An Appraisal of Venture Capital Activity in Ghana
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UNIVERSITY OF GHANA BUSINESS SCHOOL DEPARTMENT OF ACCOUNTING AN APPRAISAL OF VENTURE CAPITAL ACTIVITY IN GHANA BY OBENG YEBOAH PATRICK (10204175) OSEI-TUTU YAW BRAKO (10205383) AMAMU DAVID (10195666) A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF BACHELOR OF SCIENCE IN ADMINISTRATION (ACCOUNTING OPTION), DEGREE. MAY 2009.
Transcript of An Appraisal of Venture Capital Activity in Ghana
UNIVERSITY OF GHANA BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING
AN APPRAISAL OF VENTURE CAPITAL ACTIVITY IN
GHANA
BY
OBENG YEBOAH PATRICK (10204175)
OSEI-TUTU YAW BRAKO (10205383)
AMAMU DAVID (10195666)
A DISSERTATION SUBMITTED IN PARTIAL
FULFILLMENT OF THE REQUIREMENT FOR THE AWARD
OF BACHELOR OF SCIENCE IN ADMINISTRATION
(ACCOUNTING OPTION), DEGREE.
MAY 2009.
i
DECLARATION
We, the undersigned, hereby declare that except for references to the work of other persons,
which have been duly acknowledged, this dissertation is the product of our own research
completed under the supervision of Mr. R. M. Kuipo. This work has never been presented in
whole or in part for any other degree in this university or elsewhere.
OBENG YEBOAH PATRICK (10204175)
………………………………………………
OSEI-TUTU YAW BRAKO (10205383)
………………………………………………
AMAMU DAVID (10195666)
………………………………………………
MR. R. M. KUIPO (SUPERVISOR)
…..…………………………………..
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ACKNOWLEDGEMENT
Our foremost gratitude goes to God for helping us to achieve this feat.
We would also want to acknowledge the following persons and institutions; Fuseini Issah of
Bedrock Venture Capital Finance Company; Isaac Owusu Ansah of Aureos Ghana Advisors;
George of Activity Venture Finance Company; Osei Akuamoah of the Venture Capital Trust
Fund; Fidelity Capital Partners Ltd and the respondents in the various VC SMEs surveyed.
Without you, our study would have been impossible.
We express gratitude to our supervisor, Mr. R.M. Kuipo for his insightful comments and
critique. To all the people who helped us in many small ways but whom we cannot
acknowledge for want of space, we are eternally grateful.
We conclude by saying that we bear sole responsibility for all errors in this dissertation.
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DEDICATION
Obeng Yeboah Patrick; This work is dedicated to my parents, Mr and Mrs Yeboah.
Yaw Brako Osei-Tutu; I dedicate this work to my parents, Mr. and Mrs. Osei-Tutu, and to my
whole family. Thanks for your unwavering support.
Amamu David; This work is dedicated to my family and Margaret Adounin
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Table of ContentsContent Page
Declaration ........................................................................ i
Acknowledgement ........................................................................ ii
Dedication ……………………………………………… iii
Table of Contents …................................................................... iv
List of Figures ……………………………………………... x
List of Tables ……………………………………………… xi
Abstract ......................................................................... xii
CHAPTER 1: INTRODUCTION...……………………………… 1
1.1 Background to the Study............................................................... 1
1.2 Problem Statement....................................................................... 2
1.3 Research Questions...................................................................... 2
1.4 Significance of the Study............................................................ 2
1.5Overview of Literature................................................................. 3
1.6 Methodology............................................................................... 4
1.6.1 Data Collection............................................................. 5
1.6.2 Data Analysis............................................................... 5
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1.7 Scope and Limitations................................................................. 5
1.7.1 Scope of the Study...................................................... 5
1.7.2 Limitations of the Study............................................. 5
1.8 Organisation of the Study.......................................................... 5
1.9 References ...................................................................... 6
CHAPTER 2: REVIEW OF LITERATURE ON VENTURE
CAPITAL ACTIVITY................................................................... 7
2.1 Introduction ........................................................................ 7
2.2 Venture Capital – An Overview................................................... 8
2.3 Venture Capital Financing – Nature and Trends.......................... 9
2.3.1 VC Fundraising Process................................................ 11
2.3.2 VC Investment Process................................................. 12
2.4 The Flow of VC – Determinants of VC Investments.................. 13
2.4.1 Factors in the Remote Environment............................. 13
2.4.2 Factors in the Operating Environment......................... 14
2.5 Government Action in Relation to VC....................................... 15
2.5.1 Different Models of Government Intervention........... 16
2.5.2 Policy Initiatives in Ghana – The Venture Capital Trust Fund 16
2.6 Issues in the VC Market – The Equity Gap............................... 17
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2.6.1 Assessing VC Return.................................................. 18
2.6.2 Assessing VC Liquidity and Risk............................... 18
2.6.3 Innovation, Growth and Development Prospects for SMEs 19
2.6.4 Bottlenecks in VC Financing..................................... 20
2.6.5 Growth and Development Prospects of VC – Financed SMEs 20
2.7 Conclusion ...................................................................... 21
2.8 References ...................................................................... 21
CHAPTER 3: METHODOLOGY............................................... 27
3.1 Introduction ...................................................................... 27
3.2 Data Collection ...................................................................... 27
3.3 Sampling ....................................................................... 28
3.3.1 Populations................................................................... 28
3.3.2 Sample Size................................................................... 28
3.3.3 Sampling Technique....................................................... 28
3.4 Data Analysis................................................................................. 29
3.5 Limitations of Study Methods....................................................... 30
CHAPTER 4: ANALYSIS AND DISCUSSION OF FINDINGS 31
4.1 Introduction ........................................................................... 31
4.2 State of VC in Ghana. ............................................................... 31
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4.2.1 Trends in VC Financing.................................................... 33
4.2.2 Trends in VC Investments................................................ 33
4.2.3 The State of Government Action in Relation to VC......... 38
4.2.3.1Financing Activities – Fundraising..................... 38
4.2.3.2 Investing Activities............................................. 39
4.2.3.2.1 Direct Investment Programme............. 39
4.2.3.2.2 Indirect Investment Programme........... 39
4.2.3.2.3 Programmes Targeted at Demand for
Venture Capital................................................... 40
4.2.3.3 Tax Incentives.................................................... 41
4.3 Factors which Influence the Flow of Funds from VCFCs to VC SMEs 42
4.3.1 Determinants of VC Investments – Initial Investments..... 42
4.3.2 Determinants of Follow-on (Subsequent) Financing.......... 43
4.4 Benefits, Problems and Related Issues in the VC Industry................ 44
4.4.1 Benefits of VC .................................................................. 44
4.4.1.1 Enterprise Development Services......................... 45
4.4.2 Problems in VC ...................................................... 47
4.4.3 The Issue of a Gap .................................................... 48
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4.4.4 What Factors then Account for the Small Number of VC
investments? ..................................................... 48
4.4.5 Regulatory Issues .................................................... 49
4.5 References ............................................................................ 49
CHAPTER 5: SUMMARY, CONCLUSION AND
RECOMMENDATIONS.................................................................... 51
5.1 Introduction ............................................................................ 51
5.2 Summary of Findings ............................................................... 51
5.2.1 Trends in VC Financing.................................................... 51
5.2.2 Trends in VC Investments................................................. 51
5.2.3 State of Government Action.............................................. 52
5.2.4 Benefits, Problems and Issues in VC Financing................ 52
5.2.4.1 Benefits .................................................... 52
5.2.4.2 Problems............................................................. 52
5.2.4.3 Regulatory Issues in VC..................................... 53
5.3 Conclusions ............................................................................ 53
5.4 Recommendations............................................................................ 53
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BIBLIOGRAPHY ............................................................................ 54
APPENDIX A ............................................................................. 61
APPENDIX B ............................................................................ 65
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LIST OF FIGURES
Figures Page
Fig. 4a Source of VC Funds 31
Fig. 4b VC Funders 32
Fig. 4c Trend of Total Capital under Management 32
Fig. 4d Trend of Total VC Investments 33
Fig. 4e Successful Applicants Compared to Total Applicants 34
Fig. 4f Investments by Industry 35
Fig. 4g Investments by Size of enterprise 36
Fig. 4h Type of VC Invested 36
Fig. 4i Trend of Average Deal Size per Year 37
Fig. 4j Investments by Stage of Growth 38
Fig. 4k Approved Investments 39
Fig. 4l VC SMEs Who Receive Enterprise Development Services 45
Fig. 4m Forms of EDS Received 46
Fig. 4n Is Venture Capital Demanding? 47
Fig. 4o VC Gap 48
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LIST OF TABLES
Tables Page
Tab. 4a Success Rate (Successful Applicants as a 34
Percentage of Total Applicants)
Tab. 4b Factors Which Determine Initial VC Investments 42
Ranked in Order of Importance
Tab. 4c Benefits of VC as per VC SME Respondents 44
Tab. 4d Specific Areas of Assistance as per VC SMEs 46
Tab. 4e Problems Encountered by VC SMEs 47
Tab. 4f Factors Accounting for the Small Number of VC 49
Investments
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ABSTRACT
This exploratory study appraised venture capital (VC) activity, comprising financing
(fundraising) and investing, within the context of SME financing in Ghana. The researchers
set out to identify significant trends in VC financing and investments, including public sector
participation, and determine the critical factors which influence the flow of funds from
finance companies to investee companies. Additionally, the study aimed to isolate key
strengths and weaknesses of the emerging Ghanaian VC industry.
A purposive sampling technique was used to survey the Venture Capital Finance Companies
(VCFCs), SMEs financed by venture capital (VC SMEs) and the Venture Capital Trust Fund
(VCTF). Statistical and financial analysis of the data collected indicated among other things
that over a four year period (2005-2008), most investee companies were those in the larger
scale bracket, and that almost half of investments were made in the real estate and ICT
sectors. Fund managers ranked the business concept of a prospective investee, regardless of
industry, as the most important consideration in making a VC investment decision.
