How to finance startup businesses in Vietnam

Nội dung text: How to finance startup businesses in Vietnam

1. HOW TO FINANCE STARTUP BUSINESSES IN VIETNAM Ta Thi Bich Thuy*1 - Trinh Van Tu 2 ABSTRACT: There are numerous financing sources available for startup businesses. The options and routes will vary from business to business, however in this paper, the author want to figure out some general financing methods available for companies looking to raise money. Moreover, I also lay out the difficulties and challenges to finance startups. From that, I bring out some solutions in order to make startups easier to access the finance sources. The main funding options include: - Personal savings or from family/ friends; - Bank loans; - Venture capital- Hedge funds; - Attracting an angel investor; - Crowd- funding. The difficulties and challenges of startups’ financing consist of: - Startup businesses’ own problems; - The situation of Vietnam’s financial development; - The problems of the financial system’s external environment The solutions of providing finance for new business contain: - Diversifying Channels of Financing; - Development of startup business’s Credit Risk Databases, Credit Bureaus, and startup business Credit Rating; - Startup businesses’ Credit Rating. Keywords: startup businesses, new business, raise money, financing difficulty, financing solutions 1. INTRODUCTION Startup companies are newly founded companies or entrepreneurial ventures that are in the phase of development and market research. They are usually, but not necessarily, associated with high-tech projects because their product is mostly software which can be easily produced and reproduced. Additionally, technology-oriented projects, by their very nature, have the greatest potential for growth. An interesting fact shown by the research is that technology-oriented startups are typically located in major urban centres. The 1 The first author:TA Thi Bich Thuy - Lecturer at Banking Academy of Vietnam, Email: thuyttb@hvnh.edu.vn, Phone Number: (+84) 903. 476.895 2 The second author: TRINH Van Tu- Working at The State Audit Office of Vietnam, Email:trinhvantuktnn@ gmail.com, Phone number: (+84) 903. 152.882
2. 82 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA reason is attributed to the need for a market that exceeds the local level. However, there are more and more startup companies in traditional industries and business sectors. At the international level, there is more and more research associated with the importance and ways of financing entrepreneurial ventures (formal and informal), especially in the period of intense globalization. Investors are looking for startups that will be very successful. But that test is not as simple as it sounds. In startup businesses, as in a lot of domains, the distribution of outcomes follows a power law, but in startup businesses the curve is startlingly sleep. There are a handful of angels who’d be interested in a startup company with a high probability of being moderately successful. But angel investors like big successful too. Therefore, there are many difficulties for young businesses in calling money from external investors. The goal of this research is to answer three key questions: (1) What are the alternative financing methods for startup business in Vietnam? (2) What are the financing difficulties for Vietnamese startup business facing with? (3) What are the financing solutions for Vietnamese startup business when raising money? This study will make some contributions to the literature because the study will augment prior researches. Moreover, while we are of the view that Vietnam is on the right path to improve corporate governance, institutional capability, and build up key infrastructure that facilitates trade and investment, the development of startup companies will be very gradual in the recent years. In the development of startup companies, one of the most crucial steps is to raise money from the potential investors. This study will draw the substantial way to finance startup business under the circumstance of Vietnam. Additionally, this research will go deeper on the problems of financing difficulties of Vietnamese startup companies. From that, this paper will show some financing solutions for Vietnamese startup business when raising money. 