Venture Capital Financing And Growth Of Small And Medium Enterprises In Nairobi City County, Kenya

The usage of venture capital is fundamental for the growth of Small and Medium Enterprises (SMEs) for economic and political development of a nation. SMEs in emerging economies do experience growth constraints compared to those in developed countries, in terms of institutional longevity, asset base, employment and revenue generation. Growth of registered SMEs in Kenya declined from 204 SMEs in the year 1999 to 47 in the year 2015 representing 77% drop in SMEs. Subsequently, over 50% of SMEs closed their businesses at the age of 4 years in Nairobi, yet Nairobi City County contributes over 50% of the national GDP. Main reasons for stagnation and closures are poor usage, cost and lack of finance. Realizing the difficulties of accessing credit from financial institutions, SMEs in Kenya seek alternatives sources of financing such as borrowings from relatives and friends which are unreliable and unsustainable. In retrospect, venture capital financing provides an alternative credit, a fundamental financial leverage which comes along with a simple and structured financing methods, cost and management support towards the SMEs. It has remained unclear, however, whether the usage of these critical financial leverages in venture capital financing do contribute to the growth of small and medium enterprises in developing countries as desired. Therefore, the general objective of the study was to investigate the effect of venture capital financing on the growth of small and medium enterprises in Nairobi City County, Kenya. The County has a higher concentration of both venture capital firms and small and medium enterprises. This study adopted positivist research philosophy. Descriptive research design was used to study the target population of 97 small and medium enterprises which had received venture capital financing over the last five-year period from 2013 to 2017. Using a stratified simple random sampling design technique, a sample of 79 venture capital backed SMEs was selected and questionnaires administered to obtain both primary and secondary data. The response rate of 64.56% was adequate for analysis and drawing inferences. The study used multiple regression analysis. To address various research biases common in multiple regression analysis, diagnostic tests were undertaken namely: Test for normality, homoscedasticity, multicollinearity and autocorrelation. The study found out that 48.4% of variation in SMEs growth was due to venture capital financing. The unexpected finding was that cost of venture capital financing is positively related to the growth of venture capital. The study found that the more the cost of venture capital was used the higher the growth realized by SMEs. This was because cost of venture capital was found to be responsible for the development of technical and management skills critical for the internal operation of the business, development of customer focused strategies and this immensely contributed to growth of the SMEs. The study further found that financing method has a positive effect on the relationship between venture capital financing and SMEs growth. It was also found that management support has a positive effect on growth of SMEs. Financial performance was found to be a significant partial mediator while regulatory framework was not found to be a moderator in the relationship between venture capital financing and SMEs growth. Given that cost of venture capital positively influences SMEs growth, the study recommends that a cost containment-revenue growth trade off strategy be embraced by both venture capitalists and SMEs and due consideration given to cost during the budgeting process. Venture capital-backed SMEs should embrace management boards for professional advice as this is a fundamental management support. Further research should be undertaken to establish other factors that explain the 51.6% variation in SMEs growth.