Technology Based Entrepreneurship Financing. Lessons for Nigeria

Abstract

Technology entrepreneurship is a form of business leadership based on the process of recognizing high-potential, technology-intensive business opportunities, gathering resources such as talent and cash, and managing rapid growth using principled, real-time decision making skills. Technology based entrepreneurial firms account for a substantial number of essential inventions and innovations in successful countries. Such firms have become an integral part of the development of the global and regional economy. However, they are often characterized by the paradigms liability of newness and resource poverty, coupled with suffering from inadequate technical and marketing know-how, inexperience management, inability to discover initial financing and huge overheads. In view of this, startups in the technology sector encounter the problem of sourcing technical and financial resources and commercialization capabilities required to take their products to market. This study adopts a secondary approach to research methodology through the review of existing articles in this domain of investigation. Articles are sourced from conference and journal papers from reputable database, internet sources, brochures and newspapers. This study concludes that investment and financial decisions play an increasing vital role in economic growth and entrepreneurial new venture creation. Hence, investment and financial policies are part of the main operational resolutions in emerging nations to support investment by domestic firms, particularly technology entrepreneurial firms. Hence, policy makers in Nigeria and other developing countries could evolve ambitious policy framework aimed at developing the equity financing sector through venture capital, particularly for technology entrepreneurs. Also they could build substantial amount of skilled and experienced venture capitalists to identify high potential investments opportunities and be able to nurture and support them to an exit.

Full text

International Journal of Academic Research in Accounting, Finance and Management Sciences
Vol. 6, No.1,
January
2016, pp. 150–163
E-ISSN: 2225-8329, P-ISSN: 2308-0337
© 2016 HRMARS
www.hrmars.com
Technology Based Entrepreneurship Financing. Lessons for Nigeria
Musibau Akintunde AJAGBE1
Joshua Olusola OLUJOBI2
Anthony Akwawa UDUIMOH3
Lawrence Uchenna OKOYE4
Adunola Oluremi OKE5
1Department of Management Sciences, Ritman University, Ikot Ekpene, Nigeria, 1E-mail: ajagbetun@yahoo.com
2,5Department of Business Management, Covenant University, Ota, Nigeria, 2E-mail: joshuadlaw@yahoo.co.uk
3Department of Accounting and Finance, Ritman University, Ikot Ekpene, Nigeria, 3E-mail: auakwawa57@gmail.com
4Department of Banking and Finance, Covenant University, Ota, Nigeria
Abstract
Technology entrepreneurship is a form of business leadership based on the process of recognizing h igh-
potential, technology-intensive business opportunities, gathering resources such as talent and cash, and
managing rapid growth using principled, real-time decision making skills. Technology based
entrepreneurial firms account for a substantial number of essential inventions and innovations in
successful countries. Such firms have become an integral part of the development of the global and
regional economy. However, they are often characterized by the paradigms liability of newness and
resource poverty, coupled with suffering from inadequate technical and marketing know-how,
inexperience management, inability to discover initial financing and huge overheads. In view of this,
startups in the technology sector encounter the problem of sourcing technical and financial resources and
commercialization capabilities required to take their products to market. This study adopts a secondary
approach to research methodology through the review of existing articles in this domain of investigation.
Articles are sourced from conference and journal papers from reputable database, internet sources,
brochures and newspapers. This study concludes that investment and financial decisions play an
increasing vital role in economic growth and entrepreneurial new venture creation. Hence, investment
and financial policies are part of the main operational resolutions in emerging nations to support
investment by domestic firms, particularly technology entrepreneurial firms. Hence, policy makers in
Nigeria and other developing countries could evolve ambitious policy framework aimed at developing the
equity financing sector through venture capital, particularly for technology entrepreneurs. Also they could
build substantial amount of skilled and experienced venture capitalists to identify high potential
investments opportunities and be able to nurture and support them to an exit.
Key words
Venture capital firms, technology entrepreneurship, financing, Nigeria
DOI: 10.6007/IJARAFMS/v6-i1/2009
URL: http://dx.doi.org/10.6007/IJARAFMS/v6-i1/2009
1. Introduction
Policy makers in developed and new industrializing nations have made available substantial support
to Technology Based Entrepreneurial Firms (TBEFs) to cover certain areas of their operations. Gomez (2009)
argues that concerned ministries and public agencies should provide support in technical expertise,
training, disseminating information and financing. Massa and Testa (2008) posits that TBEFs are viewed as
major influences in the economic growth, wealth creation, job provision and creation of new innovations or
inventions. Some economists have also argued that notwithstanding the huge dominance of Research and
Development (R&D) funding in large corporations, Technology Based Entrepreneurial Firms account for a
substantial number of essential inventions and innovations in the economy (Khin et al., 2010; Bloch, 2007;
Ferrary and Granovetter, 2009). Technology Based Entrepreneurial Firms (TBEFs) have become an integral
part of the development of the global and regional economy (Somsuk et al., 2012; Ajagbe et al., 2012a).
