Economy needs venture capital to grow

There are many entrepreneurs with great business ideas in Kenya who are in need of financing. But it is frustrating to have a great idea that you cannot fund.

Many start-ups lack the right capital mix and the challenge is that Kenya does not have many home-grown venture capitalists and angel investors willing to take huge risks. The resultant gap is being filled by global venture capitalists targeting companies and acquiring controlling equity in promising companies, especially in the banking and manufacturing sectors.

GUIDANCE

A venture capitalist invests in start-ups or companies using money pooled together. An angel investor, on the other hand, uses his own money to invest in start-ups. Both categories of investors not only provide funding but also guide the start-ups through their infancy till they become big companies.

Any economy needs new ventures to succeed, with innovations and increased productivity. This is where venture capitalists are vital. With their huge financial resources, they are an asset to the economies in which they choose to operate.

The United States of America and China are way ahead of other countries as far as innovation is concerned, as they have venture capitalists and angel investors funding start-ups and transforming them into multinationals.

While most traditional investors are more concerned about forecasting returns for a predetermined amount of risk, they base their investment decisions on investment appraisal techniques like internal rate of return and capital asset pricing model.

They assess the relationship between risk and the expected return of an asset or portfolio.

ADVANTAGE

These asset appraisal models assume a normalised distribution of returns, believing that expected returns should be somewhere around the middle of the normal distribution curve.

For the venture capitalist, it is all about predicting the unexpected and taking risks. The primary objective is to find opportunities that will deliver the highest returns if enabled.

Venture capitalists look for a strong management team, a large potential market and a unique product or service with a strong competitive advantage.

Great business ideas and innovations in the world such as Twitter, Microsoft, Google, Apple and Facebook have all come about because of venture capital involvement.

The government needs to encourage the growth of venture capital to solve macroeconomic problems like unemployment, low savings and low investment.

A more conducive business environment will be required to encourage venture capital investment, including formulating policies on tax, protectionism, importation limits, fiscal policies such as reduced borrowing from commercial banks by government to avoid the crowding-out effect, and foreign exchange policies. 

The writer is an economist; [email protected]