The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
The Search for a Venture Capital Model
Appropriate to Small Emerging
Countries
Dr. Haven Allahar*
*Adjunct Lecturer, Graduate School of Business, University of the West Indies, Mount Hope, TRINIDAD AND TOBAGO.
E-Mail: havenallahar4{at}gmail{dot}com
Abstract—The purpose of this paper is threefold covering a review of enterprise financing mechanisms,
examination of the concept of Venture Capital (VC) and its operations in developed and emerging countries,
and proposing a community-based VC model as appropriate to small emerging markets. The research
methodology involves primarily, reviews of published data on the VC industry and analysis of raw statistical
data on the performance of VC in major developed and emerging countries, US, Europe, China, and India. The
main finding of the paper is that VC, as a business financing tool, has a significant role to play in expanding
the menu of financing options and facilitating business development in emerging countries and small and
medium sized businesses. The overall conclusion is that the models of VC financing available are more suited
to developed country markets and there is no model appropriate to smaller markets for which a communitybased VC model is fit for the purpose.
Keywords—Angel Finance; Business Financing; Emerging Markets; Equity Finance; Venture Capital.
Abbreviations—Corporate Venture Capital (CVC); Ernst & Young Global Limited (E&Y); Peer-to-Peer
(P2P); Small and Medium Enterprises (SME); Trinidad and Tobago (TT); Venture Capital (VC); Venture
Capital Incentive Program (VCIP)
I.
I
INTRODUCTION
N the modern business environment the search for capital
remains a major preoccupation of firms because of the
almost universal claim that there is restricted access to
capital, especially for new or start-up companies. The main
sources of capital are: entrepreneur own equity capital and
accumulated savings; informal investors such as family and
friends; internal capital networks often community based;
retained capital from the profits of the venture; business
angels or wealthy individual investors; retail banks which
provide short to medium term financing; corporate or
merchant banks which provide longer term financing;
Venture Capital (VC) which is equity investment intended for
high growth firms; Initial Public Offerings (IPOs) which is
raising private equity from selling shares; governmental
agencies such as the SBA in the U.S. and the National
Entrepreneurship Development Company in Trinidad and
Tobago (TT); commercial partnerships which involves
raising finance from existing businesses such as suppliers;
and micro-finance which targets very small enterprises with
low capital needs [Wickham, 16]. In many developing
countries the main sources of finance for early-stage
businesses is commercial banks, while growth is largely
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financed by reinvested capital because equity, by way of
IPOs, is mostly non-existent and equity capital is available
mainly from private investors known as “business angels” but
usually there is no acknowledged forum for meeting such
angels.
The motivation and purpose for this paper is to find a
solution to the access to finance challenge faced by many
Small and Medium Enterprises (SMEs) in emerging
countries. The problem is that many businesses tend to be
highly leveraged through dependence on debt financing while
alternative finance through formal VC is scarce. The
objective of the research conducted for this paper is therefore,
to formulate a solution to the lack of a viable equity system to
provide investments in SMEs as a means of addressing the
dependence on debt financing. The need for such an initiative
was confirmed by the experience of Jamaica where it was
found that family-based firms could access bank financing on
a short-term basis only because of perceptions of risk, but
there was need for long term finance to pursue growth
opportunities. It was suggested that such firms will have to
adapt their operations by keeping proper financial records in
order to tap long-term commercial finance [Williams, 27].
The argument in this paper is that a model of VC investment
which is more community-based and designed to promote a
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The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
high level of community involvement in the various
processes will make the concept of VC as a financing tool
more palatable to smaller businesses particularly in emerging
markets. The value of this paper is the contribution of a new
model for facilitating investments in SMEs in emerging
countries, such as the small islands of the Caribbean, which is
community-based and, as such, suits the scale of the
businesses started in that environment as opposed to the
traditional VC approach.
The study approach involved analyses of the literature on
VC in both developed and emerging countries, to assess the
statistical performance of the VC industry in the USA,
Europe, China, and India, and to examine models of VC
ecosystems in the quest to devise a model appropriate to
small emerging countries. The paper considers the
appropriateness of VC as a financing option for firms in
developing countries, and draws upon international best
experiences to provide an assessment of what is required to
stimulate a VC industry in developing countries, using
Trinidad and Tobago (TT) as a Caribbean case. Van Auken
[11] argued that a good understanding of the various types of
capital is vital to the effective raising of capital and
successfully developing a firm‟s capital structure and
concluded that “An inappropriate capital structure, a
misunderstanding of the characteristics of the financing
instrument, or a lack of information about the availability of
specific sources of capital can result in suboptimal firm
performance and financial distress” [Van Auken, 11].
