Governments’ policies to support capital mobilization of startups - Lessons from countries in the world
GOVERNMENTS’ POLICIES TO SUPPORT CAPITAL MOBILIZATION
OF STARTUPS - LESSONS FROM COUNTRIES IN THE WORLD
1
Vu Duc Kien - Pham Minh Duc*
ABSTRACT: Studies show that the beginning period of a business is the time the business is most likely
to fail. One of the reasons for this is the lack of funds. From the experience of other countries in setting
policies to support startup businesses in attracting capital, and based on the actual situation in Vietnam,
the Vietnamese government can enact appropriate policies to support startup businesses. By studying
the experiences of the two countries Israel and Korea, the study has identified a number of policies
that the Vietnamese government can adopt such as: supporting to develop venture capital industry,
developingbusiness incubators, establishing stock exchange for startups, and offering tax incentives to
indirectly support startup firms.
Keywords:Startups, capital mobilization, governments’policies, business incubators
1. INTRODUCTION
The common trend of startups in the world has always been difficult in the early years.In the UK,
53,7% of businesses survived after 3 years of operation(Nilsson, 2017).According to the US Small Business
Administration, 30% of new businesses fail during the first two years of being open, 50% during the first
five years and 66% during the first 10 (SBA, 2012). In 26 countries in the European Union the proportion
of enterprises existing after 5 years is 46% (Eurostat, 2018). Running out of cash is the second largest cause
of failure of startups (McCarthy, 2017).
In Vietnam, the period of 2011-2017 is a milestone marking the development of the business sector over
20 years ago. The number of registered enterprises tends to increase in both quantity and registered capital.
In 2014, there were 74,800 new registered enterprises in the country, 94,750 in 2015 and 126,859 registered
enterprises in the whole country in 2017, increasing by 15% over the same period of 2016.In general,
although the number of newly established enterprises has increased sharply, the number of enterprises that
go bankrupt or have stopped operating is still very high. Especially, these enterprises are mainly from the
private sector. This shows that the business environment of our country is not very stable and businesses
are weak in operation and competitiveness is not high(Ministry of plan and investment, 2018). Assessment
of GEM about startup ecosystem in Vietnam over the years shows that in the 12 indicators, the financial
index for business is relatively low. In 2017, this index of Vietnam reached 2.27/5, ranking the fourth low
(GEM Global Entrepreneurship Monitor, 2018). According to a study conducted by the Vietnam Chamber
of Commerce and Industry, capital constraints are one of the four constraints faced by Vietnamese startups
(VCCI, 2017).
*
Department of Corporate Finance - Academy of Finance.
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The aim of this study is to provide recommendations for Vietnamese government to ease capital
mobilization of startups. The paper is organized as follows. Section 2 provides a quick view on financial
policy system to promote startups Vietnamese government has been used so far and the concerned problems.
Section 3 presents a review of Government’s policies to support fundraising of startup firms in Israel and
Korea. The final sectionproposes a group of policies Vietnamese government should apply to help startups
attracting capital easier in the first phase of business.
The concerned problemsof financial policy system to promote startups in Vietnam
First, startup businesses are usually small and medium-sized enterprises with weak financial capabilities.
It is difficult to meet the conditions for listing on the stock market and the corporate bond market. Therefore,
the mobilization of capital through this channel has not really facilitated the startup of enterprises:
Capital mobilization channel through issuance of corporate bonds is not really achieved as expected.
The reason is due to the lack of investors, the market has not formed the credit rating agencies for enterprises
as well as business bonds. At the same time, the legal system is not wide and deep enough to limit the bond
market development.
Second, the regulations on venture capital funds are not official yet. Although Decree No. 38/2018/
ND-CP dated March 11, 2018 details the investment in startups, there are no specific provisions on the
obligations of investors.This restricts the development of this industry, which is really crucial in financing
the startups(Ly, 2018).
Third,The specific policies in the pilot phase have been applied to the Vietnam-Korea Industrial
Technology Incubator in Can Tho, not widely applied to all incubators (Ly, 2018).
2. INTERNATIONAL EXPERIENCES OF SUPPORTING CAPITAL MOBILIZATION OF STARTUPS
2.1. Experience from Israel
In 1984, Israel experienced a crisis with an inflation rate of 450% (The Economist, 2017).After 20
years, Israel, with just over 8 million people, has reached the world. It is known for being a startup country
because it has a number of companies listed on the NASDAQ stock market which ranks third in the world;
and ranks second on venture capital. There are now over 400 foreign-based R&Dcenters in Israel (The
Economist, 2017). Israel’s GEI (Global entrepreneurship index) in 2017 is 65.4%, ranked 16th in the world
and in a line with developed countries (Thegedi, 2018).
In order to achieve such spectacular results, the Israeli government has been performing policies to
nurture startup businesses.
