Panel Data Analysis on the Usage of Venture Capital Financing and Firms’ Financial Performance: The Case of Small and Medium Enterprises in Nairobi City County, Kenya

: SMEs play a critical role in the development of most economies and their success has both political and economic ramifications for most governments globally. Successful SMEs have been associated with employment creation and therefore their growth contributes to the overall Gross Domestic Product (GDP) of most economies. However, SMEs growth is dependent on their financial performance. Venture capital provides capital to start-ups and SMEs which have shown growth potential. In light of the above, data was collected from a sample of 51 venture capital-backed SMEs. The study used firm level panel data of the venture capital-backed SMEs in Nairobi City County, Kenya for a period of five years from 2013-2017. Huasman test was done to determine the most specific and appropriate test for each study model specification. Both ROA and TAP were used as dependent variables while venture capital financing methods, management cost of venture capital and venture capital management support were independent variables. The size of SMEs and age were used as control variables. The study used random effects for the analysis of ROA and fixed effect for TAP as guided by the results of Huasman tests. The study results showed that R 2 = . 1051, indicating that 10.51% of the variance in SMEs financial performance (TAP) is significantly explained by venture capital financing. Therefore, SMEs financed by venture capital are likely to register higher financial performance as measured by TAP. Further, results of regression analysis revealed that venture capital financing methods (p> .05), cost of venture capital (p>.05) and venture capital management support (p>.05) were not statistically significant and thus do not have significant effect on SMEs financial performance as measured by ROA. Management cost of venture capital, however, was found statistically significant (p<.05). The results also revealed that the size of an SME (firm size) has statistically significant effect on SMEs performance (p<.05). In conclusion, it is evident that management cost of venture capital is positively associated with financial performance as measured by TAP. The result suggests that cost of venture capital is responsible for the development of technical and managerial skills critical for the internal operation of the business and this immensely contributes to better financial performance of venture capital –backed SMEs. Therefore, SMEs should embrace good financial management practices which result in higher return on assets and total asset productivity. The study provides empirical evidence of the impact of venture capital financing on SMEs financial performance. The paper analyzed the link between the usage of venture capital financing and firms’ financial performance: the case of SMEs in Nairobi City County, Kenya. The study reveals that management cost of venture capital is positively associated with financial performance as measured by TAP. The result suggests that cost of venture capital is responsible for the development of technical and management skills critical for the internal operation of the business and this immensely contributes to better financial performance of venture capital –backed SMEs. This shows that the SMEs financial performance is affected by factors within the management control, that is management cost of venture capital. Thus, the study rejected the null hypothesis that the cost of venture capital does not have a significant effect on the financial performance of SMEs in Nairobi City County, Kenya. Further, the study established that firm size is negatively associated with firms’ financial performance measured by both ROA and TAP. The outcome suggests that small firms are better placed to follow good financial management practices which are key for their growth and this helps improves their financial performance. As firms grow, they become complex and the larger size affects their productivity efficiency. Venture capital financing methods were found to have no significant impact on the SMEs financial performance. This clearly shows that the financial performance of venture capital-backed SMEs does not depend on the type of investment strategy of venture capital financing: upfront, staged or syndicated adopted by venture capitalist. The same is true for venture capital management support. Age of firms was found to have little effect on firms’ financial performance and this means that in venture capital financing, the financial performance is independent on a firm’s age. This indicates that little emphasis mat be laid on a firm’s age when venture capitalists identify SMEs for financing. The study outcome of the study could assist venture capitalists and SMEs to recognize the critical role played by cost of venture capital in influencing the financial performance during venture capital financing. Therefore, the study recommends that venture capital –backed SMEs should put in place measures that not only