Determining the venture capital investment framework for MSMEs: the perspectice from venture capital funds in Kenya

Submitted in partial fulfillment of the requirement for the degree of Masters of CommerceThe purpose of this study was to develop the venture capital (VC) investment framework for micro, small and medium enterprises (MSMEs) in Kenya. The study extended previous works done on the venture capital investment process (VCIP) from other countries to the Kenyan context. The researcher collected data in 2010 through in-depth interviews and secondary sources from seven venture capital funds (VCFs). Data were presented and analyzed using cross case matrices, figures and content analysis. The study examined the three phases of the investment process: pre-investment, investment and post-investment phases. The study explained how VCFs made their investment decisions from when they generated a deal with an MSME until the time they exited from the deal. The key results showed the differences found in the VCIP in Kenya. The results indicated that MSMEs in Kenya received more benefits at the pre-investment phase. One noted benefit was that VCFs assisted entrepreneurs to prepare business plans. VCFs also educated entrepreneurs on the VCIP thus committed more resources in the pre-investment phase. The results also showed that micro enterprises did not receive VC because of the risks involved. This was a key result because the expectation was that VC was essentially for micro enterprises. However, market and industry data on micro enterprises were often either inadequate or unavailable thus making it difficult for VCFs to make decisions on investment opportunities and increasing investment risks. The results also suggested that lack of VC associations, local VCFs and inadequate support from the Kenyan government increased the challenges faced by VCFs that attempted to invest in MSMEs in Kenya.Areas for further research include a study on the entrepreneurs’ perspective, to suggest ways to improve the VCIP. Further study is also required on why local investors have not established VCFs in Kenya. A comparative study on the success of those MSMEs financed by debt capital versus those MSMEs financed by VC could also be conducted