Empirical examination of relationship between venture capital financing and profitability of portfolio companies in Uganda

Abstract

In recent times, venture capital (VC) financing has evolved as an alternative feasible funding model for young innovative companies. Existing studies focus on whether VC enhances profitability. While helpful, this body of work does not address a critical question: whether VC firms are more profitable than non-VC firms. The co-existence of both VC and non VC firms in Africa provides an opportunity to address this question. Accordingly, this paper sought to extend the understanding of the relationship between VC financing and the profitability of portfolio companies in Uganda, a rapidly growing VC market. We utilised a mixed methods approach, which involved quantitative data collected from 68 key VC stakeholders, and qualitative data collected from 16 semi-structured face-to-face interviews. The results confirm the superior performance of VC-financed enterprises when compared to non-VC-financed enterprises. The study makes a vital contribution by offering a diversified framework for enterprise success. The framework will assist VC firms in evaluating and customising funding programmes that can propel early-stage firms’ success in Uganda, and in similar emerging economies. Secondly, our results contribute to extant knowledge about recent developments in Uganda’s VC industry and how it influences the profitability trends of SMEs, also in similar emerging economies.

Venture Capital Financing as A Driver for Entrepreneurship Development in Africa. A Literature Review and Future Research Agenda

“…Many studies explored on entrepreneurship from various standpoints such as entrepreneurship and SME development (Abu Bakar et al, 2017;Kloepfer & Castrogiovanni, 2018;Melese, 2018;Hänle et al, 2022), entrepreneurship activities (Ngoma et al, 2021;Munyuki, T. and Jonah, 2022), venture capital and SME performance (Festel et al, 2015;Shava, 2018;Couto, 2020;(Kato & Germinah, 2022), observing it as a device for employment creation and poverty alleviation in emerging economies. However, studies on how VC investment can stimulate entrepreneurship development remains scarce.…”

“…After disentangling a spectrum of extant literature regarding entrepreneurship growth through a VC funding model, we discover that a growing body of evidence offers mixed conclusions (Figure 3). As seen in Figure 3, 44% of the reviewed articles largely focused exclusively on entrepreneurship and SME development (e.g., Abubaker, 2015; Kloepfer & Castrogiovanni, 2018;Möller & McCaffrey, 2021;Cruz Rincon et al, 2022;Endris & Kassegn, 2022) , this was followed by 21% of articles published exclusively about venture capital (e.g., Keuschnigg and Soren, 2004;Messica & Agmon, 2008;Iriyama et al, 2010;Groh & Liechtenstein, 2011;Portmann & Mlambo, 2013) while 18% studied VC and firm-level performance (Ajagbe & Ismail, 2014;Lechner et al, 2016;Kato & Germinah, 2022;Sriyono et al, 2021;Dai et al, 2022;(Kato & Germinah, 2022). Many of these studies are often narrowed to firm-level performance of entrepreneurship efforts, declining to describe the interaction between entrepreneurship and VC investment efforts Bruton et al, (2008).…”