Developing angel investors’ syndicates and networks for the enrichment of the startup ecosystem in Vietnam

Nội dung text: Developing angel investors’ syndicates and networks for the enrichment of the startup ecosystem in Vietnam

1. DEVELOPING ANGEL INVESTORS’ SYNDICATES AND NETWORKS FOR THE ENRICHMENT OF THE STARTUP ECOSYSTEM IN VIETNAM Nguyen Thi Van Anh*1 ABSTRACT: In recent years, a lot of efforts have been made by both private and public sectors to build up an appropriate ecosystem for startups in Vietnam. They mainly give direct supports to startups and the incubators where startups are incubated. Most have forgotten another element in the startup ecosystem, angel investors, who are considered the starters of the startup capital lifecycle. Angel investors are very important for startups as they provide not only capital resources but also skills, expertise, and important contacts. However, one of the characteristics of angel investors is that they like to remain anonymous and are more difficult to reach than normal investors. To solve this problem, many countries successfully established angel investor syndicates and networks to facilitate the process of matching entrepreneurs and angel investors. With the current deficient state of angel investors both in terms of quantity and quality, there is urgent for the Government to build, develop, and maintain effective networks and syndicates of angel investors for the enrichment of the startup ecosystem in Vietnam. Keywords: angel investment; syndicate; network; financial investments; startup; entrepreneurship; capital lifecycle 1. INTRODUCTION The term “angel investor” was first used in the art sector during the end of the 19th century. Directors, actors, screenplay writers depended on rich investors to finance production of new musicals and plays, their projects, or careers (Veland, 2012). Gradually, angel investors became known as a financial source for risky, but promising ideas and projects. Since then, many companies such as Apple Computer, Amazon.com, Google, and Facebook received supports from to angel investors in terms of finance, expertise, and experience. Academics have come up with several definitions for angel investor such as definition from Fiti et al., (1999), angel investors are individuals that have available financial means and are ready to invest in entrepreneurship ideas. Mason and Harrison (Mason and Harrison, 2008) define angel investor as “an individual, acting alone or in a formal or informal syndicate, who invests their own money directly in an unquoted business in which there is no family connection and who, after making the investment, takes an active involvement in the business, for example, as an advisor or member of the board of directors”. From these definitions, angel investors can be understood as individuals who possess wealth and industry experience and are willing to invest them in early-stage firms/ startups in order to help the young entrepreneurs and receive profit simultaneously. Angel investors have some distinct characteristics that set them apart from other investors. These characteristics include wealth possession, funds for investment coming from their personal assets, diversified areas of expertise, rich of business experience, and especially, willingness to take risk. * Marketing Department, Management Faculty, Academy of Finance, Hanoi, Vietnam, Anh T. V. Nguyen, E-mail address: vana- nhnguyen@hvtc.edu.vn
2. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 93 Angel investors are becoming more and more important in financing startups, especially during early stages of development. In developed countries like the United States (US), Canada, or European countries, the growth of investments from angel investors can be seen both in terms of quantity and quality. According to Veland (2012), there are 300.000 - 350.000 active angel investors in the US, who invest USD 30 billion per year in around 50.000 projects. In the United Kingdom (UK), there are 20.000 - 40.000 angel investors who invest 0.5 - 1 billion pounds per year in 3.000 - 6.000 companies. Along with the increase in quantity and quality of angel investment, angel investors are becoming more and more important for the startups’ capital lifecycle. What’s more, not only money, angel investors also bring in their expertise and know-how, and due to this reason, angel investors are more and more “interesting” for entrepreneurs in comparison to other sources of capital. Angel investors with their experience, relationships, and network of contacts in the business are gold mines for startups for the commercialization and survival of their business ideas. According to Preston (2004), companies in their development pass through several stages such as: • Seed stage: the entrepreneur has an idea or concept for potential profitable business, which needs to be developed and proven. In this stage, financing sources can be used mainly come from savings of founders, family, and friends (also called 3F Money); • Startup stage: the idea has been already developed up to the level which allows commercialization. This stage lasts for less than a year. In this phase, angel investment can be used as financing sources; • Early stage: in this stage, production and distribution of a specific product or service takes place. This stage lasts up to five years, and business can still be unprofitable. Usually, formal venture capital can be used as financing sources; • Later stage: In this stage, the enterprise is already mature and profitable, and it continues broadening. With high growth, it can become publicly famous. Initial public offering is an ideal opportunity to generate additional funds. In the US, 55% to 72% of angel investors invest in startup stage enterprises. Similarly, in the UK, 50% to 65% of angel investors invest in these types of enterprises. The reason angel investors prefer startups is because with these companies, angel investors can have an important and active role before they are opt out from the market. Some others prefer startup enterprises because they represent a real challenge for them or simply, it is their personal interest. However, the process for startups to meet suitable investors is not simple as angel investors tend to remain anonymous or within close circles. To help startups and early-stage enterprises to tackle this problem, many countries have set up angel investors’ syndicates and networks to bring investors and startups together, sharing risks, and increasing the success deal rates. 2. OVERVIEW OF ANGEL INVESTORS’ SYNDICATES AND NETWORKS Angel investors’ syndicates are associations of angels, who combine their capital, experience and knowledge in order to share risk and invest in better and bigger deals. The first ever syndicate, Band of Angels, was established in Silicon Valley (US) in 1995. Since then, there have been many angels’ syndicates establishing in the US, Europe, and other countries. Angels’ syndicates were found as investors found advantages of working together as this brings greater flow of investment opportunities (deals), better decision, ability to make more and larger investments, and sharing risks.
