New Technology Based Firms and Venture Capital policy in Nigeria
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New Technology Based Firms and Venture Capital policy in Nigeria

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An exploratory research employing systematic evolutionary approach (Avnimelech and Teubal 2002) to study Venture Capital and New Technology Based Firms in Nigeria. It offers a history of economic ...

An exploratory research employing systematic evolutionary approach (Avnimelech and Teubal 2002) to study Venture Capital and New Technology Based Firms in Nigeria. It offers a history of economic agents, actors activities and linkages in the creation of technology based firms in Nigeria, with due consideration to their economic outcomes and social impacts (Gault 2010).

Though Nigeria has no defined VC policy, the paper assumes so with Supply side policies such as the Venture Capital (Incentives) Decree No .89 1993 and 2001 Small and Medium-Scale Industries Equity Investment Scheme (SMEIS).

Macroeconomic factors (such as supply side and demand side policies) would support the emergence of NTBFs as seen from the study. In Nigeria, tremendous efforts have been made to resolve small business finance, with no particular attention directed at technology-based firms.

There is an increasing need for demand side policy changes (i.e. initiatives to improve both financial and managerial capabilities of technology entrepreneurs in Nigeria). Infrastructure supports for Nigerian NTBFs are misplaced with continuous reliance on technology transfer above creative creation within the economy.

With this study, knowledge has been extended about the policy environment that foster Venture Capital and NTBFs in Nigeria.

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New Technology Based Firms and Venture Capital policy in Nigeria Presentation Transcript