While the survey evidence obtained shows an upward trend in total capital under
management and investments, the study points to a weak regulatory environment and
widespread misconceptions about VC as the major challenges confronting this relatively new
form of entrepreneurial finance.
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CHAPTER 1
1.0 INTRODUCTION
1.1 Background to the Study
There are limited financing options for SMEs in Ghana. Traditional sources of finance
have consisted mainly of owner’s equity and debt. While a business owner’s savings is
typically inadequate to support business expansion, many find the cost of debt prohibitive
owing to generally high lending rates. Long term finance is essential in the transition
from small business to big business as the investment projects of any growing business
require significant capital commitments. This difficulty in obtaining finance, particularly
long term finance may be the single most important challenge facing small business
owners in Ghana.
Over the past decade, venture capital (VC) has emerged as one more option for
entrepreneurs. In addition to equity financing, venture capital finance companies provide
debt finance and mezzanine (quasi-equity) finance. The VC market although nascent has
widened the spectrum of risk capital options.
The Venture Capital Trust Fund (VCTF) is a scheme established by the Government
through Parliamentary Act 680 passed in November 2004. This fund represents the
greatest public financial intervention in the VC market. The object of the Act is to
establish a venture capital trust fund with the aim of providing investment capital to small
and medium scale enterprises. In addition the Act provides for the development and
promotion of VC financing in the country. A greater percentage of monies from the Trust
Fund will be invested in priority sectors of the economy identified from time to time in
accordance with the Government’s growth strategy.
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Undoubtedly venture capital will improve SME financing. Improved finance translates
into better prospects for small businesses and ultimately the whole economy.
1.2 Problem Definition
Given the strategic importance of SMEs to national growth and development, the quality
and range of financing options available to them are of prime concern. Because venture
capital is a relatively new source of entrepreneurial finance in Ghana, little is known
about the participants in the VC market. Information on VC financing; the size of funds
raised, amounts invested, the profile of investee companies, how successful the VCTF is
minimal and diffused. In general, the state of VC activity in Ghana is largely
unresearched.
1.3 Research Questions
This exploratory study seeks to undertake a general assessment of venture capital activity
in Ghana through a review of the following questions;
a) What is the state of VC financing in Ghana? What key trends, strengths and
weaknesses characterise the VC industry?
b) What factors influence the flow of VC financing from VC funds to SMEs?
c) Where are the gaps or outstanding issues related to VC market? How do
bottlenecks in the VC industry impair innovation, growth and development of
SMEs?
1.4 Significance of the study
Academically, this study will contribute to the rather limited body of knowledge
concerning the VC environment in general and VC financing in particular. This
contribution could constitute the foundation for additional inquiry.
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Practically, the findings of this research have policy implications. SMEs form the
majority of business enterprises in Ghana. The success of this economic sector therefore
has important implications for the level of employment, GDP and overall economic
growth and development. Effective policy rests on sound information and analysis, the
results of this research could aid in policy formulation.
1.5 Overview of Literature
Available data from the Registrar General indicates that 90% of companies
registered are micro, small and medium enterprises. This target group has been identified
as the catalyst for the economic growth of the country as they are a major source of
income and employment (Mensah, 2004).
Data on this group is however not readily available. The Ministry of Trade and Industry
(MOTI), in 1998 estimated that the Ghanaian private sector consists of approximately
80,000 registered limited companies and 220,000 registered partnerships.
Generally, this target group in Ghana is defined as:
Micro enterprises: Those employing up to 5 employees with fixed assets
(excluding realty) not exceeding the value of $10,000
Small enterprises: Employ between 6 and 29 employees with fixed assets of
$100,000
Medium enterprises: Employ between 30 and 99 employees with fixed assets
of up to $1million.
Venture capital is a comparatively new source of funding for Ghanaian entrepreneurs.
VC is long-term, hands-on equity investment in privately held, high-growth-potential
companies, initiated and managed by professional investors. Each element of this
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definition is important.VC investors organize VC firms (through private partnerships or
closely-held corporations) that establish VC funds to raise capital from individual and
institutional investors. Subsequently, VC funds invest in equity-type instruments (such as
shares) issued by SMEs.
VC is usually invested in young, rapidly growing companies that have the potential to
develop into important players in their industry. Venture capitalists evaluate several
hundred investment opportunities each year, but only invest in a few companies that can
offer high returns within five to seven years.
When an SME approaches a Venture Capital financing Company (VCFC), the VCFC is
going to do more than negotiating about the financial terms. Apart from the financial
resources these firms are offering; the VCFC also provides the necessary expertise the
venture is lacking, such as legal or marketing knowledge (Ruhnka and Young, 1987).
There exists an information vacuum with regard to local VC activity.
1.6 Methodology
A detailed outline of the issues on methodology is contained in Chapter 3. The study
adopts a qualitative approach. Purposive sampling, a nonprobability sampling technique
has been adopted. Purposive sampling requires the selection of cases (VCFCs and VC
SMEs) that are especially informative. The cases are then investigated in depth.
Our target populations are;
Venture capital – financed SMEs (VC SMEs)
Venture capital finance companies (VCFCs)
Samples will be chosen from each of the two populations above.
Officials of the VCTF will also be surveyed.
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1.6.1 Data collection
Although survey questionnaires will be the primary research instrument,
interviews will also be conducted to obtain supplementary information.
1.6.2 Data analysis
Data collected will undergo several dimensions of analysis. Quantitative analysis
will comprise statistical and financial analysis.
1.7 Scope and limitations of the study
1.7.1 Scope of the study
The study will focus on VCFCs and their investee companies in Ghana and the
VCTF.
1.7.2 Limitations of the study
Given the nascence of venture capital activity in Ghana, literature on venture
capital financing in general is limited. There is also the inadequacy of SMEs to
provide comprehensive financial information as a result of simple accounting
systems. These two constraints inhibit exhaustive analysis, evaluation and
interpretation of data.
1.8 Organisation of the study
This study is organized into five chapters;
The first chapter looks at the introduction and general overview of the study.
This gives the background into the study, the problem statement, the
objective of the study and methodology used.
The second chapter discusses the literature review of the study and looks at
an objective view of SME financing schemes in Ghana.
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The third chapter focuses on the methodology of the research and analysis of
data.
The fourth chapter contains analysis and discussion of our findings
The fifth chapter draws our conclusion to the study, provides
recommendations, and details the contribution of the research findings to the
general body of knowledge.
1.9 References
‘Canadian Venture Capital Activity; An analysis of Trends and Gaps, (1996-
2000)’.
(http://www.pme-prf.gc.ca/eic/site/sme_fdi-prf_pme.nsf/eng/h_01305.html)
Gesellschaft Für Technische Zusammenarbeit (GTZ),(2001) ‘Promotion of
Small and Micro Enterprises Financial Sector Market Study’, Republic Of
Ghana Final Report.
Mensah S. (2004), ‘A review of SME financing schemes in Ghana’, presented
at the UNIDO regional workshop on financing Small and Medium Scale
enterprises, Accra, Ghana.
Ruhnka J.C and Young J.E. (1987), ‘A venture capital model of the
development process for new ventures’, Journal of Business Venturing,
volume: 2, issue: 2, pp: 167-184.
Venture Capital Trust Fund Act, 2004 (Act 680)
‘Venture Capital Financing’ (http://en.wikipedia.org/wiki/venture_capital)
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CHAPTER 2
2.0 A REVIEW OF LITERATURE ON VENTURE CAPITAL ACTIVITY
2.1 Introduction
SMEs form about 75% of the membership of the Association of Ghanaian Industries (AGI),
(Ablordeppey, 2009). According to some estimates, every 10% of growth by the SME sector
translates in the creation of 45,000 jobs. A major problem that has stymied the growth of
small scale enterprise over the years is the paucity of entrepreneurial finance. Funds managed
by National Board for Small Scale Industries (NBSSI) and the District Industrialisation
Programme (DIP) have been established to aid small businesses. However, for many SME
owners, personal savings (usually inadequate) remain the only option. This problem has
created a situation where many businesses remain small businesses and never make the
transition to large scale operations.
A competitive banking environment has helped to a certain extent. Now many banks have
SME banking divisions and offer financial services dedicated to SMEs. Term loans and trade
financing provided by banks have proved expensive for many entrepreneurs; the high-risk
profile of a high-growth SME is just incompatible with conventional financing arrangements.
So while informal equity (consisting of personal savings, grants from friends and families
etc.) is typically inadequate, bank credit has proved too costly for many growing enterprises.
The emerging venture capital (VC) industry in Ghana fills this equity financing gap – risk
capital options for promising firms have now been increased. This review examines scholarly
literature on the nature, trends and processes of VC financing and investing; public policy
and government action in relation to VC and the factors which impact on the flow of funds
between finance companies and SMEs.
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2.2 Venture Capital – An Overview
Venture Capital according to the National Venture Capital Association (NVCA) of Canada is
a long-term, hands-on equity investment in privately held, high-growth-potential companies,
initiated and managed by professional investors. Black and Gilson (1998) however define
“venture capital,” consistent with American understanding, as an investment by a specialised
venture capital organisation in high-growth, high-risk, often high-technology firms that need
capital to finance product development or growth and must by the nature of their businesses,
obtain this capital largely in the form .of equity rather than debt. This excludes “buyout”
financing that enables a mature firm’s managers to acquire the firm from its current owners.
Wikipedia’s definition of venture capital is consistent with that given by the NVCA(Canada),
but adds that venture capital investments in these potentially high-growth companies are
undertaken in the interest of generating a return through an eventual realisation event such as
an IPO (Initial Public Offering) or trade sale of the company. It further states that venture
capital investments are generally made as cash in exchange for shares in the invested
company. It should be noted that for the purposes of our study the terms ‘venture capital’ and
‘private equity’ are used interchangeably.