II.
METHODS
The research methods adopted for this paper utilized mainly
secondary research of published journal articles, technical
reports, and industry studies carried out by professionals
firms. The author also incorporated personal experiences of:
past training in VC operations in Washington, U.S.A.;
establishing a venture capital fund within a small business
support organization; the experience of a former VC
administrator in TT; and networking with eminent VC
administrators and investors based in Canada and the
Netherlands.
III.
OVERVIEW OF ENTERPRISE FINANCING
Venture financing is traditionally obtained from three sources
depending on the nature of the venture and the stage of
development, and comprises: own funds and funds from
family and friends, which is the main source for start-up
firms; debt financing by way of loans; or venture capital. This
paper will focus on the more formal sources of financing
which are commercial debt, and equity by way of venture
capital. Debt finance is sourced mainly from banks, insurance
companies, and specific financial institutions such as credit
unions, but, worldwide, commercial banks are the major
source of debt financing. Bank financing comes in the form
of a variety of short-term and long-term loans. Short term
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loans comprise traditional commercial loans, lines of credit,
and floor planning. Long-term loans include term loans,
installment loans, discounted installment contracts, and
character loans. Debt financing options are also available
from nonbank sources such as commercial finance companies
which provide services such as: asset-based loans,
discounting of accounts receivable, inventory financing, and
trade credit [Scarborough & Zimmerer, 15]. This is not an
exhaustive list but provides an insight into the range of
possibilities of which firms should be conscious when
seeking to obtain venture financing.
Equity finance is obtained from personal investment
which is the entrepreneur‟s stake in the business, or from VC
which comes in the form of angel financing or investments by
specialist venture capital firms, either privately held or state
sponsored. The fundamental differences between debt and
equity financing are: debt financing carries specific
obligations regarding payment, which is independent of the
actual cash flow of the business, and are, in effect, a fixed
cost; and equity financing, on the other hand, is money that is
used to purchase common stock of the business. There is no
fixed repayment schedule and dividends may be paid when
the fortunes of the company are good, but the company may
elect to waive this payment if it is appropriate to do so
[Kuratko & Hodgetts, 13]. In the case of Europe, VC was
initially sourced from banks through subsidiaries but
subsequently funding sources opened up through institutional
investors, such as pension funds and insurance companies.
Additionally, business angels came forward to provide
venture capital but on a much lower scale [Levitsky, 4].
It was noted by Ernst & Young Global Limited (E&Y)
[35] that some countries are taking specific action to create
state-sponsored VC funds aimed at investing in new
enterprises; while in Europe governments are promoting
crowdfunding as a form of equity investment akin to VC. In
several developing countries, VC companies are sponsored
by governments because of perceptions of the private sector
being risk averse. In the Canadian situation it was found that
companies financed by government-sponsored VC‟s were
less likely to grow their businesses, and tended to provide
lower commercial value than privately financed companies.
This performance was attributed to weaker mentoring
services and managerial input by government venture
capitalists [Lamman & Veldhuis, 25]. As pointed out by de
Bettigines & Brander [19], bank finance leaves the
entrepreneur with continued ownership of the firm, avoiding
dilution of business assets and loss of control, but it deprives
the firm of the venture capitalists‟ managerial input. de
Bettigines & Brander [19] concluded that “either bank
finance or venture capital finance might be preferred
depending on several factors, including the specific
sensitivities of effort and performance to variations in
ownership structure” [de Bettigines & Brander, 19].
In terms of financing small businesses, Ambrose [30]
studied financing strategy for micro, small, and medium
enterprises in Kenya and found that personal savings (87%)
was the most importance source of finance with other sources
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The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
as comprising microfinance institutions (57%), friends and
relatives (48%), bank loans (7%), and VC (2%). The point
was made that respondents (90%) remarked that they lacked
information about VC operations which explained the reason
why the potential for VCs bridging the financing gap was not
embraced [Ambrose, 30].