3. 94 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Angels’ syndicates can be managed by either a professional manager or by members themselves. Each method of management has its pros and cons needed to be considered. If using a professional manager, the manager will manage all aspects of the syndicate, such as looking for interesting deals, analyzing and evaluating them, and recommend the syndicate to invest on potential deals. Manager can be paid through salary, enjoying part of the profits of a successful deal, or a combination of these. Syndicates managed by their members elect the most prominent members to manage the syndicate. In most cases, these members manage the syndicate without any compensation. These members are bound to find interesting deals, to evaluate them, and to present them to the other syndicate’s members to invest in (Veland, 2012). Some syndicates organize meetings once a month, while some have meetings every week. They are more in the form of a joint dinner at which syndicates’ members discuss specific investment opportunities, their characteristics, and so on. At these meetings, 1-3 entrepreneurs could be invited to attend. They will present their business plans, under which angel investors would decide whether to invest in their enterprises. Angel investors, besides forming syndicates to raise their relevance and efficiency establish their own networks as well. Angel networks are organizations whose main goal is to connect owners of small and medium enterprises and angel investors, or they are organizations which facilitate the process of connecting entrepreneurs and angel investors. Veland (2012) has concluded two approaches for establishing networks of business angels, namely top-down approach and bottom-up approach. Top-down approach is used when public authorities initiate the establishment of the network. In cases where the private sector initiates the establishment of a network, that approach is known as bottom-up approach. Such is the case with the Danish biotech network. Angel investors of existing regional networks identified a lack of investment opportunities in bio-technology sector, and therefore developed a new network with his specific activities and own management team (Gullander and Napier, 2003). 3. THE NEED TO DEVELOP ANGEL INVESTORS’ SYNDICATES AND NETWORKS IN VIETNAM According to the National database on business registration and the Ministry of Planning and Investment in 2016, there were 110.100 newly registered startups in Vietnam, by the first half of 2017, there were 72.953 new companies registered and this figure is increasing rapidly. However, not many startups were successful in turning their ideas into real products with only 28 startups did otherwise. Failure of startups in Vietnam is mainly caused by the lack of practical experiences in running business and difficulty in accessing capital sources, particularly the early stages of business. A lot of efforts have been made by both private and public sectors to build up an appropriate ecosystem for startups in Vietnam. However, they mainly give direct supports to startups or/and the incubators where startups are incubated. Most have forgotten another element in the startup ecosystem, angel investors, who are considered the starters of the startup capital lifecycle. Angel investment environment in Vietnam is in early stage of development with few numbers of investors, lack of awareness of angel investing, close-circled activities, and limited areas of interest. Though the investment market in Vietnam is gradually formed and catching up to the general trend in the world with successful deals recently like Vatgia, VMG Media, the Kafe, with investment of tens or even hundreds of million dollars. However, there is not an angel investor community in Vietnam. Not to mention the angel’s activities are close-circled and not popular in ecosystem. There are currently two investor networks in Vietnam who have been paying attention to angel investment. However, their areas of interest are limited and the activities are few. HATCH! Private investor network - HATCH! ANGEL - an initiative of HATCH! PROGRAM, Vietnam’s first entrepreneurship
4. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 95 community operating since 2013 with mission to create a platform for angel investors to share knowledge and experiences in investment, and to facilitate the investment relations with startups but the activities just stay at few meetings between investors and startups a year. VAIC (Vietnam Angel Investors Circle) is a Delaware-based LLC with the vision of nourishing, empowering, and inspiring a new generation of Vietnamese entrepreneurs. VAIC seeks to provide seeds and angel capital to budding entrepreneurs to take their businesses off the ground via the Manipadhum LP investment fund in exchange for equity. However, their members are lessened when some of them do not see the investment success. In terms of characteristics, angel investors in Vietnam have some problems which hinder their involvement in the process. • Lack of awareness that angel investing is an active process: Investors in Vietnam tends to be passive in the investing process as