Venture capital typically comes from institutional investors and high net worth individuals
and is pooled together by dedicated investment firms. A venture capitalist (also known as a
VC) is a person or investment firm that makes venture investments, and these venture
capitalists are expected to bring managerial and technical expertise as well as capital to their
investments. Venture capitalists according to Gompers and Lerner (1996) finance these high-
risk, potentially-high reward projects, purchasing equity stakes while the firms are still
privately held. Venture capitalists have backed many high-technology companies including
Microsoft, Intel, Cisco Systems, Lotus and Genentech, as well as a substantial number of
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service firms. Whether the firm is in a high or low-technology, venture capitalists are active
investors. They monitor the progress of firms, sit on board, and mete out financing. VCs
retain the right to appoint key managers and remove members of the entrepreneurial team. In
addition, venture capitalists provide entrepreneurs with access to consultants, investment
bankers and lawyers.
2.3 Venture Capital Financing – Nature and Trends
First of all, VC investors generally focus on specific industries (see among others Gompers
1995, Amit et al. 1998, Bottazzi and Da Rin 2002). Due to their sectoral specialization, they
allegedly develop context-specific screening capabilities that make them able to judge quite
accurately the commercial value of entrepreneurial projects and the entrepreneurial talent of
the proponents (Chan 1983, Amit et al. 1998). Therefore, they are able to deal effectively
with the adverse selection problems that would otherwise prevent great hidden value firms
from obtaining the financing they need. In turn, relaxation of financial constraints leads to
higher firm growth.
Secondly, VC firms are no silent partners (Gorman and Sahlman 1989, Barry et al. 1990). On
the one hand, they actively monitor portfolio companies. For instance, Kaplan and Strömberg
(2003) show that VC firms control 41.4% of the seats of the board of directors of the US VC-
backed companies that are considered in their study; in 25% of the companies they control
the majority of the board seats. Bottazzi et al. (2004) document that in 66% of the deals of
European VC firms the VC investor obtained one or more seats of the board of the
participated company. Moreover Lerner (1995) highlights that the number of VC investors
who sit in the board of directors is more likely to increase between two financing rounds if
during the same period the top manager of the participated firm is replaced, that is in
situations where monitoring is most important. On the other hand, VC investors make use of
specific financial instruments and contractual clauses (e.g. stage financing) that protect their
investments from opportunistic behaviour on the part of entrepreneurs and create high
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powered incentives for them (Sahlman 1990, Gompers 1995, Hellmann 1998, Kaplan and
Strömberg 2003).
Thirdly, VC investors allegedly perform a key coaching function to the benefit of portfolio
firms (Gorman and Sahlman 1989, MacMillan et al. 1987, Bygrave and Timmons 1992,
Sapienza 1992, Barney et al. 1996, Sapienza et al. 1996, Kaplan and Strömberg 2003). In
fact, they provide advising services to portfolio companies in fields such as strategic
planning, marketing, finance and accounting, and human resource management, in which
these firms typically lack internal competencies. Accordingly, Hellmann and Puri (2002)
document that VC investors favor the recruitment of external managers, the adoption of stock
option plans, and the revision of human resource policies by portfolio firms, thus contributing
to their managerial “professionalisation”. Bottazzi et al. (2004) show that European VC firms
helped portfolio companies in recruiting outside directors and senior managers in 40.8% and
48.4% of the deals they analyze, respectively. Moreover, portfolio companies take advantage
of the network of social contacts of VC investors with potential customers, suppliers, alliance
partners, and providers of specialized services like legal, accounting, head hunting, and
public relation services (Lindsey 2002, Colombo et al. 2006, Hsu 2004).
Lastly, VC financing signals the good quality of an entrepreneurial business to third parties;
therefore VC-backed companies find it easier to get access to external resources and
competencies that would be out of reach without the endorsement of the VC (Stuart et al.
1999). In accordance with the existence of a “certification effect”, Megginson and Weiss
(1991) found that US VC-backed IPOs exhibit smaller under pricing than non VC-backed
ones that are matched by sector and IPO size. Nonetheless, it is important to acknowledge
that the agency relation between the VC investor and the entrepreneurs of portfolio
companies may engender conflicts, leading to a deterioration of the performance of these
latter companies. In fact, entrepreneurs and external investors may have different strategic
visions; disagreements may absorb the entrepreneurs’ effort and attention to the detriment of
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the pursuit of business opportunities. Even if no conflict arises, the need of VC investors to
monitor managerial decisions may increase bureaucracy and formalisation of decision
processes, hampering flexibility and the ability of firms to timely grasp business
opportunities.
The VC financing process involves two distinct, sequential steps: fund raising and
investment.
2.3.1 Venture Capital Fundraising Process
Various factors may affect the level of commitments to venture capital organisations.
Poterba (1989b) argues that many of the changes in fundraising could arise from
changes in either the supply of or the demand for venture capital. For example
decreases in capital gains tax rates might increase commitments to venture capital funds
not through increases in the desire for commitments to new funds by taxable investors
but rather through increases in the demand for venture capital investments when
workers have greater incentives to become entrepreneurs. Gompers and Lerner (1997)
found out that most venture organisations raised money either through closed-end funds
or Small Business Investment Companies (SBICs), state-guaranteed risk capital pools
that proliferated during the 1960s. According to them, while the market for SBICs in
the late 1960s and the early 1970s was strong, incentive problems led to the collapse of
the sector. Even so, the annual flow into the venture capital fund during the first three
decades never exceeded a few hundred million dollars and was substantially less.
The sources of capital for VC funds usually establish investment criteria for each fund.
These criteria can be either general or specialized, and tend to reflect the investment
strategies and risk appetites of the providers of capital. In Ghana and other countries,
the main sources of capital are:
Small individual investors, attracted by federal and provincial tax incentives provided
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through Labour-Sponsored Venture Capital Corporations (LSVCCs), which continue to
play a significant role in the VC industry; Wealthy individual investors, trust and
endowments, diversifying their investment portfolios by funding private independent
VC firms; Chartered banks, which extend their SME financing activities by funding
subsidiary VC firms; Industrial corporations that fund subsidiary VC firms to attract
and develop new technologies in their sectors; Pension funds such as the Social
Security and National Investment Trust (SSNIT) looking for investments to match their
long-term liabilities, either by funding private-independent VC firms or by making
direct investments through their own VC firms; Insurance companies such as SIC
Financial Services Ltd., a subsidiary of the State Insurance Company; Mutual funds
and other money managers that invest modestly in VC to diversify their portfolios.
Other forms of finance provided in addition to venture capitalist equity include:
Clearing banks, Merchant banks, Finance houses and Factoring companies. Mezzanine
firms provide loan finance that is halfway between equity and secured debt. These
facilities require either a second charge on the company's assets or are unsecured.
Because the risk is consequently higher than senior debt, the interest charged by the
mezzanine debt provider will be higher than that from the principal lenders and
sometimes a modest equity will be required through options or warrants. It is generally
most appropriate for larger transactions.
2.3.2 Venture Capital Investment Process
The investment process, from reviewing the business plan to actually investing in a
proposition, can take a venture capitalist anything from one month to one year but
typically it takes between 3 and 6 months. There are always exceptions to the rule and
deals can be done in extremely short time frames. Much depends on the quality of
information provided and made available.
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2.4 The Flow of Venture Capital – Determinants of Venture Capital Investments
The size of the venture capital investments1 differs from country to country. In Canada for
example, amounts invested have increased by over 139 percent from a little over $1 billion in
1996 to $ 2.5 billion in 2002 (with a peak of 5.8 billion in 2000)2.
As at 2004, the value of investment portfolios held by private equity funds was €20,136.2
million in Germany, €25,539.5 million in France and €59,814 million in the U.K3. There is a
lack of scholarly literature and data on venture capital investments in SMEs in Ghana. Pearce
and Robinson (2009) classified the various environments affecting business, SMEs inclusive,
as the remote, industrial and operating environments. This review will focus on operating-
level factors which affect the flow of venture capital from firms to SMEs.
2.4.1 Factors in the Remote Environment.
The remote environment comprises factors that originate beyond and usually
irrespective of, any single firm’s operating situation; economic, social, political,
technological factors, etc. (Pearce and Robinson, 2009). Economic factors which affect
VC would include the overall savings rate which determines the amount available for
investment within an economy. Examples of Political factors which would affect VC
are government policies and taxation in relation to VC. In OECD (1996), rapid
economic growth in the high-technology industry in South-East Asia was attributed to
government venture capital initiatives.
___________________________________________________________
1 ‘Investment’ here refers to amounts invested in SMEs (investee companies) as opposed to investments in VC funds (funds raised)
2 Data was obtained from the Macdonald & Associates Ltd. – www.canadavc.com
3 Data was obtained from the European Private equity and venture capital association (EVCA) –www.evca.com
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2.4.2 Factors in the operating environment
The operating environment also referred to as the task or competitive environment
comprises the factors in the competitive situation that affect a firm’s success in
acquiring needed resources or in profitably marketing its goods and services (Pearce
and Robinson, 2009). Factors such as competitive situation, customer profile and a
firm’s human resources are considered operating-level factors and are critically
considered in the VC investment process.
In Hisrich and Jankowicz (1990), three basic constructs are identified as the major
determinants of VC investments; concept, management and returns
Concept entails four main elements. A good concept must; involve a new business idea
(product, service or retail concept); represent a significant earnings potential; offer a
substantial competitive advantage and have reasonable overall capital requirements.
Management is also an essential consideration. VC finance companies want see
managers who exhibit personal integrity and have a convincing track record.
Management is expected to possess the necessary experience and competence to drive
performance while identifying and mitigating risks (Fried and Hisrich, 1994).
Returns comprise three main components. Firstly VCs expect the investment to provide
them with an opportunity for exit as returns are only realised through a public offer, a
sale of the company or a buyback of the investment by the investee company.
