Government asked to resource Venture Capital fund

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ghana cediAn economist and lecturer in finance, Mr John Gatsi Gatsi, has called on the government to resource the Venture Capital Trust Fund (VCTF) to enable it execute its primary function of investing in seed-stage enterprises in the country.

Seed-stage enterprises are businesses that spring out of painstaking research or ideas from incubation centres which need to be financed from the blast for them to be established as firm companies with significant contributions to the economy.

Mr Gatsi said due to the stage of Ghana?s economy and the need to spur growth through contributions from small and medium-scale enterprises (SMEs), the country?s Venture Capital regime should be premised and focused on ?seed-stage and start-up investments? more than concentrating on mature businesses or the third stage.

The University of Cape Coast lecturer and chartered economist said for venture capital to benefit the economy significantly, ?we should operate the Virtuous Cycle of Investment.? This means raising funds to invest in seed-stage and start-up enterprises, reaping benefits and rolling over to other like ventures.

Seed-stage investments

Seed investments include funding research and development of incubator centres where ideas are generated and developed into marketable products and services, as well as start-up enterprises whose markets are considered viable and commercial to harness.

The VCTF was recently in the news for its inability to access a US$150 million facility from the China EXIM Bank due to the refusal of the Ministry of Finance to provide guarantee for the loan.

The refusal means that the fund would continue to operate with scanty funds to propagate its mandate of growing viable SMEs to create jobs and spur economic growth.

Mr Gatsi explained that with adequate funding, ability to raise own funds and human capacity, the Venture Capital Trust Fund should be liaising with research institutions to conduct relevant research that could be commercialised to solve a problem and grow the economy.

?This should be a continuous process of contacting research institutions, identifying ideas and developing workable proposals for the venture capital to finance and nurture,? the economist said.

Other examples

The United States of America has a rich story of using venture capital interventions to finance start-ups since the 1930s after the collapse of the stock markets. It raised private equity from individuals and institutions, not from the capital market, to fund mutually beneficial projects.

This has given rise to a lot of giants in the private sector, particularly in information and communications technology, growing out of business incubation and technology parks at Silicon Valley.

In Israel, most pharmaceutical and agribusiness giants there were created out of venture capital funding from seed stages. The story is the same in Scandinavian countries such as Sweden.

The Ghana regime

Ghana?s venture capital regime, although has financed some seed investments and start-ups, has dwelled more on the leverage model where it identifies mature businesses with records on operations such as revenues, credit history and a viable market.

To circumvent its low financial capacity, the VCTF has found creative ways of staying afloat, with the adoption of the leveraging model, as well as the establishment of Ghana Angel Investor Network (GAIN) to fund seed-stage enterprises.

The VCTF has, since it started operations in 2006, leveraged its seed funding of GH?22.4 million to create additional GH?40.2 million from the private sector in a public-private partnership. VCTF?s funds have a total of GH?62.6 million to be invested in the SME sector. In 2012 alone, the fund disbursed GH?1.26 million, bringing total disbursements to US$10.11 million.

Mr Gatsi also called for the expansion of private venture capital companies, capacity building for the VCTF and the injection of more capital from the government and other sources to finance this critical area of the country?s development.

The importance of venture capital

Venture capital funds have two eyes. One of leverage as in searching for mature businesses with historical records with which they partner through leverage buyouts, management buyout or partner private equity firms for equity investments.

This is usually to enable the maturing enterprise to expand and explore its potential for job creation and economic growth.

The other eye is the private equity option which deals with equity arrangements between the venture capital and owners of the business, the entrepreneur. This allows the venture capital entity a direct equity interest in the enterprises, and this has several advantages, including good governance practices, formal structures and effectiveness.

This option also comes with clear exit strategies with specific timelines when the venture capital would exit, usually within a period of five to seven years.

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