2. LITERATURE REVIEW One of the most important steps in starting an entrepreneurial venture is to ensure an adequate financing source. Analyzing the mobilization of financial resources, Kotha and George (2012) showed that entrepreneurs with previous experience in startups are able to raise more funds (from both formal and informal sources) compared to entrepreneurs without any experience. Startup projects and startup companies are most interesting to those investors who can significantly accelerate the development of the project or product through their investments as well as contribute to strong business relationships which investors tend to have and which are essential for the expansion of startup products. In his research, Atherton (2012) demonstrated that multiple factors influenced the decision of a startup founder on the financing source (formal or informal). Atthe same time, it is possible to observe very high disparity between the highly capitalized and undercapitalized startups. Finding investment funds to launch or expand a startup is one of the biggest obstacles faced by many entrepreneurs (Berger, Cowan, Frame, 2011). In their paper, researchers Paul, Whittam and Wyper (2007) proved that startup founders first turn to internal financing sources (their own funds), and afterwards they use external financing sources. Sometimes it is good to try to found startup companies independently, without third party investment, which is called bootstrapping (˝to pull oneself up by one’s bootstraps˝). In reality, this is a very difficult task, but it is one of the foundations of entrepreneurship (Lopac, 2007) and represents a creative financing strategy (Lahm, Little, 2005). Bootstrapping (Worrell, 2002) implies that the entrepreneur has certain income at the beginning, which is only possible if the startup does not require a big investment and if no financial investment has to be covered by third parties. The advantage of this approach
3. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 83 is that entrepreneurs have full control of their company (lack of co-owners), while on the other hand, the drawback is that the entrepreneur can be in some kind of isolation if he/she is young and less experienced and there is no help from experienced partners and business contacts (Lopac, 2007). Many authors point out that bootstrapping is a method of transforming human capital into financial capital, which involves a certain level of investment from external sources (Lahm, Little, 2005). Freear, Sohl and Wetzel (1995) identified four types of bootstrapping. These are: 1) bootstrapping product development, 2) bootstrapping business development, 3) bootstrapping to minimize the need for (outside) capital financing, 4) bootstrapping to minimize the need for capital. A survey carried out on 214 startup companies showed that bootstrapping has a positive impact on increasing the added value for the company (Vanacker, Manigart, Meuleman, Sels, 2010). Recent studies show that the bootstrapping and lean startups are complementary approaches. This is confirmed by the fact that both approaches use techniques that seek to eliminate all surpluses through maximization of existing resources before investing more funds from external sources (Maurya, 2012). In addition to bootstrapping, there are other various sources of financing startup projects which are divided into traditional and new methods of launching startup companies. 3. METHODOLOGY The main goal of this paper is to figure out the financing problems for startup business, including the main ways to raise money, the financing difficulties and challenges and the financing solutions for startup businesses. Apart from the Introduction, literature review, this research consists of three main parts. As the first part of this paper, the considerable funding options will be made, such as, personal savings or from family/friends, bank loans, venture capital- Hedge funds, attracting an angel investor and crowd- funding. Subsequently, the difficulties and challenges of startups’ financing under the circumstance of Vietnam will be presented, followed by the solutions of providing finance for new business. It is highly likely that the organizing system of dialectical materialism and historical materialism in social science research are two vastly remarkable methodologies which are applied in this research. Additionally, the methodology of statistical analysis is also a substantial system. The gathering of information will primarily be focused on sources, which are publicly available such as the annual reports and the homepage of some prestige websites: different external articles, stock analyses and statistics. Theoretical articles and additional information concerning the financing field will be retrieved through the national library of Vietnam. Further, the applied theory and approaches are taken from material used at lectures at Banking Academy of Vietnam. Moreover, the method of statistics and the methods of synthesis, analysis and comparison are employed. 4. ANALYSIS 4.1. The main funding options: In recent years, along with the development of startups companies, startups are playing an important role in the development of the developing countries like Vietnam, and become a significant part of propelling economic and social development. According to the General Statistics Office of Vietnam, in the first 5 months of 2018, there were 52,322 registered enterprises in the whole country with a total registered capital of VND516.9 trillion, increase 3.5% the number of enterprises and 6.4% increase in registered capital over the same period of 2017.
