Venture capital is most suited for SMEs in developing countries. It provides growth
capital, alongside managerial and technical skills, and networks for the entrepreneur.
Yet, most SMEs fail to qualify for financing, predominantly because venture
capitalists hardly consider fully the poor and underdeveloped institutional conditions
of developing countries and apply criteria intended for developed countries.
Consequently, SMEs in developing countries perform poorly. This study identified
three major obstacles to SMEs lack of investment attractiveness – high risk, high
transaction costs and lack of investment readiness – as well as 14 critical success
factors. Using factor analysis and regression techniques on a combined sample of 62
SMEs and 31 venture/equity capital firms in South Africa, the study has established
that : (i) the three obstacles account largely for the high rejection of SMEs (ii)
collectively and undoubtedly, the 14 critical success factors significantly mitigate
these obstacles. It offers alternative investment criteria and assessment perspective.