Secondly, the investment must offer the potential for a high rate of return. Hurdle rates
internal rates of return are in the 30%-70% range (Fried and Hisrich, 1994). Finally, the
venture must also offer the potential for a high absolute rate of return. In Ljungqvist
and Richardson (2003), VC investments were found to generate returns in excess of 5
to 8 times the initial investment. One interpretation offered this magnitude of returns is
that a return on a VC investment typically represents a compensation for holding a 10
15
year illiquid investment. Venture capital is risk capital, the returns realised must
therefore be commensurate with the inherently risky and illiquid nature of the
investment (Cochrane, 2001). Evidently even though an SME with a unique product or
idea and tremendous market potential can attract VC investment (Gompers, 2001),
finance companies consider several factors before any funds are committed to a
venture.
Some distinctive characteristics of VC-financed SMEs include4;
High-growth orientation that involves rapid potential and demonstrated growth in
sales and market share, based on competitive advantage and dominant market
position.
An International orientation that includes strong potential to penetrate foreign
markets and rapid growth in exports or foreign business operations.
High research and development (R&D) spending to develop unique products
with varied applications, which is required to maintain rapid sales growth and high
profit margins in domestic and foreign markets.
Ownership structures that provide for approximately one-third ownership
holdings by the initial venture capitalists (generally up to a maximum of 50
percent), follow-on venture capitalists and founders.
2.5 Government action in relation to venture capital
According to Lerner (1998), economic analysis identifies informational asymmetries and
social returns as two major reasons for the involvement of government in venture capital.
________________________________________
4. Data was obtained from the Canada Venture Capital and Private equity association (CVCA) – www. cvca.ca
16
Lerner suggests that for some enterprises, social returns exceed private returns and it these
firms that attract funds from government venture finance programmes. It is worthy to note
that public policy responses often tend to focus on engendering sustained economic growth
rather than just profit maximisation in the medium to long term which is the primary
motivation for private venture capitalists. Much of the growth in high-technology firms in
nations such as Israel, Singapore and Taiwan has been attributed to government venture
capital initiatives (OECD, 1996).
2.5.1 Different Models of Government Intervention
Papadimitrious and Mourdoukoutas (2002) identify different public policy approaches
to bridging the start-up equity-financing gap. Three major models or approaches are
defined. The indirect or ‘passive’ approach adopted by the U.S government, the catalyst
approach which is less indirect practiced by Israel and the Irish strategy of government
as an active investor. The three models show the progressive levels of governmental
participation in venture capital financing.
2.5.2 Policy initiatives in Ghana – The Venture Capital Trust Fund
In November 2004, the Venture Capital Trust Fund (VCTF) was established under Act
6805. The only publicly funded VC fund in Ghana presently, it probably represents
government’s largest intervention in bridging the SME equity financing gap. The object
of the fund is to provide financial resources for the promotion of venture capital
financing for small and medium scale enterprises in the economy and also to stimulate
the emergence of a sustainable privately owned venture capital industry in Ghana5.
_________________________________________
5. Data was obtained from the Venture Capital Trust Fund (VCTF) - www.venturecapitalghana.com
17
The fund does not directly finance businesses, instead it forms debt, equity and quasi-
equity partnerships with VCFCs who then build and maintain investment portfolios.
Although any viable enterprise may be considered, the fund’s investment focus is
restricted to certain priority sectors specified by government economic policy. As at the
time of inception, the priority sectors identifies were the pharmaceutical, ICT, tourism
and agro-processing industries. These sectors may benefit from about 55% of the fund.
The remainder is available for other business ventures. The main source of financing
for the fund was 25% the National Reconstruction Levy which was phased out in 2007.
Other sources include monies as earned by the fund in pursuance of its functions and
returns which accrue to the fund from any investment undertaken by the Board (Act
680). The fund is managed by a 9 member board of trustees appointed by the President
in Consultation with the Council of State.
Day-to-day administration of the trust fund is carried out by the Secretariat which is
headed by an administrator who is a full member of the board5. Through the VCTF, the
government has seemingly adopted the ‘catalyst approach’ to the development of
venture financing.
2.6 Issues in the Venture capital market – The Equity gap
According to UNIDO (1999), the provision of equity capital has a place in the financing of
small businesses in Africa but it can only fill a financing 'niche' which might be called 'the
equity gap' to generate an adequate balance between debt and equity. Most venture capitalists
will not invest principally in small enterprises, since high return opportunities are relatively
few; risks are high and 'exits' very difficult. In western countries, such investments take place
in smaller companies, to finance the initial concept of a business, product development,
18
expansion or to prepare a company for a public offering, typically in innovative or 'high-tech
fields’.
In the African context, it is hard to find such cases, though competitive advantages in the
low(er)-technology and service sectors with export potential could provide VC opportunities.
Agro business projects might also offer opportunities. As an indication of the risky nature of
venture capital in smaller firms in developed countries, the statistics usually quoted are that
20-30% of investments end in total losses, around 40% are survivors but with little growth
prospects or hopes of profitable assets sales. Only about 20% (at the most 30%) are successes
in which substantial returns and profits are made, often enough to cover the losses sustained
in the others. There is therefore the need to assess the potential risk (liquidity risk) and
returns of venture capital financing by the VCFC in Ghana, in light of the conditions for
offering and participating in the SMEs capital.
2.6.1 Assessing Venture Capital Return
A natural way to estimate venture capital returns is to examine the returns of venture
capital funds, rather than the underlying projects. This is not easy either. Most venture
capital funds are organized as limited partnerships rather than as continuously traded or
even quoted entities. Thus, one must either deal with missing data during the interim
between investments and payout, or somehow mark the unfinished investments to
market. Bygrave and Timmons (1992) found an average internal rate of return of 13.5%
for 1974-1989. The technique does not allow any risk calculations. This brings into fore
the issues in determining liquidity risk.
2.6.2 Assessing venture capital liquidity risk
The decision to invest in an SME by a VCFC is highly difficult one with adverse
selection risk. Venture capitalists (“VCs”) invest in small private growth companies
19
that typically do not have cash flows to pay interest on debt or dividends on equity.
VCs invest in private companies over a period that generally ranges from 2-7 years
prior to exit. As such, VCs derive their returns through capital gains in exit transactions.
IPO exits typically provide VCs with the greatest returns and reputational benefits to
venture capitalists (Gompers, 1996; Gompers and Lerner, 1999, 2001).
Liquidity risk in the context of venture capital finance therefore refers to exit risk,
particularly IPO exit risk. That is, liquidity risk refers to the risk of not being able to
effectively sell exit and thus being forced either to remain much longer in the venture or
to sell the shares at a high discount. The risk of not being able to effectively exit an
investment is an important reason for why venture capitalists require high returns for
their investments (Lerner, 2002; Lerner and Schoar, 2002). It is therefore natural to
expect that exit market liquidity affects VCs’ incentives to invest in different types of
entrepreneurial firms.
2.6.3 Innovation, Growth and Development prospects for SMEs
Porter (1990) defines innovation as «an attempt to create competitive advantage by
perceiving or discovering new and better ways of competing in an industry and
bringing them to market». Put briefly, innovation is the commercialization of new ideas
(Simmie, 2006). In 1996 little was known about the extent of innovation in SMEs. At
that time most facts and figures covered large firms but not much was known about
SMEs. At that time, ‘innovation’ was not a word used frequently; ‘technology’ and
‘R&D‘(Research & Development) received the most consideration. EIM (Executive
Interim Management) completed a study in 1996 to gain more insight into what
innovation means in small businesses, and how innovativeness can be measured in
practice. The first innovation report was published to present SME innovation figures.
Innovation in industrial sectors was measured using 13 indicators distinguishing
20
between inputs, processes and outputs of innovation. These indicators visualized the
method and organization of innovation in SMEs is better than traditional indicators
such as R&D-expenses and numbers of patents. The foreword in the report makes clear
that the publication of SME-figures was not as straightforward as it might seem to be
nowadays (EIM, 2009).
2.6.4 Bottlenecks in VC Financing
According to Fritsch and Schilder (2006), interviews with 85 German investors,
indicates, however, that the importance of closeness and proximity between investor
and company is widely overestimated in the literature. A conclusion from this survey is
therefore that the absence of venture capital investors in an area does not represent a
bottleneck for innovative entrepreneurs in Germany. Fritsch and Schilder conclude that
from the investors’ point of view the biggest bottleneck is simply the existence of
sufficiently good investment opportunities.
2.6.5 Growth and Development Prospects of VC – financed SMEs
Opinions vary about how successful VCs are in allocating resources. Chan (1983)
argues that the presence of a VC encourages efficient capital allocation. Amit, Glosten,
and Muller (1990a, p.110), though, are more critical, stating: Under the current
institutional structure of the venture capital industry, the most promising entrepreneurs
will not seek venture capital financing, and are likely to make slower progress in the
development and commercialization of emerging technologies. Further, those
entrepreneurs that are backed by venture capital are less likely to succeed in developing
their ventures because of their relatively low ability.
21
2.7 Conclusion
From the literature reviewed, venture capital can be summarised as value-added finance, as
venture capitalists not only provide investment capital but also business development services
such as marketing, strategy development and financial management. While VC financing as a
measure to bridge the entrepreneurial equity financing gap has been extensively researched
and documented in other countries, there is a paucity of information regarding the same in
Ghana. The nature and trends; the major factors which impact on the flow of funds between
VC finance companies and SMEs; and the general bottlenecks in the industry are largely
unknown. This study seeks to reduce this knowledge gap and contribute to the body of
knowledge on SME financing in Ghana.
2.8 References
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Tuesday, January 13, pp: 33.
2. Black, B. S., and Gilson, R.J.(1998), “Venture capital and the structure of capital
markets: banks versus stock markets”. Journal of Financial Economics 47, 243-277.
3. Amit, R., L. Glosten, and E. Muller (1990a), "Does Venture Capital Foster the Most
Promising Entrepreneurial Firms?" California Management Review (Spring), 102-111.
4. Amit, R., Brander, J., Zott, C., (1998). “Why do venture capital firms exist? Theory
and Canadian evidence”, Journal of Business Venturing 13, 441–466.
5. Barry, C.B., Muscarella, C.J., Peavy, J.W., Vetsuypens, M.R., (1990). “The role of
venture capital in the creation of public companies”, Journal of Financial Economics
27, 447–471.