These firms are often characterized by the paradigms liability of newness and resource poverty (Lendner,
2007; Mason and Brown, 2010). In addition, they suffer from inadequate technical and marketing know-

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how, inexperience management, inability to discover initial financing and huge overheads (Hackett and
Dilts, 2004).
In view of this, startups in the technology sector encounter the problem of sourcing technical and
financial resources and commercialization capabilities required to take their products to market (Lin et al.,
2011; Somsuk et al., 2012; Ajagbe and Ismail, 2014). Aside the aforementioned, one of the main constraints
encountered by TBEFs is their inability to have access to adequate funding. It is however very important to
highlight that investment and financial decisions play an increasing vital role in economic growth and
entrepreneurial new venture creation (Kortum and Lerner, 2000). These investment and financial policies
are part of the main operational resolutions in emerging nations to support investment by domestic firms,
particularly technology entrepreneurial firms, and multinational companies investing in these countries
(Wonglimpiyarat, 2011; Ajagbe, 2014). Whilst arguing that technology entrepreneurial small firms play
important roles in innovation, Thiruchelvan et al. (2010) point out the challenges of access to finance,
inability to cope with government regulations and non-availability of adequate professional management
expertise as a few of the challenges these technology small firms face globally.
Figure 1 below shows the conceptual framework of this research including the relationship amongst
the variables, for example, venture capital firms; technology based entrepreneurial firms and government
intervention strategies.
Figure 1. Research Conceptual Framework
2. Literature review
2.1. Technology Entrepreneurship
Dollinger (2003) posits that technology is a branch of knowledge that deals with industrial arts,
applied science, and engineering. It can be seen as a process, an invention, or a method. Technological
change can take place either through pure invention or process innovation, and includes devices such as
artefacts, processes, tools, methods and materials that can be applied to industrial and commercial
purposes. Dorf and Byers (2008) emphasizes that, technology entrepreneurship is a form of business
leadership based on the process of recognizing high-potential, technology-intensive business opportunities,
gathering resources such as talent and cash, and managing rapid growth using principled, real-time decision
making skills. Dollinger (2003) opine that an attractive business opportunity is said to consist of a great
value proposition, technically feasible products, protectable intellectual property (IP), a sustainable
competitive advantage, a large potential market, and a proven business model. This can be based on either
a revolutionary breakthrough in technology or evolutionary advancement which can target an existing
market or create an entirely new one. This entrepreneurial process is applicable to both independent
startups and established corporations (Buenstorf and Geissler, 2012; Elenurm, 2012).
Technology Based
Entrepreneurial Firms
 I CT Firms
 Biotech Firms
 Greentech Firms
 Nanotech Firms
 Electronics
Venture Capital Firms
 Private VC
 Govt VC
 Bank VC
 University VC
 Business Angels
Government Intervention
 Tax
 Regulations
 Incentives
 Grants

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Technology entrepreneurs use technology as their driving factor in transforming resources into goods
and services, creating an environment conducive for industrial growth. There are two different kinds of
technology entrepreneurs depending on their characteristics: these are technology developers (inventors)
who are those who develop a unique technology capable of driving new businesses (Dollinger, 2003). The
other group is the technology users or innovators who are those who see a new technology development
and understand how it can be applied to meet market needs (Gercia-villaverde, 2012 and Barreto, 2010).
Nicholas and Armstrong (2003), provide another definition of technology entrepreneur as someone who
organizes, manages and assumes the risk of an engineering business enterprise. Technology
entrepreneurship was recognized by the Malaysian government as a force that can create huge impact on
growth, recovery and societal progress by fueling innovation, social empowerment, economic
empowerment, employment generation and productivity. This assertion led the Malaysian government to
set up agencies to assist technopreneurs in obtaining the relevant standards and systems that are pertinent
for them to enter desired market both locally and internationally (Mosti, 2012; Janssen and Moors, 2013).
