Venture Capital and the Finance Gap in Emerging Markets: An Institutional Perspective on the Case of Kenya

Mads Emil Vestergaard Robdrup & Carl Henric Emanuel Hansson

Student thesis: Master thesis


This thesis takes departure in the premise of a finance gap in emerging markets, hindering SME growth and economic development, through an investigation of the rapidly growing venture capital (VC) industry in Kenya, known as the “Silicon Savannah”. Drawing on the institutional approach to business strategy in emerging markets, this thesis set out to explore the barriers to venture capital found in the institutional environment and the strategies used by VC firms to overcome these. By combining deductive and inductive approaches, this paper presents a multiple-case study of VC firms and other relevant actors in the industry. We find that the institutional barriers to VC relate to regulatory uncertainties mainly due to political fluctuations, a lack of underlying shareholder protection, and inadequate governance and reporting regulation. Further, local founders face challenges relating to liability of outsidership as a result of foreign networks of capital. In effect, VC firms may suffer from liability of foreignness as their portfolio ventures struggle to navigate the local business context. Moreover, we find that the VC industry suffers from a lack of supportive industries, particularly inadequate or lacking information providers, early stage technical and financial intermediators, and exit opportunities. To overcome these institutional barriers, we identify four coping strategies used by VC firms. Firstly, governance strategies relate to supporting the portfolio ventures’ governance processes. Secondly, firms may adopt local knowledge-capturing strategies to overcome liability of foreignness. Thirdly, diversification strategies refer to risk-averse investments, spread over industries and countries in the region. Lastly, in institutional avoidance strategies VC firms pursue investments in foreign entrepreneurs who they perceive as less affected by the institutional barriers. Thus, our findings show that the VC industry is indeed thriving despite facing some institutional challenges, typical for emerging markets. With regards to the finance gap, our findings indicate that this specifically relates to local founders and their ventures. We suggest that future research and policy should consider the institutions which can support this part of the industry to prevent the development of an enclave economy.

EducationsMSc in Business, Language and Culture - Business and Development Studies, (Graduate Programme) Final Thesis
Publication date2020
Number of pages233
SupervisorsMichael W. Hansen