Last week, I attended an awesome “Unconference” hosted by YouNoodle in SF/Silicon Valley. It was a great event, and the organizers, Rebeca Hwang and Ricard Garriga did a great job pulling it all together.
I also had a chance to talk with friends in Silicon Valley about the startup ecosystem here and in Vietnam.
One key question kept recurring throughout the conversations. This was, “Are Exits in Vietnam possible?”
For those who aren’t familiar with this term, an “Exit” refers to the time at which the shareholders of a start-up can sell their shares to other investors or on a public stock exchange, thus unlocking the value of their equity. Examples of recent Exits are when Google acquired Youtube, or more recently, when Facebook acquired Instagram. Both events allowed the shareholders of Youtube and Instagram to exchange their stock for Google and Facebook stock (respectively) and later, sell it on the public stock market for hundreds of millions of dollars.
In my experience, most entrepreneurs don’t necessarily want or need an Exit. This is true especially in Asia, where if an entrepreneur can build a profitable and sustainable business, they’re perfectly happy maintaining ownership and control, and passing it to their children.
So who does care about Exits? Venture Investors who’s business model is based on the assumption that can invest $1 this year in a start-up and get back $20-35 after that start-up makes it big after 3 years. These investors can’t afford to collect dividends every year from a profitable business because they are using money from their Limited Partners, who expect to be repaid at the end of the fund’s life (which is usually 8-10 years).
How do Exits happen? Most Exits occur through an Acquisition, like in the examples cited above. An IPO is another possible Exit, but these are very rare. Thus, when Venture Investors get involved, the measure of success for the start-up changes from a profitable/sustainable business to a “Exitable” business.
How does an Acquisition happen? This is a much more complex issue, but we can lay out some basic rules of thumb:
1) Acquisitions are done by large companies with a lot of Cash and/or Market Value (price of their stock on the market). Again, look at the examples stated above, both Google and Facebook had strong Cash positions and/or market value of stock at the time of their respective acquisitions.
2) Most Acquisitions happen in markets with highly structured and transparent accounting and securities regulations, like the US, and occur at a sub-$30 million valuation. For more detailed insights into Exits globally, read “Early Exits” by Basil Peters.
3) Exits are very expensive to execute, because there’s usually a lot of money involved, and the founders, managers, investors, and acquirers don’t want to get screwed or leave money on the table. Every Exit requires both sides to hire teams of lawyers and bankers to work out every detail of the deal and contractual obligations of both sides, in addition of the time from the shareholders/managers from both companies to build a strong and trusting relationship, which takes away time and attention from actually running and growing the businesses.
Now, let’s look at each of these heuristics with respect to Vietnam.
1) What companies would have a strong Cash/Equity position and would want to acquire a Vietnam-based start-up?
2) If the average Acquisition in the US is occurring at the sub $30 mil level, what would would you expect the average Exit value of a Vietnam-based start-up to be?
3) Given the lack of transparency in the accounting and securities environment in Vietnam (and many other developing economies), what would be the “cost of doing business” of acquiring a Vietnam-based start-up, and would this cost be higher (or the Exit value be lower) than in a more transparent environment like the US?
(If you are a venture investor, I’d love to get your thoughts on these issues)
If you’re an entrepreneurs starting in Vietnam, I am in the business of supporting entrepreneurs, so my goal is to help entrepreneurs find ways to be successful. We are living in a truly global world, and just because you are from one country doesn’t mean you must stay in that country. Studies of Silicon Valley start-ups show that more than half of founding teams have at least one foreigner as a key founding member. While there’s no formal data about this in Vietnam, there are a number of successful companies like this in Vietnam, including Vinagame (now VNG) and Vietnamworks (Navigos Group).
If you’re starting in Vietnam, the best way is to build a profitable and sustainable business. If you have a desire to achieve scale, look to scale globally, build relationships with international partners and focus on markets and customers where you can create value, raise capital, and find exits for you and your investors.
In the world of start-ups, anything is possible. 🙂