22
6. Black, Bernard S., and Ronald J. Gilson (1997), “Venture Capital and the Structure of
Capital Markets: Banks versus Stock Markets,” Journal of Financial Economics
forthcoming
7. Bottazzi, L., Da Rin, M.(2002), “Venture capital in Europe and the financing of
innovative companies”, Economic Policy 17, 229-269.
8. Bottazzi, L., Da Rin, M., Hellmann, T. (2004), “Active financial intermediation:
evidence on the role of organizational specialization and human capital”, Finance
working paper No. 49-2004, ECGI.
9. Bygrave, William D. and Jeffrey A. Timmons(1992), “Venture Capital at the Cross-
Roads” Boston, Harvard Business School Press
10. Canadian Venture Capital and Private Equity Association (www.cvca.com)
11. Chan, Y.S., (1983). “On the positive role of financial intermediation in allocation of
venture capital in market with imperfect information”, Journal of Finance 35, 1543-
1568
12. Cochrane J. (2001), "The Risk and Return of Venture Capital", mimeo Chicago
Graduate School of Business.
13. Colombo, M.G., Grilli, L., Piva, E., (2006). “In search for complementary assets: the
determinants of alliance formation of high-tech start-ups”, Research Policy 35,
1166-1199.
14. EIM (2009), “Ten years entrepreneurship policy: a global overview”, January 2009
15. European Private equity and venture capital association (EVCA) (www.evca.com)
16. Fried V. H. and Hisrich R.D (1994), “The Venture Capitalist: A Relationship
Investor”, California Management Review
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17. Fritsch M. and Schilder D. (2006),“Does Venture Capital Investment Really Require
Spatial Proximity?”, Discussion Papers on Entrepreneurship, Growth and Public
Policy, Technical University of Freiberg.
18. Gompers, P. (1995), “Optimal Investment, Monitoring, and the Staging of Venture
Capital,” Journal of Finance 50 (5), pp. 1461-1489.
19. Gompers, P. (1996), “Grandstanding in the Venture Capital Industry,” Journal of
Financial Economics 42, pp: 133-156
20. Gompers, Paul A., and Lerner, J. (1999), “The Venture Capital Cycle”, MIT Press.
21. Gompers, P. (2001), ‘A Note on the Venture Capital Industry’, Harvard Business
School, Boston.
22. Gompers, Paul A., and Lerner J. (1996), “The use of covenants: An analysis of
venture partnership agreements”, Journal of Law and Economics 39, 463-498.
23. Gompers, Paul A., and Lerner J. (1997), “Risk and Reward in Private Equity
Investments: The Challenge of Performance Assessment”, Journal of Private Equity
(Winter 1997): 5-12.
24. Gompers, P.A., and Lerner J. (2001), “The Money of Invention: How Venture
Capital Creates New Wealth”. Cambridge: Harvard Business School Press
25. Gorman M. and William A. S. (1989), “What do Venture Capitalists Do?,” Journal
of Business Venturing 4, pp. 231-248
26. Hellmann, T. (1998), “The allocation of control rights in venture capital contracts”,
Rand Journal of Economics 29, 57– 76.
27. Hellmann, T., Puri, M. (2002), “Venture capital and the professionalization of start-
up firms: empirical evidence”, Journal of Finance 57, 169-197.
24
28. Hisrich D. and Jankowicz A.D (1990), ‘Intuition in Venture Capital Decisions: An
Exploratory Study’, Journal of Business Venturing , January, pp 49-62
29. Hsu, D. (2004), “What do Entrepreneurs Pay for venture capital Affiliation?”
Journal of Finance 59.
30. Kaplan, S. And Stromberg P. (2003), “Financial contracting theory meets the real
world: an empirical analysis of venture capital contracts”, Review of Economic
Studies 70, pp: 281-315.
31. Lerner, J. (1995), “Venture Capitalists and the Oversight of Private Firms,” Journal
of Finance 50, pp: 301-318
32. Lerner J. (1998), The Long-run Impact of the SBIR Program
33. Lerner, J. (2002), “Boom and Bust in the Venture Capital Industry and the Impact on
Innovation”, Federal Reserve Bank of Atlanta Economic Review 4, pp: 25-39.
34. Lerner, J., and A. Schoar (2002), “The Illiquidity Puzzle: Theory and Evidence from
Private Equity,” forthcoming in the Journal of Financial Economics.
35. Lerner, J. (1995). “Venture Capitalists and the Oversight of Private firms”, Journal
of Finance 50, pp: 301-318.
36. Lindsey, L., (2002). “The venture capital Keiretsu effect: an empirical analysis of
strategic alliances among portfolio firms”, Working paper, Stanford University
37. Ljungqvist, A. and Richardson, Matthew P. (2003), “The Cash Flow, Return and
Risk Characteristics of Private Equity”, Finance Working Paper No. 03-001, NYU.
38. ‘Macdonald & Associates Ltd.’ (www.canadavc.com)
25
39. MacMillan, I.C., Kulow, D.M., Khoylian, R. (1989), “Venture capitalists’
involvement in their investments: extent and performance”, Journal of Business
Venturing 4, pp: 27-47
40. MacMillan, I.C., Zemann L., and Subbanarasimha P.N. (1987), "Criteria
Distinguishing Successful from Unsuccessful Ventures in the Venture Screening
Process," Journal of Business Venturing (Spring), pp: 123-137.
41. Megginson, W., Weiss, K. (1991). “Venture capitalist certification in initial public
offerings”, Journal of Finance 46, pp: 879-903.
42. Organisation for Economic Cooperation and Development (OECD)(1996),
Government Programmes for Venture Capital, OECD, Paris.
43. Papadimitrious S. and Mourdoukoutas P. (2002), Bridging the Start-up Equity
Financing Gap, European Business Review, Volume 14, No. 2, pp: 104-110
44. Pearce J. A. and Robinson R. B. (2009), “Formulation, Implementation and Control
of Competitive Strategy”, 11th ed., McGraw-Hill Irwin Inc. New York, NY
45. Porter, M. (1990), “The Competitive Advantage of Nations”, Macmillan, London
and Basongstoke
46. Poterba, J. (1989), “Venture capital and capital gains taxation” in: Lawrence H.
Summers (ed.), Tax Policy and the Economy 3, Cambridge: MIT Press, pp: 47-67.
47. Sapienza, H., Manigart, S., and Vermeir, W. (1996),“ Venture capital governance
and value-added in four countries”. Journal of Business Venturing, 11, pp: 439-469.
48. Sahlman, W.A., (1990). “The structure and governance of venture-capital
organizations”, Journal of Financial Economics 27, pp: 473-521.
26
49. Simmie, J. (2006). Do Clusters or innovation systems drive competitiveness? In
Asheim, Cooke and Martin, Clusters and Regional Development. London:
Routledge.
50. Stuart, T.E., Hoang, H., Hybels, R. (1999). “Interorganisational endorsements and
the performance of entrepreneurial ventures”, Administrative Science Quarterly 44,
pp: 315-349.
51. Oyen L. V. and Levitsky J. (UNIDO) (March 1999), “Financing of Private Enterprise Development in Africa”, Working Paper No. 2, commissioned by the Small and Medium Industries Branch.
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27
CHAPTER 3
3.0 METHODOLOGY
3.1 Introduction
This chapter details the overall strategy employed in the survey dilating on matters such
as the data collection methods, the target population, the sample size and sampling
technique, the method of analysis and the limitations of the study methods. The study
adopts a qualitative sampling approach; however some quantitative tools are used in data
analysis.
3.2 Data Collection
Primary and secondary data were used for data collection. Primary data were obtained
through survey questionnaires and interviews, and secondary data were collected from
sources such as the internet, library search and indexing, magazines and journals.
To avoid problems associated with conducting interviews, interviewees were given prior
notice. The investment coordinator of the Trust Fund was interviewed in this manner.
Questionnaires were used for the VCFCs and the VC SMEs. The respondents consisted
mainly of managers in finance and accounting roles for the SMEs and fund managers for
the Venture Capital Finance Companies and the Trust Fund. While questionnaires were
personally administered to the managers in the SMEs, the questionnaires for the VCFCs
were self-administered. The questionnaires for the VCFCs demanded greater breadth and
depth of information, and therefore the investment managers needed more time. Some
fund managers were interviewed in order to gain supplementary information.
28
3.3 Sampling
3.3.1 Populations
Sample populations were chosen from each of the two target populations below.
The target populations were;
Venture Capital – Financed SMEs (VC SMEs).
Venture Capital Finance companies (VCFCs).
The investment coordinator of the Venture Capital Trust Fund was also
interviewed.
3.3.2 Sample Size
The venture capital industry in Ghana is an emerging one, and as at the time of the
research, 5 finance companies were identified. 4 of them were surveyed, yielding a
sampling ratio of 80%.
The small number of VCFCs gives an indication of the number of VC SMEs. Based
on information gathered from all the VCFCs, the total VC SME population was
estimated at around 22. This list of VC SMEs constituted our sampling frame. Out
of this estimate, 9 VC SMEs were surveyed yielding a sampling ratio of
approximately 41 %.
3.3.3 Sampling Technique
For the purposes of this study, purposive sampling, a non-probability sampling
technique was adopted. Purposive sampling requires the selection of cases (VCFCs
and VC SMEs in our case) that are especially informative. These cases are then
investigated in depth. The respondents were selected with a clear purpose in mind.
The central purpose in our case was to locate VC SMEs which were microcosmic
29
of the venture capital industry in Ghana. To that end, the sample of VC SMEs was
drawn from across all VCFC portfolios and can therefore be considered to be fairly
representative.
3.4 Data Analysis
Two software packages were used; the Statistical Package for the Social Sciences
(SPSS) and Microsoft Excel. Quantitative analysis focused on;
Statistical analysis to ascertain;
The demographics of VC SMEs
The demographics of VCFCs
Distribution of VC SMEs by size, stage of growth, industry etc.
