Factors influencing venture capitalists’ project financing decisions in South Africa

Abstract

This study explores and identifies the investment criteria used by South African venture capitalists in their venture screening and evaluation processes. Using a Likert scale type of questionnaire, South African venture capitalists (VCs) were asked to rate the investment criteria identified in similar studies abroad and to report any additional criteria of their own. By evaluating the mean ratings, it was found that South African VCs consider the entrepreneur’s honesty and integrity; a good expected market acceptance; and a high internal rate of return (IRR), to be the three most important criteria. The South African VCs, just like their overseas counterparts, regard management considerations to be the most important criteria group in the evaluation of new investment projects. The results of this study are deemed useful to both venture capitalists in their decision-making process and to entrepreneurs in their venture capital applications to maximise their success rate.

Private equity and venture capital in South Africa: A comparison of project financing decisions

“…This result is observed at the 5 per cent level of significance with a z-statistic of 2.214 (Table 2). The fact that no significant differences are observed between management and market considerations, as ranked by VC firms, is in contrast with the results reported by Van Deventer and Mlambo (2009). This anomaly would appear to have two possible explanations.…”

“…Findings in the US (Kakati, 2003) and contemporary research, albeit in a European VC context, for example Spain (Pintado et al, 2007) and central and eastern Europe (Farag, Hommel, Witt & Wright, 2004), and in South African (van Deventer & Mlambo, 2009), support the assertion that the entrepreneur and/or management team are an important decision criterion. According to Pintado et al (2007:85), the "characteristics of the entrepreneur, manager background, and management team experience were consistently more important evaluation criteria than market and product characteristics."…”

“…This might possibly signify the maturation of the South African VC market, in line with the findings by Fried & Hisrich (1994) on the US market. It is also important to note that two of the firms in this study categorised by Van Deventer and Mlambo (2009) as VC firms, were PE firms, as they attested to the fact that since 2007 their activities have shifted away from typical earlystage VC investments towards later-stage PE investments.…”

“…A sample of South African PE and VC firms was surveyed using criteria identified by van Deventer & Mlambo (2009). A statistical analysis was then conducted to allow the comparison of results to those achieved by Van Deventer and Mlambo (2009). The inclusion of both PE and VC firms in the sample also enables comparison of the two fund types.…”

Determinants of Venture Capital Supply in Sub-Saharan Africa

“…In South Africa, Msweli and Oni (2014) found three factors that influence venture capital supply namely; (1) micro small and medium enterprise size, (2) the degree of industrial development and (3) portion of natural resource addition to the gross domestic product. Additionally, Van Deventer and Mlambo (2009) establish that the three main measures for venture investors in South Africa are; (1) the capitalist's trustworthiness and truthfulness, (2) an excellent anticipated market condition and (3) a good discount rate. Adongo (2011) emphasised the importance of the institutional environment underlying initial public offerings, efficacy of equity market, bond market, currency market, commodity market and derivatives as well as the uncertainty level in the market place.…”