Startup valuations in Vietnam are increasingly seeing a correction amidst the COVID-19 crisis that has drawn a clear line between investable businesses and those that have succumbed to the pressures of the pandemic.
This is particularly true for firms that are trying to clock late-stage funding, said Trung Hoang, partner at homegrown venture capital giant VinaCapital Ventures.
“For mature companies in the ecosystem, founders may be under pressure to exit; accelerate their go-to-market strategy; or sell non-core assets to extend the runway or conduct an IPO to gain access to liquidity,” Hoang added.
The markdown in valuation has particularly gripped sectors such as travel, hospitality, and transportation that have been the worst affected by the pandemic.
In new-economy sectors like fintech, education, healthtech, and logistics, however, the changes in valuation are not all that visible, said experts.
“The decrease in deal actvity in the first half of 2020 has caused a fall in valuation across sectors. However, a few sectors like SaaS for example have stayed resilient or have undergone minor glicthes,” said Vy Le, co-founder and general partner of Do Ventures.
With the slowdown of capital inflow from foreign investors in the country amidst the pandemic, startups have been being put under two distinct categories – healthy and unhealthy, said Nguyen Minh Tuan, CEO at CyberAgent Capital Vietnam.
According to DealStreetAsia’s SE Asia Deal Review Q4 2020, Vietnam reported 60 deals, just short of the 63 recorded in the same period in 2019. But, in terms of deal value, there was a drastic fall during the October-December period last year with investments plunging to $382 million from $902 million in the year-ago period.
However, all’s not lost.
E-commerce remained the best performing vertical in 2020, generating 10 deals in total with a combined value of $143 million. HR tech followed suit with seven fundraising deals worth $36.9 million in total proceeds.
According to experts, valuations depend on a couple of factors – the nature of the business, the sector the startup operates in, the traction it gets, and the scalability of its revenue model, among others.
“Founders and VCs today are agreeing on a more realistic target. The topline metrics, the likes of GMV, revenues or users, are the same for certain sectors. But the scale today is more realistic than before,” Khanh Tran, managing partner at Touchstone Partners, said. The new VC secured the first close of its debut $50 million fund in April to invest in early-stage startups in the country.
“We use a mix of top-down and bottom-up approaches to arrive at valuations. We try to explain how a similar product in Indonesia or China, with some local tweaks in Vietnam, would be valued. And we put some multiples on revenues, see sale traction in 6-9 months with COVID-19 in mind. We have seen cases where investors have too much ownership of a company early on. That may not be fair for both investors and founders. Series B and C investors have that comfort zone in terms of how much shares they want founders to own, to be motivated,” he said.
Meanwhile, some investors also point out that valuations of companies also depend on the founders’ track records.
“We invest mainly in seed, pre-revenue stages and 80% of our decisions are based on the potential of the team. The difference [in valuations] is less impacted by the sectors than by the quality of founders,” said Olivier Raussin, co-founder & managing partner at FEBE Ventures.
While mismatch in valuations is often common between sellers and buyers, VCs always do their own evaluation before finalising a transaction.
“Rather than crying about high valuations, I believe it is paramount to look forward and focus on building up convincing performances,” said VinaCapital Ventures’s Hoang.
Reasons for valuation mismatch can also be attributed to lack of information, among other factors. Also, investors often don’t understand the Vietnamese market, while founders are not familiar with the fundraising process. “The two-way information asymmetry increases the likelihood of mispricing,” Eddie Thai, partner at 500 Startups Vietnam was quoted as saying.
With the recovery in the works, deal-making in the country is expected to gain momentum. That, in turn, is expected to jack up valuations of companies looking to raise funds.
While all eyes are currently on the new economy sectors that have thrived during the pandemic, traditional sectors could also make a comeback. That could be backed by the fundamentals of the country that continue to be positive owing to a slew of factors such as growing middle-class coupled with a rising ‘netizen’ population in the backdrop of strong domestic consumption.
An earlier report jointly launched by Google, Temasek, and Bain & Co in 2019 had stated how Vietnam is expected to be a pacesetter in Southeast Asia that to touted to witness significant growth in its internet economy in the years to come.