Screening phase rejections of venture capital seekers in South Africa

Abstract

A lack of capital is one of the factors that inhibit business development in the developing world, including South Africa. This is especially true for a prospective business where the owner does not have security to secure a bank loan. A financing option that is available to entrepreneurs is venture capital. However, venture capitalists reject 88 percent of all new applications for venture capital in the initial screening phase. This study examined the reasons for the high rejection rate of applications for venture capital in South Africa. Non-compliance with the internal fund preferences of venture capitalist firms was identified as one of the biggest reasons for the rejection of applications for venture capital. Other factors were also investigated with specific reference to the Timmons Model of the entrepreneurial process. It was determined that factors relating to team, opportunity, and resources are also important in the initial screening phase, but they are not as important as internal fund preferences. Uniquely South African factors were also investigated and it was determined that factors relating to black economic empowerment and corporate citizenship play a relatively unimportant role in the approval of new ventures by venture capitalists. Based on the above-mentioned study, a Framework for venture capital seekers was developed. This framework is aimed at increasing the probability of applications for venture capital passing the initial screening phase.