More recently, the financial industry has developed
alternative financing instruments prime among which are
crowdfunding and peer-to-peer (P2P) lending which
according to Hobey & Gray [34] has more than doubled over
the past few years in the UK. The trends reveal that P2P is
leading as an alternative business financing source but equitybased crowdfunding is growing rapidly as evidenced by
“410% year-on-year from 2012-2014” in the UK despite
reservations about the inherent risks of this model [Hobey &
Gray, 34]. Further, it is argued that the prospects for a
“diverse range of alternative finance can definitely thrive‟”
provided the regulatory framework is put in place [Hobey &
Gray, 34]. According to Mark [32], a potential source of
alternative VC funding for the small countries of the
Caribbean is the mobilizing of “diaspora funds” which are
available from nationals of a country living abroad and the
evidence of this is that 25% of the diaspora community
indicated that they had already invested in Caribbean
ventures. Mark [32] saw this financing source as an
opportunity “to leverage the relationship with this group to
access to new markets, develop strategic global networks and
provide startups with well-needed mentoring and advisory
services”. Further justification for pursuing diaspora sources
is that according to Mark [32], a preference was stated for
investment in agriculture, information technology, music and
entertainment, green energy technology, mobile platforms,
internet services, and education, the areas critical to
advancing the development of TT and the Caribbean islands.
IV.
APPROACHES TO VENTURE CAPITAL
FINANCING
This section will explore the issues related to VC financing in
relation to: stages of VC financing; the VC investment
process; angel finance; and the concept of corporate VC. A
simple definition of VC is “equity investments made into new
companies for launch, early development or expansion of a
business that entails some investment risk but offers the
potential for profits substantially above average” [Rotheli &
Grotzer, 10]. It was established early that VC investments
involved high risk but venture capitalists were less risk averse
than traditional financiers, thus were prepared to consider
financing proposals that would be rejected by traditional
financial institutions [Sherman, 1].
4.1. Stages of Venture Financing
It is recognized in the literature that businesses pass through a
development cycle which Dollinger [9] defined as: the need
for early stage financing for seed capital and start-up
financing, which is used to confirm feasibility and to get the
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company organized; expansion or development financing,
which comes in three stages - second stage finance for
supporting first commercial sales, third stage finance for
expanding production, and fourth stage finance for making
the transition from a privately held company to a publicly
owned firm [Dollinger, 9]. The funding process was
elaborated as constituting: seed funding, start-up funds, firststage funding, second-stage funding, mezzanine financing,
and buyout funding [Barringer & Ireland, 22]. This process is
detailed in the Table 1 below.
Table 1: Stages of Venture Capital Financing
Stage or
Round
Seed
funding
Start-up
funding
First-stage
funding
Secondstage
funding
Mezzanine
financing
Purpose of Funding
Investment made very early in a venture‟s life to
fund the development of a prototype and feasibility
analysis.
Investment made to firms exhibiting few
commercial sales but product development and
market research are complete. Management is in
place, and the firm has completed its business
model. Funding is needed to start production.
Occurs when the firm has started production and
sales but needs additional financing to ramp up
capacity.
Applies to a firm successfully selling a product but
needs to expand production capacity and enter new
markets.
Provides for further expansion or to bridge
financing needs before launching an IPO or before
a buyout.
Provided to help a company acquire another.
Buyout
funding
Source: Barringer & Ireland [22]
4.2. The Venture Investment Process
The venture capital investment process was described as
involving: preparation of an information memorandum by the
firm for preliminary evaluation; issue of a letter of intent by
the VC company setting out all the terms, rules and
conditions precedent; completion of a technical, business,
financial, and legal due diligence audit by the VC; and finally
signing of a shareholders‟ agreement [Rotheli & Grotzer, 10].
The shareholders‟ agreement is critical and covers:
investment and investment mechanics, exit mechanisms,
dilution protection; representations and warranties;
covenants; representation on the board; conditions precedent
to closing; creation of a business plan; indemnification; and
termination procedures [Rotheli & Grotzer, 10]. The process
is therefore essentially one of negotiation and it was found
that “the success or failure of the negotiations will revolve
around the need to strike a balance between the legitimate
concerns of the founders of the company…. and the concerns
of the venture capitalist” [Sherman, 1].
The literature on VC investing confirmed that venture
capital companies vary in their investment interest and
Elango et al., [5] studied the differences among venture
capital firms based on the venture stage of interest, amount of
assistance provided, the size of the VC firm, and the regional
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The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
location. Elango et al., [5] found that there were three
different types of venture capital markets as follows: early
stage; local and regional area markets; and large, late-stage
investments at the national level. Elango et al., [5] concluded
that local VC‟s are vital if a region is to provide either earlystage or small late-stage financing but not large late-stage
financing. This position was supported by Anonymous [20]
who studied cross-border venture capital investing in Finland
and observed that local venture capitalists typically invest
first, followed by foreign venture capitalists in later rounds.
This finding is instructive for developing countries seeking to
develop a VC industry including the Caribbean.
