Data available from the Registrar General point to the fact that close to 90% of companies registered are micro, small and medium scale enterprises.
This target group has been identified as the catalyst for economic growth of the country as they are a major source of income and employment. They usually employ between 5 and 99 employees.
The issue of financing for these enterprises has been an age-old headache especially when it comes to new or startup businesses.
Small and medium-scale enterprises (SME’s) in Ghana go through torrid moments when it comes to securing funding or credit facilities for their enterprises.
Traditionally, startup businesses/SMEs have had to rely on the main stream banks or other financial institutions, the benevolence of friends or the personal savings of the entrepreneurs involved.
These means have not proven to be helpful enough. The financial institutions and banks are mostly unwilling to commit funds to such businesses and even if they do, their processes, collateral demands and interest rates cripple the businesses before they are even able to stand on their feet.
Microfinance institutions which were meant to rescue the situation are currently strangling with outrageous interest rates.
Most of them charge interest rates of between 60% and 108% per annum. This definitely cannot be a lasting solution to the pressing funding needs of these SMEs.
An innovative remedy to these funding headaches which arose in the United States of America was that of Venture Capital. This is the financial capital provided to early-stage, high-potential, high-risk, growth startup companies.
The fund then owns equity in the company thereby ensuring its growth and profitability. The fund is normally referred to as cyclical business because during the cycles, capital is first raised, invested in a business and finally after some time, returned to the investors together with interest.
This is what distinguishes venture capital from other financial intermediaries such as banks who raise, invest and return capital simultaneously.
This form of capital financing was championed initially by the likes of George Doriot, former Dean of Havard Business School, Ralph Flanders and Karl Campton.
It began initially as a way to encourage private sector investment in businesses run by soldiers who had returned from the Second World War. It should however be noted that venture capital provides equities and not loans to SMEs.
Prior to the establishment of venture capital, government had tried various lending schemes to SMEs which worked for awhile but failed to see the light of day in the end.
These included the Business Assistance Fund which operated during the 1990s, the Ghana Investment Fund in 2002 and The Export Development and Investment Fund.
The Venture Capital Trust Fund (VCTF) in Ghana was established in 2004 through an Act of Parliament (VCTF Act 680).
The Fund was intended to provide low cost financing to small and medium enterprises so as to enable them expand, create wealth and jobs. This it does by providing credit and equity financing to eligible Venture Capital Finance Companies to support SMEs and the provision of monies to support the activities and programmes for the promotion of venture capital financing as the Board may determine in consultation with the Minister.
The Fund is a revolving fund that operates in priority sectors such as agriculture, pharmaceuticals, ICT, tourism and energy with the exception of imports to sell. The Fund started with a seed funding of GHC 22.4 million from the Government of Ghana. The Fund monies are made available to investee companies through intermediary institutions called Venture Capital Finance Companies (VCFC), which are tax-exempted. The VCFCs take monies from the VCTF in the form of debt, equity or both.
The VCFCs are established in partnership with private and some other government institutions. These VCFCs are headed by Fund Managers who are basically investment bankers and advisory service providers licensed by the Securities Exchange Commission (SEC).
The VCFCs include Bedrock Venture Capital Finance Limited, which is a product of a partnership with National Investment Bank and SIC Insurance Company Limited, Gold Venture Capital Limited which is from a partnership with Gold Coast Securities Limited and Fidelity Equity Fund II, which emerged from partnership with SSNIT, Fidelity Capital Partners, FINNFUND, SOVEC, OIKOCREDIT, SIFEM and FMO.
Others include Ebankese Fund Limited, through partnership with HFC Bank, Ghana Union Assurance, WDBI AND Oasis Capital, and finally, Activity Venture Finance Company which stems from a partnership of Agricultural Development Bank and Ghana Commercial Bank Limited.
The basic requirements for accessing funds are:
1. A comprehensive business plan (business roadmap) with projections for 3 years.
2. Incorporation documents (if applicable)
3. Audited financials for the past 3 years for existing businesses
4. Tax Clearance Certificate
5. Any other information that may be requested
SMEs seeking funding will submit the basic requirements stated above to the respective VCFC. However, businesses are encouraged to talk to any of the VCFC before they prepare any new documentation.
A minimum of 51% equity contribution from the business owner (not necessarily cash) is required to access the funds from the VCFCs. It should however be noted, that VCTF does not require any collateral for accessing the funds. What it needs is a good and viable project
The Fund currently has no permanent source of funding. Its current funding comes from the government and funds from its partnership with some foreign Development Finance Institutions.
Over the years, the Venture Capital Trust Fund has made significant achievements through its operations and partners. Notable among include the following:
VCTF started with a seed funding of GH¢22.4million from the Government of Ghana. Since inception, the Trust Fund has focused on increasing the pool of venture capital funds available to SMEs in Ghana. In doing so, the Trust Fund has established five venture capital funds and invested the Ghana cedi equivalent of US$17 million.
To enhance the positive impacts of its investments, VCTF organized training and capacity building programs with top-tier institutions and management consultants. Through the efficient management systems and technical assistance provided to SMEs, some portfolio companies have recorded significant turnover growth in excess of 100%. Additionally, Government tax revenue resulting from the 39 portfolio companies increased by an average rate of 264.5% per annum after venture financing capital.