The proportion of successful SME – applicants
A financial analysis was performed to determine;
The types of VC invested
The investment preferences of Fund managers
Qualitative analysis;
Extracted key trends and defining strengths and weaknesses of VC activity
Ghana
Identified gaps and bottlenecks in the financing process
Examined the relevance of the government policy framework for VC financing
within the context of the current data obtained.
30
3.5 Limitations of Study Methods
Non-probability sampling techniques are subject to the biases of the researcher. All the
VC SMEs sampled were in the Greater Accra region of Ghana. Although most VC SMEs
are located in this region, samples from other geographic areas might have yielded a
more comprehensive result.
Besides this geographic limitation, research was constrained by the inadequacy of
disclosure from some VCFCs and VC SMEs. Additionally, the duration of the study
limited extensive data collection and analysis.
31
CHAPTER 4
4.0 ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Introduction
Although secondary data was used, interviews and questionnaires were the major sources of
data for this analysis. The analysis (both quantitative and qualitative) conducted in this
chapter seeks to provide the descriptive statistics and information relevant to the research
questions.
4.2 State of Venture Capital in Ghana.
4.2.1 Trends in VC Financing
This section of the analysis identifies key characteristics and trends in VC financing in
Ghana. Fund managers were asked to indicate the source of their various funds. As
illustrated in the Fig. 4a below, funds were raised from domestic and foreign sources
in approximately equal proportions.
This finding shows that the local VC market is not dominated by foreign investors.
Fund managers were also asked to indicate the nature of VC Funders, as the study
25%
50%
25%
Fig. 4a - Source of VC Funds
All of foreign origin
All of domestic origin
Predominantly of foreign origin
32
sought to investigate the extent to which institutional investors participated in VC
Financing. Fig. 4b shows that investors in VC are predominantly institutional.
Total Capital under management (TCM) is defined as the total cedi value of capital
invested and un-invested, in a private equity fund or the market as a whole. From Fig.
4c, total capital under management for all VCFCs surveyed remained at $58,500 for
2005 and 2006 and almost quadrupled to $344,800 in 20081.
____________________________________________
1. Some of the funds managed by local VCFCs have an international focus (investments aren’t restricted to
Ghana). Consequently TCM is conceivable as VC funds ‘available’ but not exclusive to Ghana.
25%
75%
Fig. 4b - VC Funders
Mostly Institutional Investors
Only Institutional Investors
$58,500 $58,500
$96,126
$344,800
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
2005 2006 2007 2008
Capi
tal u
nder
man
agem
ent
(Am
ount
s in
thou
sand
s of
USD
)
Year
Fig. 4c - Trend of total capital undermanagement
33
4.2.2 Trends in VC Investments
This part of the analysis focuses on the trends in local VC investments. As Fig. 4d
shows, there was an initial dip in investments to $1,016 (in 2006) from $10,000 (in
2005), subsequently, investments have increased since, to $8,058 in 2007 and $11,200
in 2008. VC investments over the past 4 years have averaged $7.569m. The highest
investment was $11.2 m (in 2008) and the lowest was $1,016m (in $2006).
Further analysis was performed to ascertain, the success rate - the number of VC SMEs who
qualified for financing in the years under review. This was obtained by dividing the number
of successful applicants by the total number applicants for each of the years. While Table 4a
displays the success rate, fig. 4e graphically compares the number of total SME-applicants to
the number of successful applicants.
$10,000
$1,016
$8,058
$11,200
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
2005 2006 2007 2008
VC in
vest
ed -
in th
ousa
nds
of U
SD
Year
Fig. 4d - Trend of total VC Investments
34
Table 4a - Success rate ( successful applicants as a percentage of total applicants)
Year Success Rate (%)
2005 3.1
2006 1.9
2007 2.1
2008 3.5
Average 2.7
Fig. 4e shows that the proportion of successful applicants to unsuccessful applicants is very low,
an average success rate of 2.7 % (from Table 4a). However, even this success rate is higher than
the Canadian average of less than 1%2.
____________________________________________
2. According to the Statistics Canada Study of Growth SMEs in 1996, only 5 percent of growing SMEs (about 0.04 percent
of all SMEs in Canada) would be considered potential investment targets by venture capitalists.
98 104
387
231
3 2 8 80
50100150200250300350400450
2005 2006 2007 2008
Num
ber o
f app
lican
ts
Year
Fig. 4e - Successful applicants compared to total applicants
Total applicants
Successful applicants
35
The ICT and Real estate industries received the largest VC investments (Fig. 4f).
Investments by size of industry (Fig. 4g) reveal that although significant VC
investments (33.3%) are made in small enterprises (defined here as firms with 6-29
employees), most investments (44.4%) were made in large scale enterprises (firms with
more than 100 employees).
Our Sampling frame (of 22 VC SMEs) indicated that financial services also constituted
a major area of investments. For the sake of simplicity, enterprises here (fig. 4f) were
classified using number of employees only; micro (under 5), small (6-29), medium (30-
99) and large (over 99).
44.4
11.1 11.1
22.2
11.1
05
101520253035404550
ICT
Educ
atio
n
Fina
ncia
l Se
rvic
es
Real
Est
ate
Oth
ers
Perc
enta
ge o
f SM
Es
Industry
Fig. 4f - Investment by Industry
36
Data collected (as shown in Fig.4h) indicates that VC invested was mostly (56%) in the
form of quasi-equity, which is a combination of debt and equity.
The preference for quasi-equity to pure equity may be because of benefit of the interest
and principal payments. The time horizon for a VC investment is long (usually 5 years
or more). These payments provide interim cash flow to the VC investor, minimising the
risk and duration of the investment.
11.1
33.3
11.1
44.4
05
101520253035404550
Micro Small Medium Large
Perc
enta
ge o
f SM
Es
Size of Enterprise
Fig. 4g - Investments by size of enterprise
44%
56%
Fig. 4h - Type of VC invested
Equity
Quasi-equity
37
Average deal (investment per transaction) sizes ranged from $508,000 in 2006 to $3.3m
in 2005. The average deal size per year was obtained by dividing the total VC
investment per year by the number of successful applicants for the same year. In other
words, total funds invested by the number of investments.
Although Fig. 4i shows funds invested have dropped from a high in 2005, Fig. 4e shows
that the numbers of successful applicants (or the number of investments) have increased
since 2005.
The four year (2005-2008) average for Fig. 4i is $1.562m.
Fund managers were asked to indicate the SME growth stage at which they investments were
usually made. Three categories were provided; the start-up/seed stage (defined as SMEs less
than a year old), Early stage (1 to 3 years) and Later/expansion stage (over 3 years).
As Fig. 4j indicates, most investments take place at the early stage while the expansion and
start-up share equal amounts of investments. It is to be noted that some VCFCs manage more
than one fund. Different funds may therefore be targeted towards different stages of growth.
$3,333
$508$1,007
$1,400
$0$500
$1,000$1,500$2,000$2,500$3,000$3,500$4,000
2005 2006 2007 2008
Aver
age
deal
siz
e ( A
mou
nts
in th
ousa
nds
of U
SD)
Year
Fig. 4i - Trend of Average deal size per year
38
4.2.3 The State of Government Action in relation to Venture Capital
4.2.3.1 Financing Activities - Fundraising
The single largest public intervention in the Ghanaian VC Industry to date is the
creation of the Venture Capital Trust Fund. From the data collected, the VCTF has
been provided with seed funding of GH¢22.4milion representing 25% of National
Reconstruction Levy (NRL) from 2003 to 2006. However the NRL was discontinued
at the end of 2006 fiscal year. The VCTF received a total interest income of GH¢
2,250,910 for the year 2007.
25%
50%
25%
0%
10%
20%
30%
40%
50%
60%
Star
t-up
/See
d
Early
Late
r sta
ge/E
xpan
sion
Perc
enta
ge o
f VC
inve
stm
ents
Stage of growth
Fig 4j - Investments by stage of growth
39
4.2.3.2 Investing Activities
4.2.3.2.1 Direct Investment Programme
Currently, energy is the only addition to the initial priority sectors. The VCFCs
have so far invested approximately GH¢5.8 million in: Agriculture; ICT;
Services; Financial and Manufacturing industries represented by the graph
below:
It is estimated that a cumulative benefit of approximately 858 jobs will be
created with a projected tax revenue of approximately GH¢5.9million within
the next 5years resulting from investment of the venture in those businesses.
4.2.3.2.2 Indirect Investment Program
The Trust Fund in certain circumstances engages in specific purpose financing
where it lends to a finance company or lend exclusively to participants of a
specific project. An example is the Sorghum Value Chain Project where the
VCTF provided GH¢360,000 to farmers in the Upper East, Upper West,
Northern and Brong Ahafo regions for the production of sorghum for Guinness
8%
33%
17%
25%
17%
Fig. 4k- Approved investment
Manufacturing
Agricultural
ICT
Services
Financial
40
Ghana Brewery Limited in replacement of imported barley used by the
company for its brewery processes.
4.2.3.2.3 Programs Targeted At Demand for Venture Capital
Awareness creation
The VCTF Management embarked on a nationwide Road Show in the year
2007 to create public awareness of the Trust Fund’s financing resources. The
impact of this event was immediately evidenced by an increase in business
applications seeking funding from a monthly average of 21 to 34, representing
a 62% increase shortly thereafter.
Technical Assistance Program
Venture Capital Trust Fund has established a Technical Assistance programme
to provide heavily subsidized or free business support to various Small and
Medium Scale Enterprises who have been approved for funding by the venture
finance companies. The program adopts a three-tier strategic approach to
provide services to SMEs through training/capacity building,
mentoring/matching, and contract services by business solutions all aimed at
creating efficiency in the operations of the SMEs for successful investment.
Partnerships with Additional VCFCs
As a result of partnerships with VCFCs (such as Gold Coast Securities and
Fidelity capital partners Ltd.), the Trust Fund leveraged its initial seed money
of GH¢22.4million, to bring on board an additional GH¢27.7 million, making
a total of GH¢50.1 million for investments in SMEs. Currently the total capital
41
under management stands at GH¢56.9million representing an increase of
13.6%.