A VC is very careful in assessing firms‟ proposals for
financing and tends to focus on four main areas which were
described by Sherman [1] as comprising: details of the
management team; uniqueness of the products or services and
their sustainability; the characteristics of the market targeted;
and the anticipated return on investment. These issues were
detailed as covering: competent management; competitive
edge of the firm; whether the firm was in a growth industry;
existence of a viable exit strategy; and intangible factors such
as the strategic planning process, chemistry of management
team, and the overall sense of direction [Scarborough &
Zimmerer, 15]. Firms in developing countries will have to
gain a deeper insight into the mind of the VC, if this form of
financing is to play a part of business development.
4.3. Angel Finance
An often neglected source of venture capital, mainly because
of lack of information, is angel finance. Levitsky [4]
indicated that there are some private investors who invest in
small companies; either becoming involved directly in
management, or offering their expertise as advisers to the
managers. Such persons are referred to as “business angels”,
and are usually retired executives or entrepreneurs who sold
their own businesses and are looking for both a business or
management interest and a rewarding investment for their
funds. However, there are different types of angel investors
and Kuratko & Hodgetts [13] identified five basic groups:
corporate angels who are senior managers who received a
large severance; entrepreneurial angels who own and operate
successful businesses; enthusiast angels who are
independently wealthy and use investing as a hobby;
micromanagement angels who are wealthy business persons
who usually seek a seat on the board; and professional angels
such as doctors and lawyers who invest in companies that
provide a product or service related to their business practice
[Kuratko & Hodgetts, 13].
An additional group, called “archangel” which is a
person who marshals informal capital through syndicates of
other investors and pursues commercialization of product
ideas and technology was identified [Riding, 8]. It was
argued that entrepreneurs need to understand what business
angels consider when reviewing investment opportunities, as
well as appreciate that they need to: manage the presentation
to investors, answer questions, and facilitate the relationship;
build an effective management team that investors can trust
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to invest in; and clearly communicate an exit strategy for
investors. Investors, on the other hand, must be wary of first
impressions and not jump to conclusions about entrepreneurs‟
trustworthiness [Sudek, 17]. Angel financing may not be easy
to access in developing countries and will not amount to a
major source of equity funding, but cannot be ignored as
potentially important, as angels tend to target specific
investments. There is merit in promoting the role of the
archangel approach of syndication as a means of tapping
angel finance in developing countries.
4.4. Corporate Venture Capital
Corporate Venture Capital (CVC) involves larger firms
investing in innovative smaller firms either through direct
acquisition of shares or through private equity funds. Lantz et
al., [28] indicated that “along with joint-ventures and partial
mergers, corporate venture capital today has become one of
the most widespread forms of financing for new innovating
firms” especially in the area of technology [Lantz et al., 28].
However, CVC is not uniform but can assume different
postures with firms opting alternatively for: an internal
division which targets investments in “peripheral
technologies” in external firms; an internal investment fund
which invests jointly with other investment funds; spin-off
ventures to create new products based on in-company
expertise; collaborative venturing by associating with
innovative SMEs to jointly pursue a project; gradual
investing through collaboration with other investors but with
low level decision-making and technological control; and
investing in a specialized external VC firm which builds a
fund for investing in growth-oriented investee companies
[Lantz et al., 28].
Apart from the formal VC companies, large corporations
are increasingly entering the field of CVC which Anonymous
[23] considers a unique opportunity for cash-rich firms to
become providers of finance to the corporate world in the
face of the collapse of confidence in banks. Anonymous [23]
suggested that, in times of crisis, firms should expect to see:
“nonfinancial players plucking teams of investment and risk
experts from the wreckage of the financial services industry”;
the increasing prominence of sovereign wealth funds and
government creating more structured investment vehicles;
corporations working in partnership with acquired firms
which will act as an appealing corporate option; and the
reemergence of rights issues as a valuable source of funding
[Anonymous, 23]. Corporate venturing was also viewed as
crucial in the financing of technology based firms, and the
concentration of investment in early stage technology-based
ventures reflected the motives of corporate investors which
are strategy oriented, related to obtaining windows on new
technologies, and concerned with financial returns from
business growth [McNally, 7]. More recently, governments
are providing increasing support to VC activity in the more
developed countries by creating funds to invest equity from
the state coffers, while some governments are focusing on
easing the regulatory restrictions on investing by institutions
such as pension funds [E&Y, 35].
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The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
V.