Technology Entrepreneurial Firms produce high value-added products that have rippling effect or spill-over
effects on other firms (Groh et al., 2010; Ajagbe et al., 2012b). For example, employment creation, the
generation of wealth and R&D spill-over benefits has been identified as the three major contributions of
technology entrepreneurship.
2.2. Technology Entrepreneurial Process
Price (2004) and Ajagbe and Ismail (2014) emphasize that in trying to understand the differences and
similarities between a conventional and technology entrepreneur, it would be useful to understand the
entrepreneurial process both have to undergo. They enumerated however that technology entrepreneurial
process involves seven stages of the entrepreneurial life cycle. Figure 2 below shows the technopreneurial
process model as studied by Price and supported by Ajagbe and Ismail.
Source: Price (2004) and Ajagbe and Ismail (2014)
Figure 2. Technopreneurs Process Model
2.3. Characteristics of Technology Entrepreneurs
Bulsara et al. (2010) elucidates on two options open to technology entrepreneurs to commercialize
their patented technology, and suggests that an innovator who does not possess an enterprising tendency
or entrepreneurial characteristics should opt for technology transfer (licensing). These authors add that
someone who has a strong entrepreneurial characteristics and enterprising tendency would also be most
suited for techno-entrepreneurship. In addition to this, they explained that the basic characteristics that
would be expected of a technology entrepreneur to be successful include: need for achievement, need for
autonomy and independence, creative tendency, moderate and calculated risk taking, drive and
determination.
2.4. Definitions of Technology Entrepreneurial Firms (TBEFs)
Ajagbe (2014), describes TBEFs as those ventures in which the sales revenue is generated through
the implementation of about 51 percent or more of technology based operations, for example, the
internet, electronics, mechanical, automobile, clean energy, bio-medical, communications, telephone, fax
companies and so on. The main trust of these ventures depends heavily on the use of high technology.
Opportunity
recognition
Opportunity
focusing
Commitment of
resources
Market entry
Liquidity event
Maturity and
expansion
Full launch and growth

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TBEFs have a high standard of business internalization (Mason and Brown, 2011) and are more likely to
engage in global markets than other non-high growth small and medium sized firms (BIS 2010).
TBEFs have been suggested to have above-average levels of productivity growth (Mason et al., 2009),
strong levels of innovation (Coad, 2009; Mason et al., 2009), and strong levels of export-orientation (Parsley
and Halabisky, 2008). The classic expressions of TBEFs are that of young entrepreneurial companies,
inventive designs which have been nurtured into high growth technology organizations. The most
successful of these young technology firms of the last ten or more years are the popular and talked about
giants of today. These are Microsoft, Netscape, Facebook, Amazon.com, Jumia, Konga, and Alibaba to
mention a few. Nelson et al. (2009) on the one hand, identifies high growth firms as those young firms that
have the potential to produce spectacular results, facilitate development of leading edge technology and,
perhaps, move on to initial public offering (IPO) in order to take their place in “the fortune 500” of
tomorrow. On the other hand, Smith (2010) groups high-technology entrepreneurial firms on the definition
of the National Science Foundation (NSF) as technology generating and technology employing firms. He
emphasizes on the profound nature of the economic and social impact of these category of firms (NSF,
2009). Whilst Fuller (2010), carried out an empirical observation of 400 ethnic Chinese firms and
categorized TBEFs based on this group of firms into technology-intensive start-ups. That is, those that aims
to create tangible or intangible products requiring a significant amount of technology knowledge or skills.
The firms were reported to depend on their technical skills to differentiate their products in order to ensure
firm survival and success.
2.5. Problems in Funding Technology Based Entrepreneurial Firms
Most TBEFs during their early growth phase are said to be faced with funding problems (Murray,
2007; Ismail et al., 2011a). These problems are believed to be mainly as a result of the cyclical nature of
both product sales, and R&D expenditure associated with their type of products. Further evidence shows
that the fast growth nature and subsequent diminishing of sales over time from an initial new product
indicate that the returns on investment (ROI) from these firms may not be sustainable (Mason, 2010;
Mason and Brown, 2011; Mason and Pierrakis, 2011). The nature of returns from TBEFs’ products and the
manner of scrutiny they go through coupled with the credibility of lenders limit their ability to pay back
their debt. Banks are therefore typically cautious or at times reluctant to lend to these firms especially to
the ones in the early growth phase. Mason and Harrison (2008) and Moore (1994) identify the reluctance
of traditional lending institutions to invest in these firms as a reflection of the problems of distinguishing
between good and bad technology businesses, and also, the lack of expertise of banks in this sector of the
economy, coupled with the limited collateral that entrepreneurial managers have.
