The relationship between investor and startup has to be based on mutual understanding and helping each other.
On November 5 Beyeu, an e-commerce website for baby and family products backed by Project Lana, put the following notice on its site before closing forever: “E-commerce requires lots of money. Many companies will decide to stop. Good luck to the rest who are still trying.” As painful as it sounds, such sentiments are all too true. Beyeu’s closure surprised many in Vietnam’s startup community, partly because it was so unexpected but mostly because there has been much discussion in the startup community recently about people rushing into business without giving serious thought to finances.
According to figures from the Vietnam Association of Small and Medium Enterprises (VINASME), only 30 per cent of small and medium-sized enterprises (SMEs) are able to approach capital from banks while the remaining 70 per cent have difficulties approaching capital. For startups, therefore, a relationship with investors is critical and the key determinant of survival.
Vietnam’s startup community is now going meta and becoming more united and organized in the way investors (angel investors and venture capitalists) and startup founders work together. At the end of the day, all of this results in the question: “How can investors value startups?”.
Valuations of startups are, in fact, more art than science: Everything regarding startups must be judged on a case-by-case basis, but there are some common factors when it comes to how much an investor is willing to part with.
According to Mr. David Beatty, Managing Director of Golden Seeds, the founding team has a crucial influence on any early-stage business, as the idea cannot work by itself. The managing team, with all its technical knowledge, will make products following the startup’s core values and sell them to potential customers in their network. Obviously, at this point, the founders’ reputation in the community is what really matters, not only as engineers but as salespeople as well.
Mr. Csaba Bundik, Management Consultant with the Hatch! Program, said that researching the market in order to create a functioning product is a decisive stage for investors from international venture capital funds or foreign entrepreneurs. For example, Ebay actually failed in Vietnam a few years ago as the country’s e-commerce facilities and customer behavior were not fully developed. This is something it should have been aware of. GrabTaxi and Uber, meanwhile, arrived on the scene at the right time.
“Nothing creates value like customers telling the investor you have value,” said Mr. Hung Dinh, Managing Director of Joomlart. Once capital has been poured into the business, the number of customers who keep coming back for its products and are likely to become paying users is clearly related to the growth of a startup. User engagement is a life-and-death matter in this fierce competitive landscape.
How a startup manages to build a well-organized team, gain traction in the market, and target their products more effectively to pilot customers is just the same as how the investment is used. Mr. Hung said that it would take a long time for any new business to reach its break-even point, let alone generate profit, especially in the current environment of stringent regulations. As an angel investor in Vietnam, Mr. Steve Landman, said: “I think we should stop teaching companies to look for investments; we should teach them how to do business.”
Mr. Hung said that there are only a few exits reaching the return on investment rate of two to three times. However, healthcare, media, agriculture, and restaurants are segments in which averagely-invested startups have margins to be made.
Mr. Landman also noted that startup founders in Vietnam are inexperienced but very willing to learn. As a network, both investors and startups can study from failed cases and become a stronger community.
In an emerging economy like Vietnam, investors are not only paying attention to making money but also developing technology and potential markets. Growing markets in healthcare, tech businesses, and e-commerce have limitless potential and could benefit much more from investors, whose interests are widespread around Southeast Asian countries.
Voice of starters
Startups, on their own, have many problems when it comes to seeking investors and dealing with related matters. “Vietnam has great potential but we lack the chance to approach foreign investors, as we don’t have the opportunity to attend major conferences to get to know them,” said Ms. Dao Thu Phuong, Sales Director at Coc Coc. Foreign investors tend to not pay too much attention to Vietnamese startups, as the focus at the moment is on the US, Singapore, and Israel, where the startup community is better known.
As investors have the upper hand in investment discussions, startups hope to persuade them to think beyond the money being spent and money to be made. “I hope that they can see our products from the customer’s perspective, because cash in and out is only short term while demand is long term,” said Mr. Phan Thanh Tung, founder of LST Media, a small media startup. Potential must be seen from a wider angle, and cooperation can last long term.
Cash flow is a basic necessity startups seek from investors, and while successful fund raising may be viewed as the greatest achievement it is still not enough, according to Mr. Nguyen Dac Viet Dung, Chairman of Management Board at Sendo.vn. When an investment is made, other needs are born. “Money is only the initial factor, and a good investor is someone who can provide the startup with experience in the field and a business network,” he said. Startups therefore need to study the investor too.
Other matters may subsequently arise. In the case of Mr. Tung, the investor he teamed up with asked him to complete some media work. It was outside of their contract, and no payment was ever forthcoming. “If I prepared an invoice, the figure at the bottom would be huge,” he said. The investor - startup relationship is a cooperation between the two sides, and startups should not feel they “owe” the investor solely because they put money into the venture.