CHAPTER ONE

INTRODUCTION

1.1 Introduction

From a global perspective, Venture Capital industry in the US economy, account for 68% of global VC activity according to Global VC Investment Report (2013). Europe accounts for only 15% of global VC activity (OECD, 2013).

China, the third largest hotbed in the global VC rankings accounts for 11% of the global VC activity. India, fourth in the global VC rankings, has in the recent years seen an increase of venture funding in consumer services sector. Israel has also seen a sizable share of global VC activity accounting for about 5% of the global activity. Canada, which accounts for 2% of global VC activity, also had an extremely strong improvement, with volumes up 23% and value up 14% (OECD, 2013).

In the U.S. and Western Europe, most venture capital funds are organized as private limited partnership where the venture capitalists serve as general partners and outside investors serve as limited partners (Barry, 2010). Venture capitalists are actively involved in monitoring, strategic management; marketing and planning of the companies they fund also called investee companies (Murray, 2011).

Much of the interest in venture capital investing in The People’s Republic of China is closely related to its rapid economic growth in recent years (Lerner, 2010). China has attracted renewed business attention since its official return to a market orientation. China’s dynamic growth can be attributed largely to its policy of economic reform and opening its markets to the outside world, which began in 1978 under the leadership of Deng Xiaoping (Stuart, 2013). According to Kelly (2010) rapid economic growth, bold reform measures, and massive infrastructure plans point to enormous market potential in China.

Hong Kong accounted for more than 40% of the foreign direct investment in mainland China because it has a stronger legal framework and a more mature venture capital industry; many foreign venture capital funds targeting Greater China are now based in Hong Kong (Wang, 2011). As a key capital Centre in Asia and a gateway to mainland China, Hong Kong’s venture capital industry has grown dramatically over the past ten 3 years. In 2009, 77% of the funds raised in HK came from non-Asian countries (mostly from US), 7% from Hong Kong locally, and 16% from other areas in Asia (Kovner, 2010).

Africa is still seen as a dangerous and costly location to do business. Transaction expenses are sometimes greater than they are elsewhere. Although labour costs are modest, they are sometimes insufficient to compensate for the high expenses of transportation, raw materials, utilities, and other inputs.

As a result, African firms find it difficult to compete in export markets, particularly those beyond the continent, as well as against imports of a variety of commodities from other developing countries (White, 2010).Moreover, many African companies, especially Start-ups, lack reliable financial data that allows financial organisations to scrutinise the health and prospects of the company.

Most start-ups in Africa also lack assets that can act as collateral and mitigate the risk involved. The economic future of developing countries and Africa in particular, is strongly linked to the development of local private enterprises.

An important role in this respect can be played by Venture Capital (VC) Funds(FACET, 2005). They can support business opportunities through investment relations with private companies in the South and the North, and introduce new business concepts. Hence their impact on the business environment can be significant. There is an increasing interest in establishing new, innovative VC Funds in Africa (FACET, 2005)

In Cameroon venture capital investment is not really as pronounced as in other developing countries because oftentimes start-ups in Cameroon do not meet requirements to attract venture capital investments. However, in recent times there has been an increase the awareness of venture capitalists. Venture capital gained recognition from late 1990s, when the government, requested for the support of the banking industry to ensure development in the country (Uba, 2009). Also other banks like Afriland First bank have woken up to the challenge of providing funding for start-up businesses for the sustainable development of the entire country.

The question now is what factors do venture capitalists firms consider before making their investment decisions. This chapter focuses on venture capital finance in Cameroon as well as the factors they consider before making investment decisions

1.2 Problem Statement

The geography of start-up activity and venture capital investment is experiencing a rapid period of globalization, thus making communities more interactive with one another in terms of exchange of ideas and design for solutions.

A start-up, as such, represents a newly emerged business venture that has the intention of developing a feasible business model in order to meet the needs of a society by creating a virtuous cycle that derives constant improvement through innovative solutions. VCs face challenges in identifying entrepreneurial start-ups that lead to investor return on investment (ROI) because of information asymmetry and environmental uncertainty (Meglio et al., 2016).

More than 50% of venture backed start-ups fail, whereas 85% of the investment returns come from only 10% of the investee companies (Nanda & Rhodes-Kropf, 2013). The general business problem that I addressed in this study was that many VCs invest in start-ups either fail or result in a little ROI. The specific business problem that I addressed in this study was that VCs often have limited strategies for determining which businesses would become profitable when investing in start-ups.

As the country in sub Saharan Africa, Cameroon is faced with a variety of economic problems such as unemployment, poverty and corruption. Being that Cameroon’s growth is mainly based on public investment and remittances, creation of a vibrant private sector is important to boost growth in order to reduce poverty and generate jobs.

It is important, therefore, to foster an entrepreneurial ecosystem as the economic imperative to redesign the way business is done in Cameroon, so that sustainable solutions can be revolutionized for different areas, such as healthcare, education, tourism, clean energy, poverty, finance, security and agriculture.

Each industry presents a number of challenges from which entrepreneurs and start-ups may benefit not only for profit, but also by bringing about constructive change based upon new and disruptive innovative technologies that have a beneficial effect on our society(Sopjani, 2019).

1.3 Research questions

The main research question for this study is; what are the Factors in Start-up Operations that Influence Decision Making Strategies of Venture Capitalists?

1.3.1 Specifically the study seeks to investigate:

1. How does a start-up’s marketing system affect a venture capitalist’s investment decision?
2. How does start-up Recruitment systems affect venture capitalist investment decision?
3. How do start-up financial records affect venture capitalist investment decisions?
4. How does the management of a start-up influence venture capitalists’ investment decision?
5. How does product factors affect venture capitalists’ investment decision?