general, and the angel process to be specific, while the best practice is to be active. They are not used to participating in deal screening, undertaking due diligence, and direct mentoring with investees. • Low risk tolerance: Angel investing is high-risk as startup is only at the idea or startup stage, but risk tolerance is low among angels in many countries, including Vietnam. Investors tend to be scared of the risk might come. • Close-circles activities: Some source their potential businesses from startup incubators that they have close connections. Others, for example, IDG Venture Vietnam mainly depends on personal channels to search for potential startups. If a startup wants to find an angel investor, they will have to actively seek and grasp opportunities. The number of successful transactions, therefore, is very few. • Not wanting to be visible: Angels are typically private about their investments, and can seem “invisible” to entrepreneurs. This hinders the match making process when entrepreneurs do not know how to connect with investors that could be interested in his or her company. • Limited areas of interests: Angel investors in Vietnam are mainly interested in businesses related to Information Technology (IT), because these businesses do not require much capital in their early stages, while the potential of business value is enormous in case of success. For businesses in other areas or important technologies such as bio-technology or pharmaceuticals, attracting the attention angle investors is a huge challenge; because the initial investment is quite high (for workshops, laboratories, equipment) and the potential profit is not attractive enough to investors, which is another obstacle in develop a comprehensive startup ecosystem. • Lack of knowledge about startup nature and the portfolio effect in investment to startups: It is studied that out of every 10 startups funded, only 2 successes at 10x returns or better, 5 reasonable returns at 2x to 5x and 3 write-off and total loses of invested money (Seedfund magazine, 2017). Therefore, if the angel investors do not diversify their investment portfolio, the chance that investment will fail is very high and they will not be confident to do more investment. Consequently, the startups still cannot access these funds and fail in their business. This slow development of angel investor environment in Vietnam is from several reasons such as undeveloped market of capital (stock exchange), small number of domestic and foreign investors, bigger risk for investment, untrained and inexperienced management, corruption, inefficient regulative, unfavorable tax treatment for this kind of investment, and bureaucratic-administrative obstacles (EBRD, 2006). In other word, the future development of angel investment in Vietnam needs more improvements in terms of
5. 96 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA economic, legal, and social. These solutions require timely and overall actions, during which investors and enterprises could have lost their opportunities to meet and success. In an environment like this, it is essential to establish a community of angel investors equipped with knowledge and skills related to startups investment and have periodical meetings/ matching with startups, contributing to develop the startups ecosystem in Vietnam. The community can be built via the establishment of angel investors’ syndicates or networks either by the initiation of the Government or the investors themselves. With the current state of Vietnam startup ecosystem, it is better for the Government to take the initiative to help with the establishment of angel investors’ syndicates and networks in Vietnam. Thus, the startup ecosystem can be enhanced as the interaction and connection among elements are better, increase both funding capacity and investment capability of the community, and the foundation of the startups capital cycle – angel investment is certainly stronger. 4. THE GOVERNMENT’S ROLE IN DEVELOPING ANGEL INVESTORS’ SYNDICATES AND NETWORKS The Government has been playing a key and leading role in the development of the startup ecosystem in Vietnam. The establishment of various startup incubators with the political direction for “Startup Nation” is a clear evident for the commitment of the Government for the private economy. With the current deficient state of angel investors in Vietnam, it is believed that the public authorities should take the initiative to enrich the angel investment environment by bringing in angel investors’ syndicates and networks. To do this, one can look at some examples of successful syndicates and networks set up by public authorities from other countries in the world. Europe (EU) has many national associations, notable ones such as the European Business Angel Network (EBAN) and Business Angels Europe (BAE). The Danish government has initiated a National network (DMBA), and after that DMBA helped the building of several regional networks. In Spain, there is a special program to support the creation and development of angel networks operating since 2010. Developing and maintaining effective angel syndicates or networks are challenging in any environment. It will