4. 84 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA 4.1.1. Personal savings or from family/ friends A common method of providing finance for startups is calling for money from your personal savings in order to fund the setup of the company. Family and friends often bring additional financial support in the early stages of your company, when getting external funding, such as, from bank, funds, etc can be particular difficult for a young business because of their lack of experiences. 4.1.2. Bank loans An additional option for financing new businesses is bank loans. There are two main categories of loans are secured and unsecured loans. Secured loans use the company assets are security, such as, a car, real estate and property based on the amount borrowed, which can be repossessed should company be unable to repay bank loans. This way brings more security for the lender and therefore the interest rates are often lower than other methods. However, unluckily, a lot of businesses can’t access the bank loans because they do not have the necessary assets in order to make a security to obtain this kind of loan. On the other hand, unsecured loans do not require a form of security but require a personal guarantee based on credit rating. But, the startups’ owner often lacks of experiences and has no famous brand-name, this is difficult for them to gain high trust of bankers. Additionally, the interest rates that the banks require are often higher than secured loans. Therefore, even this method is really interesting because of no need for assets to make a security, this way can be hard for new businesses to gain money from banks. With these loan categories, you can acquire term loans where you borrow a fixed amount of money at a certain interest rate over an agreed time period. Short-term loans are similar but with a much shorter time period and often higher interest rate. 4.1.3. Venture capital- Hedge funds You can pitch your business to the venture capital firms or the hedge funds to gain financial support in exchange for equity in your new business. This method brings a lot of benefits of potential gaining investors who can provide advice and expertise for your new business. However, one of the pitfalls of gaining venture capital is the competitive nature of the industry, which can make it difficult to convince firms to financing your company. The venture capitals are often interested in fast- growing startups which seem to be stable and lower risk than less established new businesses. Examples of venture capital in Vietnam include .Dragon Capital, Mekong Capital, IDG Venture, Vina Capital Foundation (VCF), CyberAgent Ventures (CAV), DFJ VinaCapital, Kusto Vietnam, Prosperous Vietnam Investment (PVNI), FPT Ventures, Golden Gate Venture, etc 4.1.4. Attracting an angel investor Angel investors are often known as high-net worth individuals who want to invest their personal money and make their own decision about investment opportunities. Angel investors often provide less finance than a venture capital firm but have the potential to bank riskier undertakings. Also like venture capitals, angels can bring many aids of potential gaining investors who can provide advices and expertise for your new business. In general, this type of financing is considered as a good place for new businesses to think about when they need to call for money from outsides. In Vietnam, we have a Vietnam Angel Investors Network named iAngel. IAngel aims to creating a powerful community of angel investors with various business backgrounds, selected data of investment- ready startups to grow up startups and contribute the development of the Vietnamese startups ecosystem.
5. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 85 Vietnamese IAngel community has the commitment for development of 9 organizations in Vietnam, including: Capella Vietnam JSC, Hanoi Young Business Association (Hanoi BA), Innovation Hub JSC, Startup Vietnam Foundation (SVF), Songhan Incubator, Angels 4 us, BK holdings JSC, Viet Management Consulting Group (VMCG), National Startup Consulting and Investment (NSCI). Particularly, iAngel Network is supported by the top 3 top donors of startups and entrepreneurship in Vietnam: Vietnam-Finland Innovation Partnership Program phase 2 (IPP2), Mekong Business Initiatives (MBI) and Swiss EP. 4.1.5. Crowd- funding There are various forms of crowd-funding with the most relevant for funding startup businesses including: peer-to-peer lending, peer-to-business lending, reward-based and equity crowd-funding. - Peer-to-peer lending involves investors lending money to an individual for a fixed interest rate. - Peer-to-business lending is similar to peer-to-peer lending but with loans for businesses, instead of individuals, via investors, companies and government institutions. - Reward-based crowd-funding allows new businesses to receive funds in exchange for giving investors a reward, such as, a sample of new businesses’ products or an event. - Equity crowd-funding is similar to reward-based crowd-funding but instead of providing capital for rewards, startups offer shares (equity) in their business in exchange for investment. Deciding which crowd-funding