Venture capital financing and financial performance of small and medium enterprises (SMEs) in Mukono municipal council.

Abstract

Most of the existing literature on financial performance determinants of companies suggests that capital structure decisions are of paramount importance. This is likely to be particularly so due to the present financing constraints. However, very few studies focus on startups, probably due to their lack of track record. The situation is more severe in the SMEs case since no focus is given on the matter to SMEs startups in the literature. Once startups can give a good contribution to improve industrial performance, there seems to be a need for a better understanding of the financing constraints of startups, how they can be overcome and, also, to what extent startups’ financing decisions have influence on their financial performance. This work contributes to this problematic by studying the impact of capital structure on startups financial performance, based on information for the years 2010 and 2011 of a sample of 21 SMEs startup firms. The startups’ sample was obtained from startups incubated in SMEs performance. This study is based on a linear regression model explaining the influence of the capital structure (the key explanatory variable) on financial performance (measured by relative sales’ financial performance). The regression also includes other (control) variables considered important to explain the complex financial performance phenomenon of companies. These variables are firm’s size, age and liquidity. The estimation results clearly show that the debt-to-equity ratio, the measure used for capital structure, and the age of startups have a negative impact on sales’ financial performance, while liquidity and size have a positive one. The results suggest that the amount of debt raised by startups should be controlled, and that they should move rapidly from the exploratory to the execution phase in order to favor the financial performance of the company.