VENTURE CAPITAL FINANCING IN
MAJOR DEVELOPED AND EMERGING
COUNTRIES
The VC industry experiences periods of high activity
followed by low investing activity normally tied to the
economic cycle which is increasingly global in its impacts.
However, based on investment trends from 2013, E&Y [35]
noted that: investment activity by angels is growing in
significance and extending to start-up businesses in response
to VCs shift to more established firms; technology-enabled
mechanisms are facilitating crowdsourcing which assists
firms at the seed capital stage; corporations are collaborating
with fast-growth companies and VCs, to either fill investment
gaps or deploy available funds; and governments are turning
their attention to the need to “create entrepreneurial
ecosystems in which venture finance can thrive” The general
conclusion was that VCs will target firms with the right
growth trajectories and management teams that position
themselves in the market at the appropriate time [E&Y, 35].
From the early introduction of VC as a financing
instrument, investments were targeted at technology-based
firms including bio-technology. However, the industry
Investment
Invested capital (US$b)
No. VC-backed IPOs
Median time to exit (years)
Invested capital (US$b)
No. VC-backed IPOs
Median time to exit (years)
Invested capital (US$b)
No. VC-backed IPOs
Median time to exit (years)
Invested capital (US$b)
No. VC-backed IPOs
Median time to exit (years)
Source: E&Y [35]
VI.
Table 2: Venture Capital Investment Trends
2010
2011
USA
29.2
36.2
47
46
8.0
6.4
Europe
7.1
7.3
18
15
3.8
9.2
China
6.1
6.5
141
99
2.6
2.5
India
0.9
1.5
6
2
4.3
N/S
VENTURE CAPITAL IN EMERGING
MARKETS
Govindarajan [29] of Dartmouth College observed that VCs
are taking an interest in emerging countries because of poor
returns in developed markets, and are taking a more
comprehensive approach in emerging markets such as India.
This position is supported by The Economist [31] which also
pointed to problems for VCs in traditional markets.
Govindarajan [29] argued that, while traditional VCs treat
each investment as independent entities, Nadathur Holdings
founded by N.S. Raghavan linked the investments in health
care firms operating as an executive team with a portfolio
covering “drug recovery research, companion diagnostics,
pharmaceutical analytics, reimbursement claims processing,
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broadened its range of investment activity and the current
preferred industries are: information technology in the US
and Canada; consumer services in Europe, China, and India;
and health care in the more mature economies [E&Y, 35].
The recent trends on VC investment in the major developed
markets of the USA and Europe and leading emerging
countries of China and India, were analyzed by critical
indicators of: invested capital; number of VC-backed IPOs;
and median years to exit the investment by venture
capitalists. As shown in “Figure 1”, the USA dominated the
VC industry as far as invested capital was concerned, but
Europe and China were at a similar level. India lagged behind
with approximately half of the amount invested in China. The
number of IPOs is a sound indicator of activity in the VC
market, and in this area China stands out as being way ahead
of the USA but India remains behind. In terms of the median
years to exist, which is an indicator of the length of time
investors keep their funds in a business, investors in the USA
maintain their VC investment much longer on average than
Europe and China while for the one year when statistics were
available for India the indicator registered a reasonable 4.3
years compared to 3.8 in Europe and 2.6 in China for the year
2010.
2012
2013
32.8
50
7.4
33.1
74
6.8
6.2
16
6.2
7.4
15
6.3
5.0
46
2.4
3.5
15
3.9
1.6
2
N/S
1.8
1
N/S
patient relationship management, and specialty health care
delivery [Govindarajan, 29]. It was also established that VCs
in emerging markets are adopting a systems approach to
investing
because:
“innovation
ecosystems”
are
underdeveloped; “technology-intensive firms are expected to
generate revenues” before exiting the investee firm; and there
is a scarcity of “local financial intermediaries”
[Govindarajan, 29].
The Economist [31] cited the specific risks encountered
in emerging markets which include: bureaucracy delays the
launching of start-up firms; cultural barriers to joining new
firms in exchange for equity; exit difficulties because of low
levels of IPO activity; and the dangers of “tropicalization”
which refers to the copying of successful business models
from developed countries. An interesting study was
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The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
undertaken in South Africa which investigated the indicators
used by private equity firms and VCs to assess investment
opportunities and identified the criteria deemed in 2010 as
most important for VCs in order of rank as: honesty and
integrity; sound sector knowledge; success driven; large
market size for product or service; a competitive advantage
established; a unique service or patentable product; clear
market need exists; market growth potential; good projected
market acceptance; and developed product or working
prototype [Portmann & Mlambo, 33]. Overall, the conclusion
from the study of VC investment assessment criteria in South
Africa was that the quality of management or the
entrepreneur was the main determinant for attracting VC
investment. It is generally accepted in the literature that VC
investments must be selective which Levitsky [4] suggested
should be based on three specific criteria: competence and
quality of the entrepreneur or management team; availability
of market potential for the company‟s products and services;
and confirmation of a long-term competitive advantage
resulting from its technological edge, or first mover
advantage in the market, or the entrepreneur‟s capacity to
identify viable niches.
