 2-15 1

28 Okavango Capital

Partners

Diversified Above 0.1 1

29 Partech Africa

Fund

Diversified 1-10 1

30 Progression

Capital Africa Ltd

Financial Services and

Fintech.

2-8 1

31 Privilege Fund Diversified Below 1 1

vi

32 Stichting DOB

Equity

Agribusiness, Logistics,

Off-grid Renewable

Energy.

0.25-2.5 1

33 Summit Africa Education, Healthcare,

ICT, Financial Services

Below 10 1

34 TBL Mirror Fund

BV

Healthcare (focusing on

pharmaceuticals), ICT

(focusing on software),

and FMCG.

1-5 1

35 Zephyr Acron

(Zephyr

Management,

L.P.)

Fintech, Business

Services, and IT.

0.5-10*** 1

vii

Appendix III: Questionnaire

Introduction

This questoinnaire seeks to collect relevant data that will aid in the successful completion of

the study as to the Drivers Promoting Venture Capital and Private Equity Investment in

SMEs in Kenya. Kindly respond to the questions below candidly and objectively.

Kindly note that the information shared in this questionnaire is treated with strict

confidentiality and shall only be used for the purpose of this study. No reference shall be

made on any individual.

Section A: Background Information

1. Kindly indicate the name of your organization

2. Kindly indicate your position within your Organization

Partner [ ]

Director / Investment Principal [ ]

Investment Officer [ ]

Portfolio Manager [ ]

Investment Analyst / Associate [ ]

Other (specify). . . .

3. Kindly indicate the how long you have worked in your Organization

0 – 3 years [ ]

4 – 7 years [ ]

8 – 11 years [ ]

12 years and Above [ ]

Section B

4. On a sclae of 1-5, where, 1 – least significant; 2 – partially significant; 3- neutral; 4 –

significant; and 5 – most significant; please classify the issues / challenges that you have

envisaged that are mainly faced by SMEs that seek funding from your firm.

Challenge / Issue Faced 1 2 3 4 5

ii

a. Challenge of Human Capital

i. The level of education of the entrepreneur on the

industry his / her business operates in.

ii. The age of the entrepreneur.

iii. Level of experience with regards to other SME

star-ups.

b. Challenge of Business Development Services

i. Level of technology ICT infrastructure in the

organisation.

ii. Level of political exposure the organization

experiences.

iii. Legal constraints faced by the SME.

iv. Level of environmental constraints in the industry

the SME operates in.

c. Challenge of the Investment Environment

i. Business ethics and professionalism in the

environment in which the SME operates in.

ii. Business ethics and professionalism exercised

within the organisation.

d. Challenge of Globalization

i. The level of marketing done by the SME for

promotion of its goods / services.

ii. The use of technology in the marketing initaitives

for the SME.

e. Challenge Relating to the Fund Structure

i. The corelation between the industry in which the

SME operates in and the target industries set out by

the fund.

ii. The potential returns that could be achieved are

iii

based on the risk required to be absorbed by the

fund.

f. Challenge of the Financing

i. The macroeconomic factors influencing the interest

and foreign exchange rates charged to the SME.

ii. The presence of credit information on the SME.

5. On a sclae of 1-5, where, 1 – least significant; 2 – partially significant; 3- neutral; 4 –

significant; and 5 – most significant; please rate the significance of the Critical Success

Factors in determining whether to fund an SME or not.

Critical Success Factors 1 2 3 4 5

a. The Investment Process

i. The type of investment process used by the

investment committee for screening and selection

of an SME for funding.

b. The Evaluation Criteria used for Funding

i. The financial performance or success of the SME

over the period of its existence.

ii. The SME’s relationship with suppliers.

iii. The SME’s reputation with respect to other

stakeholders including, the general public, the

environmental lobby groups, the Government

(taxman and other governement institutions).

iv. The level of skills that the top management have in

running the SME.

v. The percentage of ownership by the top

management of the business.

vi. The market factors that comprise the market

potential growth/ attractiveness and barriers.

iv

c. Other Success Factors to Consider

i. The presence of a complete business plan with

business forecasts and documented strategies for

the SME’s future.

ii. The restrictions placed by the partners of the fund

on the investment profile.

iii. The availability of complementaty financing

besides that provided by the Private Equity or

Venture Capital Firm.

6. On a sclae of 1-5, where, 1 – least significant; 2 – partially significant; 3- neutral; 4 –

significant; and 5 – most significant; please rate the significance of the leadership and

change management required in determining whether to fund an SME or not.

Role of Leadership and Change Management 1 2 3 4 5

a. Leadership in the Change Management Process

i. The willingness of the leadership or top

management to exercise change in the

management of the SME.

ii. The willingness of the owner of the business to

effect change in the leadership of the business.

iii. The willingness of the leadership or top

management to identify other opportunities in

which the business can tap or exploit in order to

maximize returns.

iv. The ability of the leadership of the SME to

construct a powerful change management coalition

or team.

v. The presence of a strategy to drive the change

successfully.

v

vi. The willingness and enthusiasm of the leadership

to effect the change of processes as well as the

level of communication wihtin the organization.

vii. The ability of the change management team to

complete milestones and reward employees

driving the change.

viii. Evidence of the changes in the organization being

embedded into the organization’s culture.

b. Role of Transformational Leadership

i. Evidence of leadership exercising transformational

leadership within the business in the past and

present.

ii. Evidence of misuse of power in the process of

gaining competitive advantage within and outside

the organization.

iii. Evidence that leadership focuses on the

employees’ development in terms of skills as well

as personality with the aim of achieving the

organization’s vision and objectives.

iv. Evidence of the top leadership exercising charisma

in their day-to-day operations.

vi

Appendix IV: NACOSTI License