  • 1. New Technology Based Firms and Venture Capital policy in Nigeria *. Adebola Daramola* National Centre for Technology Management, Obafemi Awolowo University, Ile-Ife (NACETEM) This paper was prepared for presentation at the Summer School 2011 of the Research Network on Innovation –SITE Clersé , Dunkerque, France with theme: Entrepreneurship, Innovation and Sustainable Development. August 31, 2011 – September 3, 2011
  • 2. Introduction • The presence of institution such as Venture capital (VC) serves as a strong mechanism for innovation, by providing early stage equity and strategic support in form of vested interest in the success of the technology based firm ( Oyelaran-Oyeyinka and Sampath, 2007; Debbie Ariyo 2000). • The development of high growth technology based firms (TBFs) in Silicon Valley, Israel, Bangalore and UK is attributed to Venture Capital. They helped create new industry and sectors, which in turn provides job creating opportunities for these nations. Research works in universities have been commercialized through the backing of Venture Capital fund. Novel ideas (like Facebook) from people with little or no business pedigree have known commercial success all with the support enjoyed from VCs.
  • 3. Background • With a colonial history traced to the British, we can describe the emergence of risk finance and venture capital policy in Nigeria to development financial institutions (DFIs). • The design of private equity and venture capital firms takes a clue from the DFIs, these institutions are designed to provide medium and long term financing, with provision of technical and managerial services, in addition to monitoring effectively the progress of the investee firms.
  • 4. Literature on Venture Capital Policy and Technology – Based firms. • Earlier research ( Donna Situ; Nef; Lefton ; Ansari & Uddin Mohd)on the role of VC firms and NTBFs; VC firms and Innovation ( Rahman, Manan, Azrai & Sanjivee (2008); Bowonder & Mani( 2002);)in different countries as a case, we have come to a better understanding of the public policies that foster the creation of new jobs, service activities and commercialization of research findings . The effect of this development has led to increasing entrepreneurship and innovation in countries around the world. • Some people have written about the Nigerian Venture Capital Industry (Isiadinso(2002); Ariyo(2000); Agbana(2010); Dagogo & Ollor (2009), their major coverage of the subject have been any of an analysis of the market and its role in support of SMEs and business environment. We have seen little or no interest in its role in cultivating NTBFs, which is of interest to us in this paper
  • 5. Research approach to NTBFs and Venture Capital Policy • Rosiello, Teubal and Avnimelech (2008) posit that research on venture capital and New Technology Based Firms have followed two route ; firstly: finance literature where venture capital is seen as an arm of the financial system only , restrictive in approach and confines the assessment of NTBFs and VC Policy to the definition of VC as a pool of blind funds to invest in new starts up and later stage companies, the second method is the systematic evolutionary( SE) takes into cognizance the relevance of interlinked policies in achieving new start up development, a combination of all economic and Science, Technology and Innovation(STI) policy. • The use of systematic evolutionary (SE) approach (Avnimelech and Teubal ,2002) to understanding VC Policy is rooted in a broader history of economic agents and actors activities and linkages in the creation of new startups, with due consideration to their economic outcomes and social impacts ( Gault 2010)
  • 6. Policy Environment for NTBFs and Venture Capital • With the knowledge of Innovation system approach, we are aware that policies matter. Policies play a role in setting the parameters within which actors make decision about learning, investment and innovation (Adebowale 2010). Government drives economic development through policy decisions and incentives. This takes the form of economic, institutional and regulatory frameworks through which market can channel resources to new innovative enterprises.
  • 7. External factors These are macroeconomic and other factors affecting both the supply and the demand for venture capital. Nature of Supply side policies Types Description DIRECT SUPPLY OF CAPITAL Government equity investment To make direct investments in venture capital firms or Technology –Based firms(TBFs) To make low-interest, long-term and/or non-refundable loans to venture capital firms or TBFs To provide tax incentives, particularly tax credits, to those investing in small firms or venture capital funds To guarantee a proportion of bank loans to qualified Technology-Based firms To guarantee a proportion of the losses of high-risk venture capital investment To allow institutions such as pension funds or insurance companies to invest in venture capital Government loans FINANCIAL INCENTIVES: Tax incentives Loan guarantees Equity guarantees Investor regulations:
  • 8. Demand side policies Consideration Cultural Environment Rationale/Description Personal entrepreneurial characteristics (PEC). Demographics This refers to the underpinning characteristics of entrepreneurs in the economy, the need for achievement, personal locus of control and risk taking propensity. Education Structure Infrastructure & Support Major factor of importance Entrenching changes in education that encourages training in entrepreneurship and business. Encouraging education in Science, Technology, Engineering and Mathematics as a building block to NTBFs creation. A designated area to create and nurture SMEs with physical infrastructure and various services such as business planning, financial advisory, management training, advertising, secretarial , security, intellectual property protection and post incubation support. An environment designated by government , universities or research institutions with incentives such as access to research facilities, technology transfer and spin-off offered to companies to relocate to catalyses the process of growing more TBFs , provide entrepreneurs with access to expertise, networks and business support to make their venture successful. They have strong R&D components in their organizational structure. A special type of business incubator that focuses on new ventures that employ technologies, it serves as a market for commercialization and diffusion of technologies. Business Incubator ( government –funded or private-public partnerships) Technology Parks Technology Incubators Clusters Export Processing Zones(EPZs) Support Agencies Give attention to age, gender and educational background and former work experience as an impact on entrepreneurial intention and endeavor such as establishing TBFs This could be based on factors such as natural resources or geographical advantages .It is a critical mass of firms allowing economies of scale and scope, a strong science and technology base, and a culture conducive to innovation and entrepreneurship. This is a mechanism employed by economies to acquire and diffuse technology in the local economy by permitting participating firms to acquire their imported inputs free as long as they export 100% of their products. The focus is attracting FDI and providing access to infrastructure and tax incentives leading to increase productivity in host country. These refers to government ministries, agencies(MDAs) and department established to support the growth of TBFs.
  • 9. Evolution of Venture Capital in Nigeria Pre 1997 Key Features of the period 1997-2002 2003-Date  Preceded by the emergence of development financial institutions (DFIs), commercials banks, Major government investments in heavy industry (steel, aluminum, fertilizer etc)— poorly planned and executed Several development plans conceived to push the country into the frontier economy failed Presence of White Elephant project Inefficiency of management of DFIs investee companies     Development financial institutions (DFIs) and negligible number of VCs- prominent were the National Risk Fund Plc and Venture & Trust Company investments in manufacturing, agro-allied, tourism and hotel etc   High levels of effective protection including outright bans on imports for domestic manufactures Poorly designed product and location specific incentives, including tax and import duty rebates, and development of export processing zones. Several of these schemes were subject to gross abuse because of weak governance the First National Policy on Science &Technology was developed National Risk Fund was introduced      VC’s Presence and Funding Focus   Government’s Role toward VC development and NTBFs        The exit of military in the governance of Nigeria Deregulation Privatization of Government –owned Industries Liberalization of Telecommunication sector        Continual democratic governance Reforms-banking consolidations and pension Privatization of Government –owned Industries Emergence of adoptable Technologies/Model for inclusive penetration of markets- MobileMoney, MHealth Return of Nigerian diaspora in droves to take up management and creation of business More VC players public investments in heavy industry (steel, aluminum, fertilizer etc) privatized companies, Telecommunication companies; Financial Services, Oil and Gas, FCMGs,   Facilitated the establishment of Small and Medium-Scale Industries Equity Investment Scheme (SMEIS) Initiated favorable business policies Review of the first National S&T policy The Investment and Securities Decree was passed into law Establishment of the Investment and Securities Tribunal for speedy resolution of disputes arising out of investment deals  Investment friendly policies leading to enormous interest by foreigners and confident earned from the locals  Full review of the first National S&T policy(2003)  Introduction of a Science, Technology & Innovation policy draft (2011)  Bank consolidation, strengthen the financial landscape  More VC firms, with increase in deals VC Industry development with specialty firms emerging privatized companies, Telecommunication companies; Financial Services, Oil and Gas, Infrastructure, Technology based or Technology Business model companies, Power/Energy;Shipping,
  • 10. Venture Capital Firms activities in Nigeria • With the establishment of Small and Medium-Scale Industries Equity Investment Scheme (SMEIS) in 2001 and the liberalization of telecommunication in Nigeria, venture capital activities have expanded leading to a corresponding increase in the presence of VC firms in Nigeria or outside with focus on Nigeria (Sub-Saharan Team often based in London, South Africa or Ghana). • The use of ICT in Nigeria is growing, with the financial services sector outside the Oil and Gas Industry, a major consumer of technology and the agriculture business sector (renewable energy, seed production) enjoying interest from the VCs. • The interest to invest in Nigeria over the last ten years by both local and international venture capital funds is attributable to the stable macroeconomic indicators fuelled by a continual democratic governance and entrenchment of rule of law and economic policies.
  • 11. New Technology Based Firms- Definition • The origin of the term NTBFs is attributed to the Arthur D. Little Group. They defined it as” an independently owned business established for not more than 25 years and based on the exploitation of an invention or technological innovation which implies substantial technological risks. • James Allen’s definition as quoted in the Bank of England report (1996) on “The Financing of Technology-Based Small Firms”, state that NTBFs is a business whose products or services depend to a significant extent on the application of scientific or technological skills or knowledge (whether it be novel application of advanced technology to provide a totally new product or service, or an application of existing technology in an innovative manner).