2.6. Financing Sources for Technology Based Entrepreneurial Firms
Ajagbe and Ismail (2014) however, posit that different financing possibilities are available to
technology based entrepreneurial firms. These can be family funding, loan from friends, overdrafts or
personal loan from banks. This is popularly known as financial bootstrapping. Financial bootstrapping
involves adopting strategies that reduce cash requirement by securing resources at little or no cost.
Managers may for example rely on their personal relationships to secure free access to certain resources.
They may also adopt a strategy to secure resources without making use of commercial bank funding or
external equity funding. They may obtain capital through subsidy financing or personal sources of finance
(Helleboogh et al., 2010; Ismail et al., 2011b). For other projects with high growth potentials, a TBEF owner
can access funds from private investors known as venture capitalist (VCs) and or business angels (BA). Lam
(2010) in his research on financial bootstrapping discussed that despite unequivocal evidence, more than
90% of new ventures are financed through informal means, and more than 60% of the start-up capital is
financed by business founders. He found that vast majority of research emphasize on the supply of formal
sources of finance, mainly in the area of equity as corroborated by McNally (1995) and in debt financing as
studied by Fabowale et al. (1995). These two common avenues used to finance technology based
entrepreneurial firms are discussed further in the next section.
2.6.1. Debt Financing

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Hisrich et al. (2008) identify debt financing as a financing method that involves an interest–bearing
instrument, usually a loan, the repayment of which is only indirectly related to the sales and profits of the
entrepreneurial firm. In most cases, debt financing requires that some asset of the borrower be used as
collateral security. Ismail et al. (2011a) suggest that debt funds have a lower capital cost to the company
than company shares and they increase the financial risk attached to the shareholders investment. This is
because shareholders’ investment ranks last for payment in the event of liquidation, hence, are at greater
risk. They added that, there are different sources of debt financing, for example, debentures and unsecured
notes. These funds can be sourced from the public, and requires the preparation of a prospectus. Ajagbe et
al. (2012a) found that other sources of debt financing such as term credit and bank overdrafts are short-
term in nature and require the company to approach individual lending institutions to obtain the funds.
2.6.2. Equity Financing
Ismail et al. (2011b) identifies that in for example, Malaysia, raising capital through company share
issues is a significant source of finance for potentially strong technology entrepreneurial firms. Most firms
are incorporated with authorized share capital stated in the memorandum of understanding (MOU). The
value of authorized capital is the maximum that can be offered to individuals or firms to raise funds for the
company. Hisrich et al. (2008) argues that equity financing is an alternative method of financing growth in
firms without the use of collateral security and it offers the investor some form of ownership position in the
TBEF. In this type of financing, the investor shares in the profits of the TBEF, as well as in any disposition of
assets on a pro-rata basis based on the percentage of ownership of the venture. The suitability of a
particular funding source is however dependent on the availability of adequate funds, the assets of the
venture, and the prevailing interest rates at the time (Bathelt et al., 2010; Boehm and Hogan, 2012; Janssen
and Moors, 2013). Majority of technology entrepreneurs are found to adopt a combination of debt and
equity sources of financing. Figure 3 below shows the different types of financing sources available to
technology based entrepreneurial firms in different parts of the world.
Figure 3. Technology Business Financing Sources
2.7. Venture Capital and Private Equity
Venture Capitalists are specialized mediators that direct capital to firms and professional services to
companies that might otherwise be excluded from the corporate debt market and other sources of private
finance (Mason and Brown, 2011; Mason and Pierrakis, 2011; EVCA 2011). On the evaluation of Venture
Capitals (VC) in Japan, Kirihata (2008) refers to venture capitalists as individuals directly involved in the VC
investment process from scouting and screening activities to post-investment and exit, and excluding
employees of the Venture Capital Firms who are engaged in general duties that are unrelated to
investment process, for example, general personnel affairs. Venture Capital financing is used to invest
mainly in technology small firms with good growth and exit potentials (Groh et al., 2010; Wonglimpiyarat,
2011), while private equity finance is used for the change of ownership in established businesses, often
supported by debt capital. Ahlstrom et al. (2007) views VC as early stages of equity investments including

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later stage mezzanine, turnaround and buyout investments typically associated with private equity
investments in the West. Cumming & Dai (2010) posits that VC operates across countries and time zones,
providing capital and skills to entrepreneurial firms competing in global markets. This is especially true in
the early stages of the firm when technology transcends geographic boundaries (Groh et al., 2010; Ajagbe
et al., 2015).
