Theoretical and actual venture capital valuation practiced toward early- stage ventures in VietNam
Abstract
Due to limited collateral (i.e., tangible assets), negative earnings, and large degree of uncertainty about their future high-growth technology SMEs cannot borrow from the majority of banks—Venture Capital (VC) has become one of the major alternative funding channels in developed and developing countries from U.S and Europe for many decades and in Vietnam recently. However, in our previous research (Diep, Khiem and Anh, 2017), we have shown that due to the immaturity of the VC market in Vietnam, there are four barriers between Vietnamese entrepreneurs and VC, namely: (i) finance gap “Rào cản tài chính”, (ii) knowledge gap “Rào cản kiến thức”, (iii) empathy gap “Rào cản sự tương đồng/đồng cảm”, (iv) Vietnam-specific gap “Rào cản cụ thể ở Việt Nam”. We found that one of the major barriers and the main causes for many disagreements among entrepreneurs and VC is the knowledge gap, especially disagreements on startup valuation. But all valuation discussion between entrepreneurs and VC occurs behind closed doors—hence there are little or no information. This becomes more challenging when it comes to the early-stage ventures where there are opaqueness, lack information or a generally accepted practice on valuation. This thesis aims to figuring out the generally accepted valuation methods applied by VCs in Vietnam in-depth.
With the mixed research approach, the data captured from eight VC funds in Vietnam shows the intensive preference on DCF and Multiples methods with the assumption on six qualitative factors: Team, Product, Management, Market, Competition and Matureness, plus the special finding from the real valuation case in downstream investor consideration. Despite some ineludible limitations, the eventual finding serves as recommendation for early-stage entrepreneurs for the effective and desirable formal capital investment call and further researches on this magnetic topic in practice.
Keywords: Valuation methods, Early-stage ventures, Venture Capital