In order to support VC funding in small emerging
economies, a case was made for a VC guarantee scheme in
which losses incurred from investment in SMEs would be
covered by governments as applies in the Netherlands. In this
scheme the government funds 50 percent of losses on an
investment while the remaining 50 percent was treated as
allowable tax deductions and Kruisinga & Veerschoor [14]
found that these provisions contributed significantly to the
development of a thriving VC market in the Netherlands. On
this basis, it was recommended that a guarantee scheme be
created for Slovakia to address the venture financing gap. The
critical issue of exit from the investments require: alignments
of interests among stakeholders; a sound working relationship
between management and shareholders; transparency of
information; agreement on exit conditions; and a market for
trading in shares with a vibrant stock exchange [Kruisinga &
Veerschoor, 14]. The experience of guarantee systems in the
Caribbean is very limited but a guarantee system was
introduced in 1990 in TT for a small business loan portfolio
[Allahar & Brown, 6]. In the case of small business loans,
guarantees are intended to provide funding „additionality‟ by
facilitating bank and credit union lending which the TT
experience demonstrated.
VII.
DESIGNING A VENTURE CAPITAL
MODEL FOR THE CARIBBEAN
The entrepreneur in TT and the Caribbean islands
traditionally relied on debt financing to meet the needs of a
new start-up venture or for expansion of an existing
company. A relationship is usually established with a bank
and loans negotiated as the business grows. This growth is
limited in many instances by the amount of capital that can be
injected into the operation. The amount of capital that is
available from a debt financier is limited basically by two
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factors, available collateral, and projected cash flows
sufficient to service the debt. While in some instances the
lending institution may give a character loan, waiving a part
of the collateral requirement, this is the exception rather than
the rule, and is contingent upon the entrepreneur‟s track
record.
The quest for an appropriate VC model for small
countries led to an experiment with VC in TT with the
establishment of a Venture Capital Incentive Program (VCIP)
[37] by way of formal legislation to address difficulties
experienced by small firms in accessing commercial finance
and the lack of equity capital available for small business
financing. The prime objective of the VCIP was to increase
the supply of risk capital to the entrepreneurial small business
sector, thus fostering the expansion and preservation of small
businesses as well as creating new jobs. This objective is
achieved by tax credits that are granted to investors in
qualifying companies. The process required a business to
register as a Venture Capital Company in order to invest in a
small or medium business ventures and benefit from tax
credits available through the VCIP program. The record
showed that from 1998 to 2002 only two venture capital
companies were registered with the VCIP with one VC
operating outside of the VCIP regulations as permitted. After
almost 15 years of existence, only 15 investments have been
made, with the independent company responsible for five
investments. It can be concluded from this evidence that the
VC industry was not vibrant and was not an effective source
of equity for businesses in TT, despite no direct involvement
of the government in the investment process as compared
with the Canadian case described by Lamman & Veldhuis
[25].
Mark [32] suggested that VC in the Caribbean should
pay close attention to the interrelatedness of the elements in
the VC ecosystem which include: supply or the availability of
a sufficiently large pool of venture capital and
complementary financial products; creating demand by
spawning new high growth businesses and by converting
existing demand to real demand through access to new
knowledge, centers of innovation, practical entrepreneurship
education programs to create a new wave of entrepreneurs
and business advisory and support services; and fostering an
enabling environment through governmental action towards
the creation of a supporting legal and regulatory framework.
It was concluded that an appropriate VC model was required
“to provide the impetus to implement a solution-focused
transformation agenda for the Caribbean” but stayed short of
describing such a model [Mark, 32]. A workshop on SME
financing agreed that VC financing for small enterprises was
a failure in TT and a risk-capital model was offered as a
superior model. The proposed risk-capital model blended
equity and debt with an agreed exit percentage for investors
and represented a public-private partnership with government
contributing two-thirds and the private sector one-third of the
subscribed capital [Maharaj, 36]. Somehow, the proposal
anticipates investors deriving confidence from nonintervention by the government because they will not be
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The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
represented on the board of the investee firm which in this
author‟s view is naïve.