model is right for startups is dependent on business’s stage and how much company needs to raise up. In Vietnam, people have some website for startups to call for money from this method: betado.com (IG9.vn), comicola.com, firststep.vn, fundingvn.com, fundstart.vn, etc 4.2. The difficulties and challenges of startups financing Accelerating the development of new businesses has been widely recognized by Vietnamese society. Consequentially, people begin to pay more attention to financing difficulties, which restrict the development of startups. In order to resolve the problem, the Vietnamese government and some financial institutions have made great efforts in reducing the pressure faced by startups. However, the problem and hurdles still exist. Getting funds from banks is the first choice for many new businesses. Very few startups chose other financing channels, including borrowing from their friends and usurious loans. In addition, banks are short of incentives to help startups, because the new businesses’ financing scales are not large enough. The financing difficulty of new businesses is a worldwide issue. The adverse selections problem and moral hazard caused by asymmetric information usually happen to formal financial institutions, because new businesses cannot provide complete financial information and effective mortgages. Moreover, during the process of economic and political reform, Vietnamese startups are restricted by several factors, including the government intervention, weak legal system, and the incompleteness of financial system. Facing the difficulty of receiving formal financing, new businesses have to pay attention to the informal financial market. However, it not only has increased startups’ financial cost, which will have a negative effect on the development of new businesses, but also will raise the potential risk of the whole financial system. Therefore, this paper has a significant meaning in exploring the causes of financing difficulties of Vietnamese startups. 4.2.1. Startup businesses’ own problems Firstly, the scale of startup business limits their borrowing capacity in the financial market. Generally, the production scale and owning capital of startup businesses are relatively small.
6. 86 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Thus, startup businesses cannot get enough funds due to lacking of effective mortgages. In addition, most of startup businesses are still influenced by the traditional family-own management mode. Some startup businesses are short of necessary financial management, information openness and high-level credit, which cause banks to have a huge cost of supervising startup businesses. Besides, during the process of expanding, startup businesses often face problems such as lacking of management experience, and uncertainty of technology and market. Therefore, startup businesses usually have characteristics of high birth rates and high mortality, and the loans offered by banks will face high risk. Comparatively, large enterprises have obvious advantages in several aspects, including financial information, credit rating, and accessible mortgages. Hence, banks will have a relatively low cost for searching the fund receivers’ information and supervising large enterprises. In other words, banks will face a relatively low risk if they choose to provide large firms with funds. In order to lower the risk of offering funds, banks will choose to reduce the amount of funds startup businesses request. The risk is raised from asymmetric information. Due to the existence of asymmetric information, adverse selection will appear in the financial market. Once the adverse selection appears, in order to eliminate negative effect, banks will refuse to determine interest rates according to the level of risk. Rather, banks will establish lending conditions according to the information they have for enterprises. It is clear that under the formal financial system arrangement, the relationship between banks and enterprises changes into the situation that banks will prefer to provide large firms with funds and refuse to offer loans to startup businesses. Quitting from the startup businesses credit market becomes a rational choice for banks, because in this way banks are able to avoid risk and achieve profit maximization. 4.2.2. The situation of Vietnam’s financial development Financial development could improve the efficiency of financial system, reduce significantly the level of asymmetric information that exists between banks and startup businesses, help financial institutions process credit evaluation, and identify potential investment opportunities. However, the laggard financial development causes the probability of returning loans to become lower and lower, while the risk of providing enterprises with capital becomes larger and larger. Hence, the credit constraints phenomenon is obvious in the startup businesses credit market. a. The reform of Vietnamese financial institutions still has the characteristics of financial restraint. It is confined to strengthen internal management and pays less attention to the institutional transformation. Nowadays, Vietnamese financial reform mainly focuses on the