Typically, VC concentrates on industries with a great deal of uncertainty, where information
asymmetry (gaps) among entrepreneurs and investors are commonplace. These ventures are identified as
financially constrained. The Technology Ventures rely on VC as one of their main sources of funding. Recent
empirical research found that the effects of VC on the success of these ventures are considerable. The
value of venture capital investment is borne out by figures which show that VC backed firms grow on
average twice as fast as those not backed by VC (EVCA, 2011). This category of equity investors focuses on
particular regions, or single countries when searching for corporations that deserve financial backing. This
means that one of the main criteria for selecting potential investments is the proximity to source of funding
to facilitate the transaction processes of monitoring and oversight (Wonglimpiyarat, 2011; Groh et al.,
2010). Venture Capital is equity financing available to select new TEFs and growth businesses that
demonstrate the ability to produce extraordinary returns for investors within a 5-7 year time frame (Nelson
et al., 2009). Classic Venture Capitals invest pools of funds in portfolio of industries on behalf of limited
partners. Majority of Venture Capitals manage more than one portfolio simultaneously, and they are
typically small firms with flat partnership style organizations; investment decisions are made jointly by the
partners and the firms tend to specialize by industry and or by stage of development, with a concentration
in science and technology innovation.
Investors in venture capital funds are known as Limited Partners. These are either wealthy individuals
or institutions with available capital. Similar types of investors are “Business Angels”, who are affluent
individuals that provide capital for business start-ups (Olsson et al., 2010). Venture Capital (VC) investors
study general factors related to their potential investments, such as market size and growth, competitive
advantage, entry barriers, patents, legal issues and contractual restrictions and also evaluate the
management teams of the firms they wish to invest in. De Carvalho et al. (2012) in their study of private
equity (PE) and its evolution in Brazil in the last five years, found that the participation of investors in the
investment process, absence of leveraged buyouts, shared control and use of special rights to compensate
for the absence of a controlling stake were very important. They found an increase in the use of PE
investments and VCs, and of the efficiency of managers in the selection process. The use of special rights to
compensate for the lack of control in the portfolio companies such as veto power, the use of arbitration
panels for the resolution of conflicts, and the participation of limited partners in the investment process
were also found to be important. These PE investors seek investments that have a potential for high return
on investment. The investors must see potentials for realistic exit options so that profit from the
investment can be realized either via initial offerings or acquisitions. These are the most common or
preferable exit options to VCs (Olsson et al., 2010).
Different Venture Capitalists specialize in different areas and types of investments. Certain VCs
establish themselves as leaders in their respective niches, for example, Kleiner Perkins, by developing
expertise in linking up its portfolio companies with more established companies in the industry (Kenny and
Patton, 2011). The VCs are known to achieve high rates of returns by gaining access to proprietary deal flow
and providing value added services to their portfolio companies. From a Limited Partner’s perspective,
Venture Capitals are expensive because the venture capital partners receive not only hefty management
fees, (typically 2% of funds committed) but also a profit share (called carry) of 20%. The unique expertise
and value added contribution however, of the general partners are responsible for this expensive
arrangement (Hellmann and Puri, 2002; Kenny and Patton, 2011). The current nature of public intervention
to encourage the growth of the informal VC market beginning from the early 1990s in the UK and in the
late 1990s, in other parts of Western Europe were identified by Mason (2009), whilst in Eastern Europe
such interventions are found to still be in their infancy. Mason (2010) and Cumming and Dai (2010)
identified six forms of interventions that have evolved overtime; with new approaches supplementing,
rather than replacing earlier approaches; fiscal incentives for investors; Business Angel Networks (BANs) to
enable investors and entrepreneurs find one another earlier. Changes to Securities Legislation to remove
constraints on the advertisement of investment opportunities; capacity building initiatives to raise the

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competence of investors to make investments and to improve investment readiness of businesses seeking
finance; and co-investment schemes that leverage public money with angel money. Mason (2009) also
found that the informal VC market has been a focus of public sector intervention to improve access to
finance for the young TBEFs for less than two decades in Europe, and in most other countries for less than a
decade. The form of intervention has evolved from a supply-side approach using tax incentives targeted at
high net worth individuals, through an intermediationary approach aimed at improving the availability of
information using capacity building and only currently, back to supply-side approach with the use of
government funding to leverage private investment (Mason, 2010).
2.7.1. Venture Capital in Asia
Zhang et al. (2011) investigated and found that in Asia there are more Venture Capital investments in
the early stage firms than found in Europe where it is more predominant in the later stages of a firm’s life.