It can be argued that the TT experiment did not
acknowledge that the successful operation of a traditional
venture capital industry depended upon the involvement of:
universities, large firms, research laboratories, VC firms, law
firms, investment banks, commercial banks, public
accountants, consulting groups, recruitment agencies, public
relations agencies, and media [Ferrary & Granovetter, 24].
These agents are vital to the life cycle of start-up businesses
which are the potential target companies in developing
countries. It was concluded that the success of a start-up is
not based solely on “the quality of the entrepreneur and its
innovation, but also from its embeddedness in complex social
networks. The more connected an entrepreneur is, the better
is his access to financial resources, to advice, to partners and
experts” [Ferrary & Granovetter, 24].
Acs & Szerb [18], in their paper to the second Global
Entrepreneurship Research Conference, suggested that
middle income countries should concentrate on increasing
human capital, upgrading technology availability and
promoting enterprise development while developed countries
need to focus on labor market reform and deregulation of
financial markets. An initiative that is relevant to developing
countries such as TT, is the Utah Fund of Funds which, in
addition to making VC investments, provides certain benefits
which were documented by Anonymous [21] as comprising:
actively counseling entrepreneurs about fund-raising
strategies; forging and strengthening relationships with
leaders in the national investment and business communities;
supporting the development of key support infrastructure;
increasing awareness and credibility of companies and
entrepreneurs in the investment community; and boosting
confidence among the entrepreneurial community. Further
the Fund promotes networking events, workshops, industryspecific conferences, and introduces individuals with
significant experience as limited partners, as active
participants in the Utah Capital Investment Corporation.
The literature on VC models for small economies is very
sparse as confirmed by Ayodeji [26] who traced the
development of VC models over time noting that such
models focused on the VC investment process. As a result,
Ayodeji [26] proposed a model relevant to emerging
countries which highlighted the importance of VC as a
catalyst for technological development and sustainable
growth in Central and Eastern Europe, Latin America, Asia,
and Africa. The model was based on the commercialization
of patents and intellectual property produced by universities
and research centers which in small emerging countries is at
an exceedingly low level. The model depicts VC firms at the
heart of the system supported by: financial institutions
supplying funds; higher institutions of learning and research
centers providing creative ideas and innovative products;
portfolio companies which allow equity participation with
management and skills provided by the VC firm; and
government and support agencies which supply funds and
complete the support framework all operating within the
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context of the macro-economy [Ayodeji, 26]. This paper
proposes a community-based investment fund which will
incorporate the element of higher learning organizations in
the model identified as “the missing link between universities
and research centers where ideas, innovation, patents, and IP
are generated” [Ayodeji, 26].
VIII. A MODEL OF A COMMUNITY-BASED
INVESTMENT FUND
This paper proposes a model for promoting VC investments
based on a community approach which was suggested by Van
Auken [12] for rural communities. Both models developed by
Ayodeji [26] and Van Auken [12] focus on technology-based
firms but this approach has limited application in TT and
other Caribbean island economies and will have to be
broadened to include a range of investments as identified in
Mark [32]. The proposed model (“Figure 1”) was designed
based on insights culled from the literature reviewed in this
paper and operational experience of a small business VC
fund. The model comprises a community fund as the
investment vehicle with the fund performing the critical
coordinating role and ensures effective communication with
all partners. Further, the key components of the model
include: the community environment which provides
leadership, support, and capital mobilization; the external
environment which participates by identifying opportunities,
networking, and facilitating enabling public policy.
Juxtaposed between these key environments are the higher
learning institutions which contribute creative thinking,
innovative products and services, business planning and
human capital development. The model is predicated upon
coordination of efforts, establishment of an environment of
creativity and innovation, and effective identification and
selection of viable sound business opportunities which target
early-stage dynamic firms which traditional VC avoids.
This community investment model suggests that a
community will benefit directly from: development of the
local economy; an increase in community dynamism;
expanded social capital from wider networking and
collaboration; accelerated business development with new
ventures being started up; job creation which may even
attract skills from outside the particular community; and
private investment and wealth creation as a result of the
productive environment created. In this context, the adoption
of the model by small developing countries, which reflect a
high level of community action, is proposed which is
reinforced by the following statement: “The result of a
community effort that assembles each segment of the model
can be an environment in which members of the community
contribute to an investment fund, cooperate in attracting
firms, and provide networking assistance to the new business
owners. Communities benefit through job creation and
economic stability, and community members benefit through
wealth creation” [Van Auken, 11].