4.2.3.3 Tax Incentives
Section 18 of the Venture Capital Trust Fund Act, 2004 (Act 680) states that “ a
venture capital financing company shall enjoy such tax incentives as shall be
provided in the Internal Revenue Act, 2000 (Act 592) as amended. Under the
Internal Revenue (Amendment) Act, 2007 VCFCs are allowed the following tax
incentives;
A 5 year tax holiday on corporate income
A 5 year tax holiday on dividends earned
A 5 year tax holiday on capital gains
Losses from the disposal of shares during the 5 year tax holding period can
be carried over for 5 years
For banks and other financial institutions which provide VC finance, they are
allowed;
A full deduction of the VC investment from their total income in the year of
assessment.
All the incentives enjoyed by VCFCs.
According to an investment coordinator of the VCTF interviewed, these incentive
schemes have been quite successful in stimulating partnerships with VCFCs. It is to
be noted that the tax incentives are only available to finance companies which
partner with the Trust Fund.
42
4.3 Factors which influence the flow of funds from VCFCs to VC SMEs
4.3.1 Determinants of VC investments – Initial Investment
Table 4b – Factors which determine initial VC Investment ranked in order of
importance
Percentage of VCFCs
Factor Most
Important
Second Most
Important
Third Most
Important
Fourth Most
Important
Total
Concept 75% 0% 25% 0% 100%
Returns 0% 75% 25% 0% 100%
Management 25% 25% 50% 0% 100%
International
Orientation
0% 0% 0% 100% 100%
Total 100% 100% 100% 100%
Fund managers were asked to rank the following the factors; concept, returns and
management. The foregoing factors were based on the model of Hisrich and Jankowicz
(1990). ‘International orientation’ was included by the researchers.
Given the ranking of factors in Table 4b above, concept is the first consideration,
returns the second, managerial calibre the third, and international orientation the last.
43
4.3.2 Determinants of follow-on (subsequent financing)
Venture capital financing is not a one-time transaction. It entails several rounds of
financing (up to the agreed limit) as the VC SME satisfies stated objectives. Frequently,
Key Performance Indicators (KPIs) are a performance measurement tool employed to
gauge the extent of strategic progress of a firm. These indicators are critical
performance measures for management and investors alike. They are therefore an
essential factor in determining follow-on or subsequent VC financing for an investee
company.
KPIs can be both financial and non-financial. They are usually aligned with an SME's
strategic objectives. Fund managers stressed that the type of KPIs used also depend on
the industry or business segment as factors which determine performance differ across
industries. However some KPIs, usually basic financial ratios are common to all
industries.
General KPIs
Indicators of Operating profitability
Gross profit Margin ( calculated as Gross Profit/Net Sales)
Net profit Margin (calculated as Net Income/Net Sales)
Return on Equity (Net Income/Average Total Equity)
Indicators of Operating Efficiency
Total Asset Turnover (calculated as Net Sales/Average Total Net Assets)
Fixed Asset Turnover (calculated as Net Sales/Average Net Fixed Assets)
Internal liquidity indicators (where the VC SME is leveraged)
Current Ratio ( calculated as Current Assets/Current Liabilities)
Quick Ratio (calculated as Current Assets – Inventory/ Current Liabilities)
44
Times interest earned (calculated as EBIT/ Interest expense)
As debt increases the risk associated with the investment of VCFCs, the level of debt
VC SMEs can contract is restricted – it is typically predetermined in financing
covenants.
Industry-Specific KPIs (Financial and Non-Financial)
KPIs relevant to a specific industry’s segment or strategy supplement those with a
general focus. For a Savings and Loans Company for example, a VC fund manager
would use specific financial and non financial indicators such as; Asset quality, Capital
adequacy, Assets under management, Loan loss, Customer retention and penetration.
4.4 Benefit, Problems and related issues in the Venture Capital Industry
4.4.1 The Benefits of Venture Capital
Interestingly, all VC SMEs stated that VC offered distinct benefits over other forms of
financing such as bank loans.
Table 4c Benefits of VC as per VC SME respondents
Benefits Frequency Total Percentage
Enterprise development services (EDS) 2 8 25.50%
Interest free - on debt service burden 1 8 12.50%
Access to larger funds 1 8 12.50%
Low interest/flexible payment terms 3 8 37.50%
Diversification/risk sharing 1 8 12.50%
Favourable debt terms (low interest/flexible payment terms) were the most cited
advantages of VC. This is not surprising as interest rates on the debt components of
45
quasi-equity investments average about 3%. The provision of EDS was also cited by
VC SMEs as one of the distinct advantages of VC. Interest-free private equity, larger
deal sizes (in comparison to banks), and the diversification of risk that results from
partnership with the venture capitalist were other advantages given.
4.4.1.1 Enterprise Development Services
These services take the form of management or technical support in areas ranging
from the training of managers to the establishment of accounting and internal control
systems.
As shown in Fig. 4i on the previous page, most (7 out of 8) of the VC SMEs
surveyed stated that they received management or technical assistance from the
VCFCs.
88%
13%
Fig. 4l - VC SMEs who receive EDS
EDS
No EDS
46
Most major areas of technical support were in the development of accounting,
financial reporting and internal control systems. Human resource development was
also a priority to VCFCs.
Table 4d Specific areas of assistance as per VC SMEs
Specific areas of assistance Frequency Total Percentage
Recruitment in top-level management 1 6 16.67%
Product/Service development 1 6 16.67%
Follow-on financing 1 6 16.67%
Training of management/staff 2 6 33.33%
Cost management 2 6 33.33%
Development of arithmetical/accounting control 1 6 16.67%
Financial reporting 1 6 16.67%
Increase in customers 1 6 16.67%
14%
27%
33%
13%
13%
Fig. 4m - Forms of EDS received
Strategy development and implementation
HR management and development
Accounting, Fin. reporting and ICSs
Marketing
Financial mgt. and Corporate advisory services
47
6 out of 7 VC SMEs or 85.71% stated that specific improvements had resulted from
the EDS provided. Table 4d above details specific forms of support provided by
VCFCs to investee companies.
4.4.2 Problems in Venture Capital
The risky nature of VC financing means VCFCs closely monitor the performance of
VC SMEs. Many SMEs find pre-investment evaluation and post-investment evaluation
burdensome. This is illustrated in Fig. 4n below;
From Fig. 4n, when asked if the terms of VC were demanding, 62% of SME-
respondents (5 out of 8) answered in the affirmative.
Table 4e - Problems encountered by VC SMEs
Problems Frequency Total Percentage
Constant reporting 2 5 40%
Documentation/Legal arrangements 1 5 20%
Pressure to meet targets/ KPIs 1 5 20%
It takes a long time to access funds 1 5 20%
62%
38%
Fig. 4n - Is venture capital demanding?
Yes
No
48
Constant financial reports demanded by VCFCs were a major burden to VC SMEs.
4.4.3 The Issue of a Gap
The emerging VC industry is viewed as more intervention in the equity financing gap.
The research explored the issue of whether a VC financing gap existed, that is “whether
or not existing investible funds meet the capital requirement of qualified applicants”.
Fig. 4o on the following page shows the response to that inquiry.
67% of fund managers surveyed indicated that available investible funds exceed the
capital requirements of qualified applicants. This raises the issue of a large number of
SMEs which are not investor-ready.
4.4.4 What Factors then account for the small number of VC investments?
As seen from table 4f below, all fund managers cited misconceptions about VC among
entrepreneurs as one of the bottlenecks hampering VC investments. A general lack of
awareness about VC was also given as one of the problem factors. The other factors
such as weak management, unwillingness to cede some control, poor record keeping
and corporate governance point to the general problem of SMEs who are not investor-
ready.
67%
33%
Fig. 4o VC Gap
Surplus
Neither
49
Table 4f - Factors accounting for the small number VC investments
Factors Frequency Total Percentage
Lack of awareness 3 4 75.00%
Misconceptions about VC 4 4 100.00%
Terms of VC demanding for most SMEs 2 4 50.00%
Weak SME management 2 4 50.00%
Unwillingness to share control 4 4 100.00%
Overly risk-averse investment strategies 1 4 25.00%
Poor record-keeping 1 4 25.00%
Poor corporate governance 1 4 25.00%
Lack of flexibility ( from entrepreneurs) 1 4 25.00%
Lack of potential exit opportunities 1 4 25.00%
4.4.5 Regulatory Issues
Presently, the only law which indirectly regulates VC activity is the Venture
Capital Trust Fund Act, 2004 (Act 680) which set up the VCTF. Fund management
companies are licensed as investment advisors by the Securities and Exchange
Commission. 50% of fund managers surveyed considered present legislation
inadequate and proposed the enactment of a law to directly regulate the private
equity and venture capital industry.
50% also proposed the establishment of a separate independent body to regulate
private equity and venture capital as they believed the industry had a lot of
prospects.
50
4.5 References
1. Hisrich D. and Jankowicz A.D (1990), ‘Intuition in Venture Capital Decisions:
An Exploratory Study’, Journal of Business Venturing , January, pp: 49-62
2. Venture Capital Trust Fund Act, 2004 (Act 680)
3. Internal Revenue Act, 2000 (Act 592)
4. Statistics Canada (1996), ‘A Study of Growth SMEs’ ( http://www.pme-
prf.gc.ca/eic/site/sme_fdi-prf_pme.nsf/eng/h_01305.html)
5. Venture Capital Trust Fund (2007), ‘Annual Report’, pp: 6
51
CHAPTER 5
5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
This chapter gives an overview of the analysis performed in the previous chapter. In the
following sections we provide a summary of findings and analysis and we draw conclusions
to our study on the basis of the data gathered and analysed. Additionally, we state the
contribution our research has made to the general body of knowledge and make
recommendations which may be useful to policy formulation.
5.2 Summary of Findings
5.2.1 Trends in VC Financing
From the analysis done in chapter 4, the following were realised;
VC funds were obtained mainly from local and foreign institutional investors in
almost equal amounts
The trend of total capital under management, shows VC funds are increasing (from
$58.5 in 2005 to $344.8m in 2008 – a growth of 489%) yielding an average growth
rate (from 2005-2008) of 107.6%.