only get harder in a country with capital flow of small quantity and quality and low investor protection like Vietnam. Looking at successful examples from the above countries, some measures could be taken as first steps for the Vietnamese authorities to develop angel investment environment. The authorities first need to promote the role and meaning of angel investors in Vietnam. Then,the development of the stock exchanges in the direction of more relax towards new successful companies needs more attention. And finally, the authorities could boost angel investment by means such as tax and other incentives. First, in order to promote the role and meaning of angel investors in Vietnam, the authorities should first raise awareness of current investors, academic, business, and public of angel investment: In Vietnam, angel investment is not widely known, not to mention appreciate. It is necessary to increase the parties’ awareness about the subject via holding seminars, workshops, consulting, publishing of scientific and professional papers, where the advantages and disadvantages of this way of financing will be explained. Second, the authorities should exercise more liberal conditions for new successful companies in the stock exchanges – investors would be more secured to invest in new businesses if they see a “way-out” for their angel shares and the stock exchange is a great place to start. The stock exchanges could exercise more liberal conditions for quoting for successful new companies. When the startups have reached the early and
6. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 97 later stage of development, being able to list in the stock exchanges could help angel investors “exit” if needed or raise more funds for the companies. Moreover, the stock exchanges should offer a special service which would collect the purchasing and selling prices of shares from different dealers and represent them to the potential investors. Later, investors would close their transaction through computers, without being linked to brokers. NASDAQ, Reuters, Telerate, and Bloomberg work based on these principles. Third, the authorities could offer tax incentives and other incentives to encourage angel investment: Tax incentives for first few years of investing would be helpful to encourage angel investment. This could be considered as the Government is sharing the risks with angel investors when investing in new small businesses. However, a clear definition of angel investment by the Government is needed together with a system of angel investment assessment to authorize this activity. The UK angel market has been uniquely supported by a major tax relief scheme (EIS and SEIS). The EIS scheme has been in operation for a good twenty years showing the extent and depth of government support for business angels. The SEIS scheme has been established more recently to substantially kick start angel investing in seed companies. While tax incentives for active angels seem to be the best solution, other nations have established different methods to stimulate the angel scene. Germany has established a grant for business angel investments in 2013. The INVEST Zuschuss für Wagniskapital provides a 20% tax - free subsidy on the investment in a young, innovative company. Similar actions could be done in Vietnam with the authorities acting as the leader calling for grant from major corporations and investors for this type of grant. 5. CONCLUSION The ecosystem in Vietnam has been developing towards technical supports to startups and startup incubators, rather towards a key element in the startup capital lifecycle which are angel investors. Angel investors are becoming more and more important as financial, skills, knowledge, and network resources for new companies. However, the angel investment environment in Vietnam is still in early development as the angel investors are lacking of angel investing knowledge and experience, limited areas of interest, low risk tolerance, and limited network of contacts. These problems could be limited via the establishment of angel investors’ syndicates and networks. And to do that, the Government in Vietnam needs to play a central role in the direction of the syndicates and networks’ development toward a better angel investment environment, and a better startup ecosystem as a whole. 6. REFERENCES Books: InfoDev team (2014), Creating Your Own Angel Investor Group: A Guide for Emerging and Frontier Markets, The World Bank. Fiti, T., Markovska H. V., Bateman М., (1999), Entrepreneurship, 2nd Edition, Faculty of Economics-Skopje. Gullander, S. And Napier, G., (2003), Handbook in Business Angels Network: Nordic Case, Stockholm School of Entrepreneurship, Sweden. Hill, B. E. And Power, D. (2002), Attracting Capital from Angels- How Their Money and Their Experience Can Help You Build a Successful Company, John Wiley & Sons, Inc., New York, USA Hill, B. E. And Power, D. (2002), Attracting Capital from Angels, John Wiley & Sons, Inc., New York, USA. Susan L. Preston (2004), A guide book to developing the right angel organization for your community, August 2004 edition, Kauffman Foundation.
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