Application of Principal Components Analysis on Venture Capital Investment Decision Process in Ghana

Abstract

In response to the numerous complaints by the business community of inadequate and high cost of capital to runtheir businesses, the Government of Ghana, in 2004 established the Venture Capital Trust Fund with a vision toprovide low cost financing to businesses to enable them grow, create jobs and improve wealth creation towardspoverty alleviation. The Trust Fund operates through institutional partnerships by means of joint venturearrangements that establish Venture Capital Financing Companies managed by Fund Managers, who areresponsible for deal sourcing, selection, monitoring and exit of Fund investments. Small and Medium-ScaleEnterprises seeking for funding submit a Business Proposal, among other documents, to the Venture CapitalFinancing Companies. The Business Proposal goes through an initial review, and if found to be viable a secondround review is initiated. When all claims are verified and authenticated, due diligence follows. Considering theamount of time that due diligence and negotiation of terms may take, it is imperative that the FinancingCompanies minimize their efforts during screening so that only those ventures with the most potential proceed tothe next stage. Yet, at the same time, the screening process should also be careful not to eliminate potentiallyviable Proposals prematurely. To achieve this, the use of statistical models will aid in the screening process. Inthis study, Principal Components Analysis have been applied to the several variables considered at the initialreview stage. The implication of this study is that properly developed statistical models may be successfulscreening decision aides.Keywords: Venture Capital, Small and Medium-Scale Enterprise, Business Proposals, Principal Components