Venture capital: why hasn’t it taken off as financing for SMEs?

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Small and medium-sized enterprises (SMEs) in Uganda suffer from a lack of financing for their survival and growth. This liquidity urgency, according to Ian Nvula, capital markets expert and founder of TE Markets, has motivated struggling start-ups to find alternative sources of funding to conventional bank loans, writes Nelson Mandela Muhoozi.


According to Nvula, venture capital finance is now a popular and viable financial mechanism to boost the performance of SMEs.

Although it is well established that SMEs are the engines of economic growth, boosting the national gross domestic product (GDP) and the main sector of employment in industrialized and emerging economies, Nvula asserts that the failure rate Business start-ups in Africa remain high, triggering a huge threat to entrepreneurship and sustainable development.

According to Nvula, the latter is attributable to lack of funding, the main stumbling block for the survival and development of start-ups.

Ing. Kenneth Legesi of Ortus Africa says venture capital finance in Africa is generally still low, at 1% of global venture capital finance.

“In addition, this funding is concentrated in the major economies of Kenya, Nigeria, Egypt and South Africa,” adds Legesi.

“Uganda, compared to these ecosystems, has a more nascent ecosystem, with a smaller market to serve, which makes it less attractive to venture capitalists,” Legesi said.

According to Legesi, attracting more venture capital will take time. He says that as the ecosystem matures, we need to be discovered and seen as the geography that has entrepreneurs who create world-class start-ups.

“We need to support entrepreneurs through mentoring and entrepreneur support organizations or market linkages to build their value and attract more venture capital funding,” Legesi said.

Further, he says Uganda needs more local capital, including capital anchored by the public sector and relevant laws, for example Law 12J in South Africa and the Enterprise Investment Scheme / Seed Enterprise Investment. Scheme in UK, because it gives confidence, thus attracting more foreign capital.

“For example, can our local pension funds, pension plans and investment clubs collectively allocate only 1% of their portfolios to venture capital, from NSSF alone, or $ 40 million,” suggests Legesi.

CHALLENGES

Dickson Ssembuya, director of market research and development at the Capital Markets Authority (CMA), says corporate governance was one of the main weaknesses the private sector faced when it tried to access capital through capital markets.

However, he said, as part of CMA’s current 10-year master plan which was launched recently, they are pushing for the proposal with other partners to develop what he calls “Advisory Capital.” Markets Center ‘which will provide training to companies on key aspects of corporate governance, record keeping, business strategy and plans and more, all aimed at helping grantees tap into the capital market to raise long-term financing. term for expansion and related opportunities.

“Most of our companies are not ready for external financing because they are not ready to be transparent and to develop management strategies, which is the only way to prepare our SMEs for financing,” he said. declared.

According to Ssembuya, companies look only to their families to raise capital without considering that the public can also support them through the capital markets.

INCREASE VC FUNDING

Economic transformation consultant Prof Augustus Nuwagaba describes venture capital in Uganda as small and underdeveloped, with little upstream private equity (PE) activity.

Nuwagaba says that to stimulate SMEs, private equity would have been a good alternative.

However, he says the sector is still underdeveloped and outlines the sectors in which PE / VC companies can invest such as infrastructure, energy, construction, manufacturing, pharmaceuticals, health services and health products, retail, as well as financial services.

Nvula says, “There is tremendous growth in VC-funded businesses in terms of revenue, profitability and return on assets corresponding to non-VC-funded businesses. “

“Last week, we launched the Africa Consolidated Exchange (ACEX) to enable Africans to exchange mineral products, such as gold, agricultural products, including coffee, and local currencies. The exchange is

built by TE Markets to enable people to buy and sell stocks, bonds, forex, cryptocurrency and to obtain venture capital from around the world from a single trading platform “, did he declare.

He adds: “We have our own coin (XTEMCoin) which will be used as the main medium of exchange on the platform. There has been a lot of cryptolization and massive adoption of crypto assets all

in the world and Africa is one of them. We know crypto is here to stay. And with ACEX, we hope to put Africa on the map and help companies get venture capital funds from around the world.

According to Nvula, TE Markets’ first goal is to leverage disruptive technology to solve the problem of access to finance that is currently not offered by other players in the African market.

“I realized that there was no one stop shop for trading agricultural products, especially those of African origin, stocks, indices, forex, and cryptocurrencies.

ACEX will close this gap with Africa’s first consolidated exchange

which will be synthetically indexed to almost all negotiable instruments, including African commodities, ”Nvula said.

For the venture capital market to flourish in Uganda and the developing economies as a whole, Nvula says it is incumbent on public and private sector structures to increase venture capital investment in businesses at a low cost. early stage with potential for growth.

VC banknotes in Uganda range from $ 250,000 to $ 1 million, according to a 2016 Ernst and Young report explaining why Uganda’s VC market is struggling.

VC STIMULATES GROWTH

According to the Organization for Economic Co-operation and Development 2018, venture capital finance stimulates the growth of start-ups and is a lasting solution to their lack of equity capital.

The 2015 VC4Africa report shows that an increasing number of African companies are successfully expanding their operations over time.

Research shows that 49% of companies start generating income in their first year of operation, and 44% of companies are successful in securing external capital investment.

The main investment categories are related to technology, followed by agriculture, health, finance and energy.

WHY VC FINANCING?

According to the Uganda Investment Authority (UIA), micro-SMEs are encouraged to opt for this means of equity financing, which takes longer than borrowing and is a better option as well-equipped companies are exposed to financing options. mezzanine.

According to Asher Namanya, a techpreneur, Venture Capitalists (VCs) generally remain low-key in their contribution to the success of these ventures.

Besides the capital they provide, there is also considerable trust in the founders which translates into advice, improvement for the company, exposure to relevant networks and greater knowledge for the start-up.

However, Namanya says that there is no need for a business to raise external capital if its cash flow is positive, but capital always helps to grow faster. Economic transformation consultant Prof Augustus Nuwagaba says venture capital provides significant funding, generates high returns and facilitates active participation of financiers where experienced professionals get involved in the business, resulting in major improvements.

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