VCTF embarked on a mega cross-country Road Show to increase awareness of its operations and educate the SME sector on the merits of venture capital/equity financing.
Since 2006, the Trust Fund, in collaboration with partners has committed GH¢3.7 million in commodity value chain activities including Sorghum and Soybean. Despite the numerous challenges confronting this sector, significant achievements have been made, which have positively impacted on farmers and the economy in general. To date, an estimated 8000 smallholder farmers have been integrated into the global supply chain of local industries with ready-made market for their produce.
An estimated 12,600 metric tons of Sorghum (valued at GH¢7.4 million) have been produced out of which 6,600 metric tons (valued at GH¢4.6 million) have been sold to industries for import substitution. An estimated 1,400 jobs have been created in the participating communities and farmer-base organizations (FBOs).
The Trust Fund initiated discussion with Development Finance Institutions (DFIs) and other Private Equity Funds to attract additional funds for the fund pool available to SMEs. We have been in talks with several potential investors to attract additional capital for investments in more SMEs.
The Trust Fund liaised with EMCB Secretariat to conduct training programmes for investee companies. Over 30 employees and Owner/ Managers were trained
It also organized an In-house-Training course on valuation for industry professionals. More than 25 venture capital industry professionals were trained
The Fund signed a MOU with GIMPA in 2013. The agreement with GIMPA is expected to culminate in the establishment of a GIMPA Centre for Impact Investing (GCII), which will receive seed-funding from the Fund using a grant from the Rockefeller Foundation. This is to lay the ground for impact investment in Ghana as investors are not just considering financial returns, but also having a positive social and environmental impact in areas where they channel their investments.
VCTF has also partnered successful entrepreneurs with proven track-record in their fields of business to endeavour to support young entrepreneurs with viable business proposals to succeed. The venture dubbed ‘Ghana Angel Investor Network’ (GAIN) provides a formalized platform to attract investors to invest in early-stage businesses.
It also makes available long term capital to entrepreneurs in addition to coaching and mentoring. The Initial membership of the Business Angels include Prince Kofi Amoabeng of UT Group, Kwame Banim, Frank Adu of Cal Bank and Kwesi Twum.
The emergent venture capital industry is building on the impetus given it by the VCTF and is taking on a life of its own. Several investment institutions in Ghana, for instance such Databank, now have their own venture capital and private equity units, to match investors with start-up or early stage enterprises, independent of the VCTF itself.
Aside all these achievements, the Fund is also burdened with a few challenges. Notable among them is the problem of a permanent source of funding to enable it function far better than it is currently doing. Other challenges confronting the Fund include:
a. The general lack of knowledge and understanding of how the fund operates. Some applicants have been confused by the processes and the difference between that and a conventional bank loan. Some find the level of involvement intimidating rather than reassuring. However, that is not the case as fund managers, while keen on the survival and growth of their investments, are careful to leave day to day management of the funded firms to the original owners.
b. Most of the SMEs require financial assistance from VC firms in the form of debt and not equity. In other words their willingness to partner VC firms is not that certain because they are not prepared to dilute their ownership. If the funds are given as equity the Venture Capital Finance Company becomes a partner or shareholder of the investee company and no debt service is charged but the Venture Finance Company gets annual dividend from time to time.
c. Some SMEs have heard about this source of finance, however some of them have not heard about it and even if they have heard about it they do not know what the Fund has which can benefit them.
d. The Fund and most of its finance companies are concentrated in the capital of the country, Accra. This has made it difficult for SMEs outside the capital to know more about the Fund and even access it. This situation can be resolved if the authorities concerned endeavour to spread VC activities to all parts of the country for SME’s in other regions of the country can benefit.
e. Most of the entrepreneurs (SMEs) see the establishment of the venture capital industry as the solution to their financial difficulties; however they would want the venture capital firms to relax their criteria and conditions a little bit so that more of the SMEs can benefit from this source of finance.
Further solutions to tackle some of the above challenges bedeviling the Fund comprise;
Entrepreneurs should be given the needed technical and managerial assistance to put their businesses in order to enable them qualify for VC funding.
The Fund must continue to build close links with universities and research institutions to identify opportunities for technology-based new ventures. Universities and research institutions are valuable sources of new technologies that can be used to realize the business opportunities identified in discussions with large corporations and other potential clients.
The Fund should invest in a small number of companies which they truly believe in and which can become global successes rather than small investments in a large number of companies without active support. It is important not only for their returns, but also for the whole market.
Public awareness, seminars, and conferences should persistently and consistently be encouraged where business communities will be educated on how to access venture capital funds and the benefits of using equity capital to pursue business expansion.
Government also has an important role in creating an enabling environment for the venture capital industry to thrive. So a well-designed VC policy is important, because venture capital has a significant role to play to ensure that SMEs in Ghana become the engine of growth of our economy.
Considering the massive achievements chalked so far by the Venture Capital Trust Fund a decade since its inception and the exciting potentials of venture capital as a whole in Ghana, it can boldly be said that this form of financial intervention has been a great source of relief for SMEs.
It directly addresses the major burden of start-up businesses in the country and has a huge potential of providing the much needed financial boost for entrepreneurs and the economy as a whole. Since the SMEs are the bedrock of the nation’s economy, with such financial intervention, they can continue to contribution conspicuously to the overall health of the economy and revenue to government for development.
Author: Solomon Sackey | solsackey@yahoo.com