5.2.2 Trends in VC Investments
Sectoral trends indicate that the Real Estate and ICT sectors are the largest recipients
of VC
Although venture capitalists typically targets high-growth-potential SMEs, in Ghana
almost half (44.4%) of the investments made since 2005 have been made in large
scale enterprises
52
The business concept of an SME is the most critical criterion in making a VC
investment decision.
5.2.3 State of Government Action
Government, through the VCTF has engaged in a variety of direct and indirect VC
investment programmes.
Various tax incentives have been provided and priority areas have been broadened to
include energy
No new major source of funding for the VCTF has been instituted to replace the
abolished National Reconstruction Levy.
5.2.4 Benefits, Problems and Issues in VC
5.2.4.1 Benefits
Among other benefits, VC SMEs were unanimous in citing the provision of
enterprise development services as a major distinct advantage of VC
All VC SMEs also regarded VC as cheaper than alternative sources of capital in the
long run.
5.2.4.2 Problems
Fund managers agree that available funds exceed capital requirements of
qualified applicants – this raises the issue of a lack of investor-ready firms
A general lack of awareness and widely held misconceptions were given by fund
managers as some of the reasons for the small number of VC investments.
The terms of VC financing are generally rigorous and the stress of constant
financial reporting was stated by finance managers (in the VC SMEs) as a problem
53
5.2.4.3 Regulatory issues in VC
Half of fund managers proposed the enactment of separate laws and the
establishment of an independent body to regulate the emerging private equity and
VC industries in Ghana
5.3. Conclusion
From the analysis carried out VC is an emerging industry with strong growth prospects. This
is evident in the increasing trend of total capital under management and investments. The
higher success rate (in comparison to Canada) probably signals the existence of even more
opportunities.
Notwithstanding the strengths noted in the above paragraph, VC in Ghana faces several
weaknesses. These include the apparent lack of investor-ready SMEs and the existence of a
weak regulatory environment. Such weaknesses present real challenges to the growth and
development of VC activity.
5.4 Recommendations
VC activity in Ghana would benefit immensely from improved governmental financial
support and a stimulating legal, policy and tax environment. Several avenues exist for further
research. Studies could be undertaken to;
Investigate the effects of tax incentivisation in private equity or venture capital
financing.
Measure the financial performance of VC funds in comparison to other long term
investments.
Measure the financial performance of VC SMEs in comparison to other SMEs.
54
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APPENDIX A – Questionnaire for VC SMEs
60
University of Ghana Business School
Department of Accounting
Dear Respondent,
This questionnaire is meant to solicit data for a study titled ‘An Appraisal of Venture Capital Activity in Ghana’. As the data collected is for academic purposes only, all responses provided will be treated with the confidentiality due them.
Section A
Company Information (Please circle where applicable)
1) To which industry do you belong?
1. Information Communication Technology
2. Manufacturing
3. Telecommunications
4. Pharmaceuticals
5. Education
6. Agriculture and Agri-business
7. Tourism and hospitality
8. Consumer products and services
9. Healthcare
10. Media
11. Financial services
12. Others (specify)………………………………………………………………………
2) In which year did your company commence business?
...................................................................................
3) Which type of venture capital did you access?
1. Equity
APPENDIX A – Questionnaire for VC SMEs
61
2. Debt
3. Quasi-equity
4) Prior to venture capital financing, what was the major type of capital for your enterprise?
1. Owner’s equity
2. Debt
3. Others (specify).............................................
5) How many people are employed in your organisation?
1. Under 5
2. 6 – 29
3. 30 – 99
4. Over 99
Section B
Benefits of venture capital
(Please circle or state where applicable)
6) Do you receive management/technical assistance from your Venture Capital Finance Company (VCFC)?
1. Yes
2. No
7) If yes, in which of the following areas?
(Please circle as many as applicable)
1. Strategy development and implementation
2. Human resource management and development
3. Accounting, financial reporting and internal control systems
4. Marketing
APPENDIX A – Questionnaire for VC SMEs
62
5. Financial management and corporate advisory services
6. Others (specify) .........................................................................................................................................................................................................................................................................................................................................................................................
8) Have there been any improvements in the areas of assistance indentified above?
1.1 Yes
1.2 No
2. If Yes, in what areas?................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................
3. For each of the areas identified in 8) 2 above, what has been the extent of the improvement (in what ways have there been improvements)?
..........................................................................................................................................
..........................................................................................................................................
..........................................................................................................................................
..........................................................................................................................................
..........................................................................................................................................
9) Does venture capital offer any distinctive benefits over traditional forms of financing such as owner’s equity, loans etc.
..........................................................................................................................................
..........................................................................................................................................
..........................................................................................................................................
..........................................................................................................................................
..........................................................................................................................................
Section C
Costs of venture capital
(Please circle and state where applicable)
1) Are the terms of venture capital financing generally too demanding?
APPENDIX A – Questionnaire for VC SMEs
63
1. Yes
2. No
2) If Yes, in what ways?
..........................................................................................................................................
..........................................................................................................................................
..........................................................................................................................................
3) As per the provisions of financing covenant, would you say venture capital is more expensive than other forms of financing in the long run?
1. Yes
2. No
This is the end of the questionnaire.
Thank you.
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University of Ghana Business School
Department of Accounting
Dear Respondent,
This questionnaire is meant to solicit data for a study titled ‘An Appraisal of Venture Capital Activity in Ghana’. As the data collected is for academic purposes only, all responses provided will be treated with the confidentiality due them.
Section A
Fundraising Activities of Venture Capital Finance Companies (VCFCs) in Ghana
(Please circle or state where applicable)
1) Which of the following best describes the source of funds under your management?
1. All of foreign origin2. All of domestic origin3. Predominantly of foreign origin4. Predominantly of domestic origin5. Approximately equal proportions of foreign and domestic funds
2) Which of the following best describes the investors whose funds you manage?
1. Institutional investors only2. Individual investors only3. Mostly institutional investors4. Mostly individual investors5. Approximately equal proportions of individual and institutional investors
3) What was the total capital under management by your VCFC as at the end of the following periods?
2005…………………………………..
2006…………………………………..
2007…………………………………..
2008……………………………………
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4) 1. Have you had any experience of angel investors in your operations in Ghana so far?(Angel investors are usually wealthy business people who invest their capital and business experience in start-ups/early stage firms)
1. Yes2. No
2. If yes, what is your estimate of the significance of their investments with respect to total investments in the venture capital industry?
1) Negligible (under 1% of total investments)2) Minimal ( 1% - 5% of total investments)3) Significant ( 6% - 10% of total investments)4) Very Significant (over 10% of total investments)
Section B
Investing activities of Venture Capital Finance Companies (VCFCs) in Ghana
(Please circle or state where applicable)
5) How many applications for venture capital did you receive in the following years (as at year end)?
2005…………………………
2006………………………….
2007………………………….
2008…………………..............
6) How many applicants received venture capital in the following years?
2005…………………………..
2006…………………………..
2007……………………………
2008……………………………
7) How much was invested as venture capital in the following years?
2005……………………………
2006…………………………….
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2007……………………………..
2008………………………………
8) What is the investment focus of your company?
1. General
2. Specific
3. Both general and specific (although certain industries are preferred, applications are welcome from any high-growth-potential enterprise)
9) If your company has a specific investment focus, what are the target sectors?
(Please circle as many as are applicable)
1. Information Communication Technology
2. Manufacturing
3. Telecommunication
4. Pharmaceuticals
5. Education
6. Agriculture and Agri-business
7. Tourism and hospitality
8. Consumer products and services
9. Healthcare
10. Media
11. Financial services
12. Others (specify)……………………………………………………………………………………………………………………………………………………………..
10) At which stage of an investee company’s growth are investments usually made?
1. start-up/seed stage (under 1 year)
2. Early stage (1 to 3 years)
3. Later stage/expansion stage (over 3 years)
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11) In making an investment, how would you rank the following 4 decision criteria in terms of their relative importance?
Concept (potential of a business idea and its competitive advantage)
Management (track record of entrepreneur, managerial competence)
Returns (earnings potential, growth potential, opportunity for exit)
International orientation (prospects of a foreign market)
(Please write in spaces provided below noting that 1 is for the most important criteriaand 4 for the least important)
1. …………………………..
2. …………………………..
3. …………………………..
4. ………………………….
12) 1. Has your company exited from any of its investments since it commenced operations?
1.1 Yes
1.2 No
2. If yes, was it because,
2.1 The investment had reached the desired maturity (exit stage)
2.2 Others (specify)
………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
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Section C
The Ghanaian Venture Capital Market
13) Which of the following explain the small number of venture capital investments?
(Please circle as many as are applicable)
1. A general lack of awareness among entrepreneurs about venture capital
2. Misconceptions among SME owners about venture capital financing
3. Inability of SMEs to satisfy the generally demanding terms of venture capital
4. Weak SME management
5. Unwillingness of SME owners to share managerial control
6. The adoption of an overly risk-averse investment approach by VCFCs
7. Others (specify) ……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..
14) In your opinion, is there a shortage or surplus in the supply of venture capital by your VCFC relative to demand by qualified applicants?
1. There is a surplus (investible funds exceed capital requirements of qualified SMEs)
2. There is a shortage (investible funds do not meet the capital requirements of qualified SMEs)
3. There is neither a shortage nor a surplus
4. Others (specify) ……………………………………………………………………………………………………………………………………............................................................................................................................................................................................................................................................................................................................................................................................................................................
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15) What is your overall assessment of the tax framework for VC in the country?
……………………………………………………………………………………..........................................................................................................................................................................................................................................................................................
16) What is your overall assessment of the policy and regulatory framework for the venture capital industry in Ghana?
1. Adequate
2. Inadequate
17) If inadequate, what improvements would you recommend?
…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….
This is the end of the questionnaire.
Thank you.