  • 12. Classification of Technology Based Firms (TBFs) • In this research, our understanding of what qualify as a technology based firms (TBFs) employ ISIC Rev.3, also known as the OECD classification of industry based on technology. • It is a division of industries into high-technology, medium-high-technology, medium –low-technology and low-technology groups, it includes a new division of services classified according to their “knowledge-intensity. This enables knowledge based services such as Finance, Insurance, business services, Telecommunication, Education and Health.
  • 13. Nature of New Technology Based Firm (NTBF) in Nigeria • NTBFs in Nigeria are enterprises across industries which utilize technological innovation or exploit an invention; the common driver has been ICT. They fall within the medium –low-technology; low-technology and Knowledge Intensity services groups.
  • 14. Industry Description of Technology or Invention Technology Innovation (tick off) Education E-learning, On-line Registration/Examination √ Medicine TeleMedicine, Assisted √ Exploitation of Invention (tick off) Examples of TBFs in Nigeria National Open University of Nigeria, JAMB, √ NAFDAC, Reproductive Technology, Telecommunication GSM, BroadBand Technology, ICT √ MTN, Etisalat, Aitel, Globacom, V isafone Financial Services ATM, Online Banking, e-commerce √ Commercial Banks, Etransact, Interswitch, Agriculture Seed production, mechanization farming, Animal Production, √ √ Obasanjo’s Farm, Animal Farm Oil and Gas Refinery, Oil Drilling, √ √ Shell, Oando, ICT Computers, Software √ √ Resourcery, Omatek, Zinox, Chams, Logistics &Transportation Online Reservation √ Arik, Dana, ABC Transport, Mass Communication broadcast, electronics and print media √ Silverbird, ePunch, FM radion stations Defense Intelligence Gathering, Artillery Manufacturing √ Government Election registration √ INEC, FGN MDAs Entertainment Movies, Music, Video √ Silverbird, StormRecords, Manufacturing FCMG, Paints, Wire & Cable √ √ √ Armed Forces Promasidor, Ayoola Foods,
  • 15. Nigerian experience of NTBFs and VC Policy Policies and programs VC-directed policy (tick off) Financial incentives(Tax ) √ Venture Capital (Incentives) Decree No .89 1993 Act. √ the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) 2001 VC –related policy (tick off) √ Science, Technology & Innovation policy draft (2011) √ Entrepreneurship Development syllabus introduced into Primary, Secondary, University (2006) √ Technology Incubation Centres √ Clusters( Otigba, Nnewi) √ Support Agencies( SMEDAN, BOI, NOTAP, √ Establishment of Intellectual Property and Technology Transfer Offices √ Stable macroeconomic environment (1999-Date) √ Export Processing Zones(EPZs √ Educational and Research Organisations √ Entrepreneurial characteristics of the diverse tribe in the country √
  • 16. Research Methodology • Relied on secondary source material as well as conducted open (unstructured) questions interviews of selected members of the Venture Capital Association of Nigeria (VCAN) and executives in technology-based firms( Vassilev ,2005). • For the secondary source material, data were collected from several sources: electronic searches were performed to identify previous research on the topic: venture capital policy and NTBFs, Venture Capital in Nigeria and the classification of technology based firms (TBFs). • Research report of leading consulting firm, Private Equity firm and Africa Venture Capital Association were scanned for relevant data. Nigerian based and focused Venture Capital firm website was visited to compile useful information for the study. Company press announcements and Industry leader’s presentation were equally scanned.
  • 17. Data Analysis and Presentation of Results • At this level of presentation, the research is exploratory with reliance on secondary source material and opportunity to gather more data. So far, interviews were conducted with five (5) members of the Venture Capital Association of Nigeria (VCAN), with between 9-25 years work experience in the Nigerian Financial Industry, particularly Venture Capital firms. They were Senior Investment Analyst (2), Investment Principal (2) and Regional CEO/Partner (1). Further face-to-face interviews scheduled with executives in technology –based firms could not be held, but the researcher took time to interview about six (6) executives and professional services consultant over the phone. Each interview with the total eleven (11) individuals lasted no less than one hour.
  • 18. Findings • Insight from the interviews was the need for demand side policy changes to encourage an upsurge of entrepreneurial and inventive discovery in the country, with proper framework such as intellectual property to support the growth of TBFs. This should take emphasizes on Sciences, Technology, Engineering and Mathematics (STEM) education above the Management Sciences education as we currently have. • Infrastructure supports to foster NTBFs are misplaced with continuous reliance on technology transfer above creative creation within the economy. • Also government incentives targeted toward TBFs are minimal or non-existent which invariably affects the level of VC investments in Nigeria
  • 19. Conclusion • With this exploratory research, we have extended knowledge about New Technology Based firm and Venture Capital policy in Nigeria (Andreas Pfeil,2000) using the Systemic Evolutionary (SE) perspective (Rosiello, Teubal and Avnimelech ,2008; Avnimelech and Teubal ,2002 ). • There is room for indepth data gathering and collection across all actors of the Innovation ecosystem beyond the members of the Venture Capital Association of Nigeria (VCAN) and some executives in technology-based firms to assess VC Policy in support of NTBFs creation
  • 20. THANK YOU FOR YOUR ATTENTION!