extension, such as establishing new branches, introducing new financial instruments and opening up new markets. However, facing with more serious problems that may impact the existing institutional framework and financial order, such as the admittance and development of small and medium-sized private financial institutions, the government is unhelpful, and avoids giving out specific plan on this area. Although there are some new financial arrangements already released, there are no meaningful and substantial changes happened in the content of these arrangement. At present, the monopoly situation among state-owned banks still exists. The control of interest rate and the business pattern of financial institutions have not changed radically. First of all, the four major state-owned banks have comparative advantages on the share percentage of deposit and lending market. Small and medium-sized commercial banks, which can provide startup businesses with financial service, only make up a small portion. The financial system, which is dominated by
7. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 87 major state-owned banks, has the responsibility of managing the national macro-economy. The ownership discrimination and credit preference problem still exist, and banks have preference of providing large enterprises and projects with financial aids. Meanwhile, due to the inherent shortages, startup businesses lack of viable financial channels even though they have plenty of investment opportunities. Secondly, Vietnamese government has controlled the setting of loan interest rates bottom limit and deposit interest rate cap limit for a long time, which can maintain necessary loan-to-deposit spreads, help limit price malignant competition among banks, give reasonable protection to banks’ profits, and leave more time to improve financial industry competitiveness and the efficiency of overall economy and finance. However, due to the control of interest rates, banks make considerable profits because of the large interest rate spreads between loan interest rate and deposit interest rate. Hence, banks will be satisfied with their situation and pay less attention to improve their own competitiveness. b. The government attaches great importance to improve financial intermediaries and pays less attention to financial market. And the government is prudent to develop capital market. Hence, the multi- level capital market cannot be established. The direct consequence of this type of industrial structure is that Vietnamese financial service functions and risk management function are both weak. Meanwhile, social financing structure becomes single and relies more on bank loans. Consequently, enterprises have to raise funds mainly by indirect financing channels. At present, Vietnamese capital market is still unenlightened, financial transaction is simple and hard to satisfy needs of different scale enterprises. Additionally, it is pretty hard for startup businesses to get the right of issuing public stocks and enterprise bonds. Though Vietnam has experience of western developed countries for reference and established startup businesses’ board market that provide startup businesses with financial service, especially for startup businesses’ financing, the market’s listing requirements are too rigorous for startup businesses to enter the market. Hence, for most startup businesses, they are unable to enter the market, because they cannot meet the requirements for operation scale, information transparency and operating capability. From the enterprise bond market, we can see that startup businesses are hard to get opportunities to issue enterprise bonds, because issuing enterprise bonds is strictly controlled by the government. Lacking of multi-level capital market causes startup businesses to rely on indirect financing channels such as bank loans. 4.2.3. The problems of the financial system’s external environment For a long time, Vietnam’s economic marketization reform is mainly controlled by the Vietnamese government. After implementing the tax reform, the local government’s ability of controlling resources shows an increasing trend. Local government officials not only pay attention to the increase of fiscal revenue, but also focus on the GDP growth to get promotion. In order to get enough fiscal revenue and get advantages in political promotion, government officials only care about the short-term economic growth during their tenure. Hence, large enterprises and projects become preferences of the local government. The local government often chooses to offer land as mortgages, and provide enterprises with implicit guarantees to control the allocation of financial resources and support their preferences, which makes startup businesses face a more difficult financing situation. Besides, the local government will put a large number of resources in economic construction fields under the drive of fiscal revenue and performance examination, but put fewer resources in credit construction and legal environment, which help maintain a healthy environment for economic development. Therefore, it is no doubt that startup businesses face a difficult situation in financing.