Europe although, boasts of more investments in medical and biotechnology firms than found in Asia, there
are now more tremendous efforts in Asia towards this end too (Wonglimpiyarat, 2011; Ismail et al., 2011b).
Studies on health biotech innovation in China recognize the fact that the Venture Capital industry in Asia is
less developed than in North America and Europe. Consequently, TBEFs in the region especially in the
biotechnology sector depend more on funds from outside Asia than within Asia (Ajagbe, 2014; Zhang et al.,
2011). Hence, 37% of new capital in Asia comes from outside investors, whilst in Europe the figure is 29%
and in the Americas less than 10% (White et al., 2005; Wonglimpiyarat, 2011). In this view, public policy
makers are advised to evolve an ambitious intervention policy in developing the biotechnology sector. In
addition, they should enhance the venture capital contribution to innovation and clearly demarcate the
role of government in the management of uncertainties.
Even though, Japan has been the focal point of Venture Capital (VC) activity in Asia for most of the
last three decades (Kirihata, 2008; Hasegawa, 2004; Ajagbe and Ismail, 2014), China has suddenly been
observed to have received increased attention in recent years. This is likely because it has developed
majority of the needed components required for a vibrant VC industry, including robust economic growth, a
growing commitment to IP rights, and a strong entrepreneurial culture (Ahlstrom et al., 2007; Zhang et al.,
2011). China, not only drives much of the economic development in the home country, but also in many
other Asian countries such as Taiwan, Indonesia, Singapore, Hong Kong, Malaysia and South Korea. Zutshi
et al. (1999) reports in their study of VCs in Singapore the tremendous growth of the industry during the
last decades of the last century. They argued that the steps taken by the Singaporean government in
encouraging VC development by making selective VC investments through the Economic Development
Board (EDB) in 1991 was highly commendable. The aim of setting up the agencies was in promoting high-
tech ventures in Singapore. The South Korean government also created the Korean Development and
Investment Corporation (KDIC) and Korean Technology Finance Corporation (KTFC) to invest in cutting edge
technology firms. Similarly, the government of Taiwan and India created venture funds, primarily, to invest
in technology ventures. In Japan, Hasegawa (2004) and Kirihata (2010) found that Venture Capital Firms
were established by banks, securities companies, trading companies, and large industrial groups to pursue
high-tech start-ups (Ray and Turpin, 1993).
In Malaysia, the Government noted that the best way to move the country out of the “middle
income” trap is to pursue economic policies that will succeed in the knowledge industries of the future,
encourage technological innovation to grow and build more technology based entrepreneurial firms,
supporting these firms to grow to a global scale, thereby attracting foreign direct investment (FDI) and
inform of VC from within and abroad (Najib, 2010). Government Transformation Programme (GTP) and
Economic Transformation Plan (ETP) that are built into the National Key Economic Areas (NKEAs) will be
instrumental to achieving such dreams. This is with a view to deliver the New Economic Model (NEM), and
makes government achieve its aspiration of becoming the manufacturing and financial hub of South East
Asia. This could be achieved through the 7th-11th Malaysia Plan which is aimed towards developing a
Knowledge Based Economy. It will also help to attract Foreign Direct Investment (FDI) of about 92 percent
in the years ahead. In order words, both the traditional or conventional lending institutions and equity
financial market are expected to play significant roles (Gomez, 2009).
2.7.2. Categories of Venture Capital Firms

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Independent Venture Capital: Muala et al. (2005) recognizes the unique form of risk capital provided
by VCFs to young high potential businesses has been viewed as crucial in supporting a vibrant modern
'information economy’. Further consideration of the scale of sophistication of the America’s VC industry
was also accepted as one of the strong point for America’s exceptional ability to turn innovative ideas from
institutions of higher learning and research organizations into world-class firms. Examples are; Sun
Microsystems, Oracle, Amazon.com, Microsoft, Cisco Systems, Genentech, Federal Express, Intel
Corporation and Yahoo to mention a few (European Commission, 1998; Mason and Pierrakis, 2011). These
new firms are mostly established by technically skilled entrepreneurs with little managerial expertise. Such
companies can only reach their maximum potential when assisted by VCFs who are able to provide active
coaching support cum financing (Hellmann and Puri, 2002; Kim, 2012). Classic VCs specializing in the
earliest stages of investment (seed, start-up and early growth finance) are commonly mandated to deal
with talented but inexperienced entrepreneurial teams. The VCs ability to impart needed knowledge and
experience in addition to capital may be instrumental in the portfolio firm's subsequent success or even
survival.
