Influence Of Venture Capital Financing On Corporate Governance Of Small And Medium Enterprises (Smes) In Nairobi County

ABSTRACT

The role of small and medium sized companies cannot be understated in the global economy. Though appreciated for growing the economy both in developed and developing economies, SMEs are faced with challenges including lack of proper corporate governance and lack of access to finances, among others. With lack of proper financing from sources such as venture capital, SMEs face high risk of collapse which limits social and economic growth. However, while SMEs can be adequately funded the challenge of good corporate governance does not therefore guarantee sustainability of the SMEs. Therefore, there was need for good corporate governance structures to align with the expectations of venture capital financing. In this regard, how venture capital influences and ensures good corporate governance should be put into consideration as an assurance to venture capitalists. At this stage, there was need for empirical evidence to support understanding of the influence of venture capitalist on corporate governance particularly in venture capitalbacked SMEs, yet the evidence is not adequate. It is against this backdrop in empirical evidence on the extent to which venture capital influences corporate governance that this study sought to investigate the influence of venture capital on corporate governance among SMEs in Nairobi. The study focused on three objectives: To determine the extent to which investment decision influence corporate governance in SMEs in Nairobi; To examine how management of the investment influence corporate governance in SMEs in Nairobi; and to determine the extent to which exit of venture capital influence corporate governance in SMEs in Nairobi. The study was anchored on two theories: pecking order theory and modern portfolio theory. In methodology, this study employed descriptive survey design which supported collection of quantitative data from a large population of SMEs in Nairobi. A total of 133 board members or owners and 133 managers were selected randomly from 133 SMEs. Questionnaire was used to collect data after reliability and validity test during piloting. Before data collection, ethical consideration involved acquisition of research permits as well as ensuring privacy and confidentiality of the respondents. The findings obtained were checked for completion, sorted and coded. The quantitative responses per objective were entered to Statistical Package for Social Sciences (SPSS) and analysed descriptively to yield frequencies, percentages and means before correlation and regression. Findings revealed that SMEs in Nairobi are ready to modify their governance structures as a means of allowing the capital venture to provide funds. Also, venture capitalists utilize most of the time in ensuring that management of investment is favorable to them. In addition, venture capitalists often build capacity by equipping human and technological resources. However, SMEs resist the takeover of the firms by the venture capitalists as a means of protecting their interests. Therefore, the study concluded that investment decision, management of the investment and exit of the venture capital jointly, separately and significantly influence corporate governance. The study therefore recommended that venture capitalists and SMEs owners interested in venture capital should develop clear frameworks that ensure interests of all parties are considered and respected. This will ensure that investment decisions are entrenched in a clear framework that will ensure collaboration and partnership.