8. 88 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA 4.3. The solutions of providing finance for new business 4.3.1 Diversifying Channels of Financing In this section I want to figure out three different methods for startups’ financing: the development by governments of credit guarantee schemes, specialized banks for startups, and community-based financing schemes, e.g. hometown investment trust funds for financing risky startup businesses. a. Development of Credit Guarantee Schemes by Governments Owing to the significance of startups to Vietnamese economies, it is important to find ways to provide them with stable finance. In order to remedy the undersupply of credit to startups, various government and donor initiatives have emerged in both developed and developing and emerging economies, including the so-called credit guarantee scheme. The public guarantee scheme is a tool aimed at reducing the gap between supply and demand in startups’ finance. Credit guarantee schemes have been used for decades in many countries and in various forms as a way to increase the flow of funds into targeted sectors and groups. The purpose of the creation of such a scheme is to contribute to the flow of funding into sectors that have difficulty raising funds, including the startup businesses sector. A credit guarantee scheme makes lending more attractive by absorbing or sharing the risks associated with lending to the targeted sector. Such schemes can also increase the amount of loan funds available to an enterprise beyond its own collateral limits, because the guarantee is a form of loan collateral. However, guarantee funds have a cost, which is paid through the fees charged and/or subsidized by the government or by a third-party institution. If the government covers 100% of the startups’ default costs and absorbs the full risk, then lending institutions will not monitor and analyse the healthiness of the borrowers, because their risk is covered by the government. Thus it will increase the non-performing loans in the banking sector and reduce the productivity of the public reserves. Hence, a partial credit guarantee scheme may be the optimal case scenario. A credit guarantee scheme consists of at least three parties: a borrower, a lender, and a guarantor. The borrower is often a startup business, seeking debt capital. This borrower typically approaches a private financial institution (bank) for a business loan. For reasons of asymmetry of information, the loan request will frequently be turned down by the private lender. This is where the guarantor comes into the picture. The guarantor (Credit Guarantee Corporation), usually a government or trade association, seeks to facilitate access to debt capital by providing lenders with the comfort of a guarantee for a substantial portion of the debt. b. Specialized Banks for startup business Financing That is a good idea of thinking about establishing a specialized private bank for startup businesses’ financing. This type of banks is deposit-taking cooperative banks that specialize in financing startups within a region. Just like city banks and regional banks, banks for startups are protected by deposit insurance and subject to capital adequacy requirements and other banking regulations and supervisions. Unlike city banks or regional banks, however, banks for startups provide loans mainly to new businesses. c. Development of Hometown Investment Trust Funds for risky startup businesses Given that Vietnamese financial systems are dominated by banks, the creation of community based funds (or hometown investment trust funds) to promote lending to startup companies and riskier borrower, would help to maintain the soundness of the banking sector, as banks would not be exposed to the risks that lending to such companies inevitably poses. Selling those community trust funds through branch offices of regional banks, post offices, credit associations, and large banks would increase funding sources for startup companies and riskier borrowers.
9. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 89 Such trust funds would not be guaranteed by a deposit insurance corporation and the associated risks would be borne by investors. The terms of a trust fund would have to be fully explained to investors, such as where their funds would be invested and what the risks associated with the investment would be, in order to strengthen potential investors’ confidence and help expand the trust fund market. A hometown investment trust fund has three main advantages. First, it contributes to financial market stability by lowering information asymmetry. Individual households and firms have direct access to information about the borrowing firms, mainly startups. That they lend to. Second, it is a stable source of risk capital. The fund is project driven. Firms and households decide to invest by getting to know the borrowers and their projects. In this way, the fund distributes risk, but not so that it renders risk intractable, which has been the problem with the “originate and distribute” model. Third, it contributes to economic recovery by connecting firms and households with startups that are worthy of their support. It also creates employment opportunities at the startups as well as for the pool of retirees from financial institutions who can help assess the projects. The main differences between the hometown investment trust funds and conventional crowd-funding or venture capital is the “warm feeling” that is behind the hometown investment trust funds, because investors sympathize with the company/project owners and their efforts and are not solely seeking profit, while in crowd-funding and venture capital the investors are solely seeking financial profit. 