Government Supported Venture Capital: A modest amount of Government Venture Capital (GVC)
finance was reported by Ajagbe and Ismail (2014) to improve the performance of entrepreneurial firms
relative to ventures supported purely by Private Venture Capitalists (PVCs). They emphasize that high levels
of support from GVCs are usually associated with weaker performance. In their empirical study they find
that at low levels of GVC finance, success is increasing in the GVC share (Ajagbe, 2014). At high levels of
GVC support, additional government support reduces success. Thus, a little bit of government support
appears to be a good thing but too much government support has an opposite effect. Full GVCs are fully
owned and operated by governments. Partial GVCs receive investment from governments but also receive
private investment and are independently managed. Indirect GVCs are not based on investment by
government but receive subsidies and/or preferential tax treatment.
Bank Supported Venture Capital: The banks in China were very active and played prominent role
during the development of new ventures in the early years (White et al., 2005). Whereas in Japan the
background of VCFs were set up as affiliates of financial institutions such as insurance companies, securities
companies and commercial banks (Kirihata, 2008; 2010). They were the primary source of financing to high
tech start-ups. They, rather than the government bureaus directly, provided the majority of the investment
in spin-off projects under the Torch Program. Gu (1999) estimates that initially banks contribution stood at
only 10% of investment in 1988 when the program began but steadily rose to 50% by 1990 and 70% by
1991. The banks themselves did not have the capabilities or access to critical information to assess risk at
the initial start-up stage. Instead, they relied on a project’s designation as a recipient of Torch Program
support as policy guidance. The majority of banks financing, however, was available only at the expansion
and later stages of a venture’s development (Kirihata, 2008; 2010), with local governments acting as
guarantors.
University Supported Venture Capital: White et al. (2005) and Kirihata (2008) identifies that during
the developmental phase of VC in China in the 1980’s, research institutions and universities played the
most important role at the start-up stage, providing both the original technology and seed capital for TEFs.
Kirihata (2008) posits that substantial numbers of VC funds for university spin-offs which are critical sources
of financing for nascent technologies, was set up by Hokkaido University’s “Hokudai Ambitious Fund”
established in 1997 and until today has shown a continuous increase (Kirihata, 2010). It was emphasized
that majority of the technologies financed during that era emanated from the universities and research
institutions. White et al. (2005) highlight that universities in China utilized their new authorities to allocate
resources and provide financial support to university spin-off companies. Ajagbe and Ismail (2014) reports
that though Malaysian Universities have not been generally seen to set up VCFs with the sole aim of taking
up equity and occupying board positions directly with technology start-up firms. The authors concluded
that they play significant roles very similar to that of equity financiers. Ajagbe (2014) argues that in
Malaysia, some Universities have established what they call Innovation and Commercialization Centre (ICC)
in other climes referred to as University Technology Transfer Office (UTTO). Such Universities award
financial support in form of research grant schemes to academics (students, lecturers and staffs) to pursue
research that would lead to major innovation capable to be patented and commercialized as spin-off

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companies or through licensing to large companies. This they do in collaboration with Malaysia Technology
Development Corporation with the aim to spin out university ventures.
Business Angels: The venture capital market consist more than just the institutional VC industry,
however, there is an informal venture capital market, an invincible market place comprising wealthy
personalities referred to as “Business Angels” who provide risk capital directly to new and growing
businesses in which they have no family connections (Mason, 2010; Cumming and Dai, 2010). There has
been an astonishing swing away from investing in early staged firms in support of sectors in growth mode
which have bigger capital requirements (Mason, 2010; Mason and Harrison, 2010). This exposed the need
for BA to have become an important source of new capital for new and young technology based firms. The
most fascinating thing to note about this class of investors is that; their market is considerably larger than
the institutional VC market; they fill the so-called equity gap by making investment exactly in those areas in
which institutional VC providers are very reluctant to invest. Hence, and most significantly they finance
TEFs in terms of more dollars and number of ventures the fund especially in the USA (Wetzel and Freear,
1996). Several researchers reported that business angels are also regarded as individual investors (Wong et
al., 2009; Wiltbank et al., 2009). They can also be regarded as informal investors.
2.8. Roles of VCFs on TBEFs
Venture Capitalists help technology entrepreneurial firms by emphasizing on value creation. Ajagbe
& Ismail (2014) argues that value creation is realized through a concerted effort that leads to accelerated
growth of innovative product and services either with technology or greater market penetration ability.
