As it appeared in the Daily Nation on January 29th 2019
Dr. Lucy Kiruthu
In the last decade, Venture Capital (VC) firms have grown their investments in the Kenyan market to billions of dollars. As a result, these firms have a number of businesses under their portfolio. Their portfolios range from schools, to pharmacies, courier companies, advertising firms, agro-processing companies, online businesses, software developers, clean energy companies and many others. One only needs to visit the website of a VC firm in Kenya to get a grasp of the businesses under their portfolio. Most of these financing deals have been closed in the last few years pointing to a developing venture capital industry in Kenya.
VC firms are commonly known to manage pooled funds that provide financing to businesses at different stages of growth. For start-ups with high growth potential, they provide seed or early stage financing and for businesses that have shown evidence of high growth, they finance the growth. Simply stated, venture capital financing is a type of private equity. The financing is therefore offered in exchange of equity in the business. In addition to providing the financing, most VC firms promise to offer strategic advice, technical expertise and mentoring. The VC firms also often get a significant control over the business’ decisions. This is unlike other forms of businesses financing such as debt. Private equity is considered an expensive source of capital for businesses.
The history of venture capitalism dates back several decades ago. In 1946, Georges Doriot often referred by many as the “father of venture capitalism” founded American Research and Development Corporation (ARDC) one of the first venture capital firms. Doriot a former dean of Harvard Business School also founded the renowned INSEAD business school. Before going into a merger with Textron 26 years after it was founded, ARDC is said to have invested in over 150 companies. It is however not clear how many of these companies were successful. Since then, venture capitalism has spread out globally and VC firms are behind some of the world greatest innovations such as Apple.
Venture capital investments have potential for high rates of returns as well as the risk of losing the entire investment. The VC firms invest expecting high returns. These returns depend on the overall business performance. The returns are earned when the VC firm finally exits by selling back equity to the founders, selling shares to the public as part of an initial public offering or when the business goes through a merger or an acquisition. It is in the interest of the VC firm that the businesses they have invested in stay on a growth path and are profitable. Therefore, VC firms often do an in-depth analysis of their target business. Whilst some VC successfully exit within the projected period, others remain a little longer while some fail to get a return on their investment if the business fails.
As venture capitalism booms, entrepreneurs being approached by a VC or those looking out for an investor must carry out their due diligence and clearly understand what they are getting into. Despite the said advancements in Kenya’s VC industry, there are also many start-ups not within a start-up ecosystem and other entrepreneurs that remain unaware of the private equity industry and especially the nature of venture capitalism. These business owners must appreciate that many businesses globally have benefited greatly from the capital injection by VC firms while others have found themselves in an uncomfortable space.
Dr. Lucy Kiruthu is a Management Consultant and Trainer. Connect via twitter @KiruthuLucy