4.3.2. Development of startup business’s Credit Risk Databases and Credit Bureaus Given the importance of startups to many dimensions of Vietnamese economic activity, further efforts are needed to offer them access to finance. Their financial and nonfinancial accounts are often difficult to assess, but the Credit Risk Database shows how startups can be rated based on financial and nonfinancial data. The Credit Risk Database includes a huge amount of data that can be used to rate Startup businesses through statistical analysis. The National Credit Bureau is well-known among debtors, businessmen, and startups can be established as the organization that collects and processes the credit information of the clients of financial institutions. However, not many people know exactly what the responsibilities and duties of the National Credit Bureau are. Some people believe that the credit bureau can place people on a blacklist, or that it sells credit information to telesales businesses, and most people believe that the credit bureau is responsible for credit rejections. 4.3.3. Startup businesses’ Credit Rating Credit ratings are opinions expressed in terms of ordinal measures reflecting the current financial creditworthiness of issuers such as governments, firms, and financial institutions. These ratings may be regarded as a comprehensive evaluation of an issuer’s ability to meet their financial obligations in full and on time. Hence, they play a crucial role by providing participants in financial markets with useful information for financial planning. To conduct rating assessments of large corporates, agencies resort to a broad range of financial and nonfinancial pieces of information, including domain experts’ expectations. Rating agencies usually provide general guidelines on their rating decision-making process, but detailed descriptions of the rating criteria and the determinants of banks’ ratings are generally not provided. 5. CONCLUSION Startup businesses play a significant role in Vietnamese economies as they are responsible for very high shares of employment and output in all Vietnam. However, in the bank dominated financial systems in Vietnam,
10. 90 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Startup businesses have difficulty accessing cheap finance. Banks are cautious about lending to Startup businesses even though such enterprises account for a large share of economic activity. Startup companies, in particular, are finding it increasingly difficult to borrow money from banks and the strict Basel III capital requirements have made the situation more difficult. Riskier Startup businesses also face difficulty in borrowing money from banks. It is difficult for banks to evaluate Startup businesses since they often do not have solid accounting systems and their credit risk is not obvious for lending institutions. Many Startup businesses in Vietnam borrow money by paying high rates of interest or offering costly collateral, which hinders their growth. Many banks prefer to allocate their resources to large enterprises rather than Startup businesses. The reason for this is that for large enterprises the financial statements are clearer. Startup businesses are mainly riskier from the point of view of lenders as they do not have clear accounting information. This paper highlighted Startup businesses’ difficulty in accessing finance, and, with a view to easing the financing of Startup businesses, provides three methods for diversifying channels of finance. These three methods are the development of sustainable credit guarantee schemes by governments, specialized banks for Startup businesses, and community-based financing schemes, i.e. hometown investment trust funds for financing risky Startup businesses. One of the major requirements for making Startup businesses’ credit risk transparent for lending institutions and for credit guarantee corporations is having a nationwide credit risk database. If such systems could be established in Vietnam to accumulate and analyzes credit risk data, and to measure each Startup businesses credit risk accurately, Startup businesses would not only be able to raise funds from the banking sector, they could also gain access to the debt market by securitizing their claims. The establishment of a Credit Risk Database could be a medium-term infrastructure target in Vietnam. In the short run it is possible to implement various methods for measuring the credit risk and assessing the credit rating of Startup businesses. These methods could be used by lending institutions, credit guarantee corporations, or independent local rating agencies, using data regarding Startup businesses. Finally, it is important for the developing countries, particularly in Vietnam, startup businesses’ represent the main parts of their economies to diversify channels of financing of Startup businesses. The developing countries also need to accumulate the Startup businesses data in a nationwide database for categorizing Startup businesses based on their credit worthiness. Those who are ranked higher get higher credit guarantees from the government at lower costs, so that they can be successful. They will have a significant role in job creation and in production. In addition, those that are risky should avoid borrowing from banks, because if they use bank loans it will cause nonperforming loans. For promoting startups and riskier Startup businesses, community-based lending such as hometown investment trust funds, which are explained in this paper, is a suitable solution. REFERENCES Åstebro T., & Bernhardt I. (2003). Startup financing, owner characteristics and survival. Journal of Economics and Business, 55, 303–319. Atherton A. (2012). Cases of startup financing: An analysis of new venture capitalisation structures and patterns. International Journal of Entrepreneurial Behaviour & Research, 18(1), 28-47. Baptista R., & Mendonỗa J. (2009). Proximity to knowledge sources and the location of knowledge-based startups. The Annals of Regional Science, 45(1), 5-29. Basu Ch., Difference Between Seed Funding & Early-Stage Funding. Small Business Financing Sources. http:// smallbusiness.chron.com/difference-between-seed-funding-earlystage-funding-33038.html. Accessed 19 March 2013.
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