chapter One

1.0 Introduction

1.1 Research background

Small and medium enterprises (SMEs) play a central role in the economies of countries around the world. This is especially true in emerging markets. They are seen as drivers of growth in both developed and developing countries. Benefits of a dynamic SME sector include:
creating employment opportunities; strengthening industrial ties; and promoting flexibility and innovation. and export revenue generation (Lerner, 2002; Rangamohan et al, 2007).

For example, in South Africa, eight out of ten new jobs are created in the SME sector (Karungu et al., 2000). In the United States, Japan, and Germany, SMEs each contribute more than half of the Gross Domestic Product (GDP) of those countries. SMEs have been the engine of growth in various developed and developing countries, but have always struggled with access to finance.

Without adequate financing, SMEs cannot compete globally, acquire technology, or expand their operations to meet their fixed and working capital needs (Wanjohi and Mugure, 2008). SMEs face significant challenges, including access to finance (Iwisi et al., 2003) and financial management skills and support (Gem report, 2003). This contributes to the slow development and high mortality rate of SMEs in Nigeria.

Access to financing is especially important for previously disadvantaged entrepreneurs who do not have access to collateral or a network of wealthy individuals who can provide angel financing. Small businesses need funding to start and expand their businesses, develop new products, and invest in new staff and production facilities. Many small businesses start with the idea that one or two of them invest their own money, and may ask family and friends for financial support in exchange for investing in the business.

However, when we are successful, there comes a time when we need more funding to continue expanding and innovating. Some SMEs often struggle because it is much more difficult to obtain financing from banks, capital markets or other lenders (Afua, 2011).

Almost every company we know started as a small business. Vodafone as we know it today was once a small spin-off from Racal. Hewlett-Packard started in a small log cabin. Google was started by young people who thought they had a good idea. Even Volkswagen was once only a small carmaker in Germany (as opposed to the world’s giant small carmakers) (Lukacs, 2005). Microsoft may be a software giant today, but it began in typical his SMB fashion as a dream developed by a young student with the help of family and friends.

Only if Bill Gates and his colleagues had a product available for sale could they launch it and seek investment from more traditional sources (Amissah 2009). The growth of SMEs has been hampered by the lack of adequate knowledge and well-structured financial markets to mobilize capital. The role of finance has been viewed as an important factor in the development of SMEs. Cook and Nixson (2000). However, venture capital has a significant impact on small and medium-sized enterprises (SMEs) in developed countries. SMEs were, and still are, the starting point for industrialization in these countries.

1.2 Problem Description

SMEs undoubtedly play an important role in economic development as they contribute to the economic development of both developing and developed countries. SMEs also contribute to job creation and entrepreneurial breeding grounds, as well as centers of investment creation and technology development. SMEs are also a source of domestic and international trade. Weak business environment, lack of managerial or technical capacity, and lack of financial resources are believed to be the main reasons for the slow development and high mortality rate of SMEs in Nigeria. Finally, while several studies have been conducted on the impact of venture capital funding on SMEs, only one study to assess the impact of venture capital funding on SME profitability in Nigeria is not always done. 1.3 Purpose and objectives of the research

The primary objective of this study is to assess the impact of venture he capital financing on the profitability of Nigerian SMEs. Other specific objectives of this study are:

1. To determine the extent to which venture capital funding affects the profitability of Nigerian SMEs.

2. Determine the factors that influence venture capital funding for SMEs in Nigeria. 3. Explore SMEs’ perceptions of venture capital as an important source of funding.

4. Provide possible solutions to problems.

1.4 Research question

1. To what extent does venture capital funding affect the profitability of Nigerian SMEs?

2. What factors influence venture capital funding for SMEs in Nigeria?

3. How do small businesses perceive venture capital as an important source of funding? 4. What are the possible solutions to the problem?

1.5 Description of research hypothesis

Venture capital funding does not have a significant impact on the profitability of Nigerian SMEs.

Venture capital funding has a significant impact on the profitability of Nigerian SMEs.

1.6 Importance of research

A study on assessing the impact of venture capital funding on SME profitability will help Nigeria in that it will enable the government to understand the role played by both formal and informal venture capital. Very beneficial for small businesses as a whole. Create a favorable environment for business activities and formulate strategies to support entrepreneurs in particular. The research also allows venture capitalists to consider the need for seed funding leading to the creation of many such ventures. These funders can also confirm strict requirements to accommodate more users of their funds. Finally, this study adds to the existing body of literature and knowledge on this research area and provides a basis for further research.

1.7 Scope of investigation

Studies evaluating the impact of venture capital funding on SME profitability are limited to Nigeria.

1.8 Research Limitations

Financial Constraints – Lack of funding tends to prevent researchers from obtaining relevant materials, literature, or information and efficiently conducting data collection (internet, questionnaires, and interviews). time limit-


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