Ajagbe (2014) added that VCs also share their wealth of expertise & knowledge and provide advice on vital
issues in order to advance the firm’s performance. They are able to harness the inherent strengths of TBEFs
because VCs are people who are determined to empower entrepreneurs to create new wealth. The next
section discusses the two most important roles VCs play in helping to nurture technology entrepreneurial
firms apart from financing support.
Resource Based Theory: Following from the resource based theory, Muala et al. (2005) and Barney
(1991) argues that physical, social and knowledge resources of particular investor categories influence the
nature and worth of the value-added that VCs are able to provide to investee firms. Defining the term
‘resource’ in the concept of the “resource based-view”, Barney (1991) refers to resource as ‘all assets,
capabilities, organizational processes, firm attributes, information, knowledge controlled by a firm that
enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness’.
Prior research on the value-added of both independent VCs (Macmillan et al., 1989) and corporate venture
capitalists (CVCs) (Maula, 2001; Muala et al., 2005) indicate that the majority of the value-added of
independent and CVCs is linked to their membership of valuable networks (social capital) or their
ownership of private and not easily imitable knowledge and experience (knowledge-based view). But, for
the value-added provided by investors on the basis of their knowledge resources (Eisenhardt and Santos,
2001; Elenurm, 2012; Kenny and Patton, 2011). The knowledge-based literature considers knowledge as
the strategically most significant asset of the firm. Proponents of the knowledge-based view have argued
that heterogeneous knowledge bases, such as; knowledge of markets, knowledge on competition,
knowledge of technology and knowledge of organizing which both contribute to and are sustained by
unique capabilities among firms, are the main determinants of sustained competitive advantage and
superior corporate performance.
Value-Added Role: Chemmanur (2010) declares that a very significant contribution of VCs that has
been talked about by practitioners is the roles they play in helping TEFs create value in the product market.
This is done by helping them develop high quality management teams, contacts and credibility with
suppliers and customers, and in improving their deficiency overall. The perspective of the author is
consistent with that of Chemmanur et al. (2010a) who also adds that significant evidence have been
developed recently indicating that VCs indeed help to strengthen firm’s management teams, and to
improve on their operating efficiency, as measured by their total factor productivity overall. Chemmanur et
al. (2010b) opines that once an investment has been made, it is in the interests of the investors to do
everything they can to ensure that their investee firms succeed in order to maximize their financial returns.
Various forms of managerial activity on the part of the equity investor can help to add value to a firm. This

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is particularly important in the case of TBEFs where the entrepreneur’s technical competence rarely
matched with business skills (Murray, 2007).
3. Conclusions
This research finds that the main roles VCFs play in helping to nurture technology based
entrepreneurial firms (TBEFs) are: to source additional capital, they bring to the board of TBEFs a wide
range of industry experience and boost the image of the company, they help to build track records, to
develop a credible financial capability, help improve profit generation, sometimes they help in
commercialization support, they help to recruit qualified manpower, provide mentorship and training to
team members, introduce TBEFs to existing contacts and source technology from overseas. The outcome of
this study it is believed, will contribute immensely to existing body of literature on venture capital
financing. This research is one of the few studies that have reviewed the relationship of the characteristics
of the elements in the conceptual framework and how they impact on funding of technology based
entrepreneurial firms. In explaining the importance of social and human environment as elements that
attract international venture capital investment, the study finds that in order to foster a growing risk capital
industry, research culture plays an important role, especially in universities or national laboratories. Policy
makers in Nigeria could build substantial amount of skilled and experienced venture capitalists to identify
high potential investments opportunities and be able to nurture and support them to an exit. Furthermore,
majority of Chief Executive Officers (CEOs) of startups in developing nations have been found to be non-
university graduates and do not hold MBAs, hence they may lack the requisite management capabilities
and skills required to propel the TBEFs to success. Another issue is that the money raised by VCs may be
poorly managed due to lack of experience of personnel, this may result in poor quality investment decisions
and provide inadequate support for their portfolio companies and more so, some countries cannot also
boast of a talent pool of professional VC experts. The major problems facing TBEFs therefore are their
inability to secure adequate financing because of lack of collateral, inadequate VC professionals and
inexperience in choosing good equipment and transfer of technology; these have hindered the growth of
the industry in many countries. The Nigerian government can help TBEFs in the country by developing a
policy framework for the equity investment sector particularly for those aimed at financing in the
technology sector.
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