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The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
COMMUNITY INVESTMENT FUND
Promotes networking events, workshops, industry-specific conferences, counseling,
introduces experienced individuals to entrepreneurs, ensures high level coordination and
communication
Higher learning institutions &
research centers
Community Environment
 Effective leadership
 Committed community
support
 Mobilization of Capital




Highly coordinated efforts for
pursuing equity investments
in early-stage dynamic firms
Creative business ideas,
Innovation
Planning
Human capital development
An environment for generating
creative ideas and innovative
products and services
External support environment
 Identification of sound opportunities
 Provision of support network
 Enabling public policy
Supports communities in identifying,
screening, and structuring investments
in early-stage dynamic firms
Community Benefits






Economic development
Community dynamism
Social capital
Business development
Job Creation
Private investment & wealth creation
Figure 1: Proposed Model of a Community Investment Fund
IX.
CONCLUSION
Based on the lessons learnt from several countries it has been
concluded that the provision of equity capital has a place in
the financing of businesses, but it can only fill a particular
niche, or what has been termed in the literature, a „financing
or equity gap‟. In order to create an environment which can
be successful in venture investing, specific conditions must
obtain and these were identified in the case of Africa by Hart
[3] as constituting: an abundance of good proposals; a history
of rapid equity growth in new companies; adequate business
management and management consulting expertise; expertise
in financial and industry analysis; readiness of local
investors; appropriate tax incentives; transparency in
company valuation; and societal acceptance of
entrepreneurship, profit and wealth [Hart, 3]. This position is
supported by Levitsky [4] concluded that the lessons learnt
from several countries indicated that “the provision of equity
capital has a place in the financing of small business but it
can only fill a particular „niche‟ or what has been called a
„financing or equity gap” [Levitsky, 4]. In this context,
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Levitsky [4] advised that, to facilitate the provision of equity
finance to small business: grants should be offered to
partially defray operational costs; the financing package
should include minority equity participation of 20 to 40
percent, „quasi-equity‟, conventional loans and some
investment from the entrepreneur on the basis of syndication;
establishing close coordination with financial institutions,
business consultants, and support agencies; and development
of a wide network of contacts with business associations.
In developing countries, a critical factor is the
availability of exit mechanisms which include a functioning
securities markets and methods of divestment, such as
mergers, private placements, management buy-outs and, most
importantly, acquisitions. This was recognized by Sagari &
Guidotti [2] who pointed to the experience of the World Bank
in VC operations highlighting 10 success factors including
hands-on-management, maintaining a manageable portfolio
by keeping it small; developing a long-term investment
horizon, and establishing acceptable exit mechanisms for
investors.
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The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 2, No. 10, December 2014
In order to enhance access to venture financing including
venture capital, the position espoused by Van Auken [11] that
a lack of information about the availability of specific sources
of capital can result in suboptimal firm performance and
financial distress is critical to the process. Further, Ferrary &
Granovetter [24] have detailed all the players required to
make the VC system work and therefore, developing
countries have to ensure that the roles of these players are
explicitly known and promoted. The specific actions that
need to be undertaken are detailed by the Utah Fund of Funds
which this paper considers most relevant to developing
countries and TT in particular. The overriding requirements,
as pointed out by Acs & Szerb [18], are for developing
countries to focus their efforts on human capital
development, upgrading of technology, and promotion of
entrepreneurship and enterprise development. In this context,
this paper supports the approach of creating a community
based VC fund as shown in Figure 1 which is considered
appropriate to the development circumstance of small
developing countries.
[14]
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ISSN: 2321-242X
Haven Allahar has a doctorate in business
administration (DBA) from California
Intercontinental University and is an adjunct
lecturer in entrepreneurship at the Graduate
School of Business, University of the West
Indies, Trinidad and Tobago. He is also a
director of APDSL a private consulting firm
specializing in urban and regional,
transportation, and economic and small
business development planning. He has served in the public sector
as the CEO of development companies, and in the private sector as a
consultant spanning 40 years. As CEO of the Small Business
Development Company he led the establishment of a venture capital
fund for small firms. In addition to his interest in entrepreneurship
and economic development issues, he is a practicing futurist with
special interest in scenario planning and strategic foresighting. He
has published journal articles in Small Enterprise Development, The
Futurist, and Journal of Management and approximately 100 articles
over the last 20 years in the business magazine of a leading
newspaper. He has participated in many seminars and conferences
over the past 40 years including the conferences held by the World
Future Society of which he has been a member for 17 years.
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