First, developing venture capital funds
Israel has incubated the establishment of technology enterprises based on government resources.
However, just after the government entrusted this task to Yozma, the success came. Yozma is a professional
investor and the first pillar of the venture capital industry in the country (Yin, 2017).
Creating a venture capital market is Yozma’s primary task. In order to fulfill this mission, a huge
amount of one hundred million dollars has been invested in Yozma by government. The private sector and
foreign investors are enticed to create new venture funds, and the investment committee in these new funds
also includes Yozma. In addition, the fund was required to invest in new Israeli companies, (Aviv, 2018).
Yozma 1 is the name ofYozma’s first venture capital fund. This fund was established in 1993 (Aviv, 2018).
At that time, there were other similar funds in the country. However, startups receive little financial support
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from these funds (Yin, 2017). During the first two years of its establishment, Yozma has created 10 mutual
funds with twenty million dollars each. In addition to receiving eight million dollars from government funding,
the private sector is also a source of hundreds of millions of dollars. In addition, 15 startups were invested
direcltyby Yozma. This is due to the policy of the Israeli government, which allows Yozma’s subsidiaries to
redeem the state’s shares. The selling price of each company share is equal to the cost of the state plus interest.
This, in turn, paved the way for the privatization of Yozma. Each of these funds was required to cooperate with
foreign institutions with experience in venture capital (Aviv, 2018; Yin, 2017).
Finally, in 1998, Yorma was fully privatized as the Israeli venture capital market was fully developed.
Today, in the Israeli venture capital industry, Yozma and its subsidiaries continue to play an important role.
Domestic investors are called upon by Yozma to cooperate with reputable investors from the United States
and Europe. Yozma II was established in September1998 and Yozma III was established in 2002. Today, a
total of $220 million is managed by all three of Yozma’s parent funds, investing in 50 unlisted companies.
Among these companies, some companies have invested in the US and European stock markets. By the end
of the 1980s, only a small number of Israeli companies were first offering on the NASDAQ stock market.
Today, this number has reached the third largest in the United States and Canada (Yin, 2017).
Second, support enterprises through enterprise incubators
Even with good ideas, since the initial startup phase is risky, startups are not eligible to invest from
private funds or investment companies. Most investors do not like risk so they only invest in startups that
have grown to a certain size with the shaped products and the lower risk. Therefore, startup funding is
extremely important and essential in this phase.
In Israel, startups are funded through incubators. There is a close-knit relationship between Yozma
and a network of twenty technological incubators across Israel. In most stages of business development
there is support from Yozma, but most concentrated in the first stage. On average, each project in incubators
receives about $600,000 from the budget. The government subsidizes about 85% of this amount and 15% is
provided by the incubator (Aviv, 2018). Further investments in subsequent business development stagescan
be considered. The project only has to repay the aid in the case of success at a rate of 3% of revenue each
year (Yin, 2017). Startup companies can register for new projects and continue to receive new support in
case of failure. Today, the government funds about fifty million dollars in 18 state-funded incubators. About
85 startups are born each year in the incubator. Among them, there are more than ninety percent completed
(Yin, 2017).
2.2. Experience from Korea
Korean’s GEI (Global entrepreneurship index) in 2017 is 54.2, ranked 24th in the world (Thegedi,
2018). In Korea, the number of small and medium enterprises accounts for 99% of the total number of
enterprises (Mss.go.kr, 2018). In order to be able to support this group of enterprises, the government has
enacted many financial policies system for startups, including the establishment of a separate stock market
for startups, as well as tax incentives.
First, establishing a stock exchange for startups
In order to support startup businesses access to capital from the market, in 2013 the Korean government
established the Korea New Exchange (KONEX) (OECD, 2018). In essence, the KONEX is similar to a
stock exchange for public companies, but is specifically established for startup businesses with looser
listing conditions, financial capacity.
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Startup companies registered on the KONEX only meet one third of the total number of registration
requirements on the KOSDAQ Stock Exchange: KOSDAQ Securities does not require businesses to have
an average of twelve years above. While In order to list on KOSDAQ, businesses must have a minimum
equity of three billion won, registered enterprises on the KONEX arerequired toown a minimum equity of
500 million won (Kang, 2017). In addition, to help increase the competitiveness of startups, KONEX does
not allow eligible businesses to register on KOSDAQ to be listed on KONEX (OECD, 2018).
Although the rules for listed companies are looser, the Korean government has specific strong
regulations for the operation of the KONEX to protect investors as well as minimize unwanted transactions.
For example, direct investment on the KONEX is limited to professional investors, including venture capital
funds, institutions. Individual investors are usually allowed to indirectly invest through funds (Kang, 2017).
After four years of establishment, in 2017 the market capitalization on the KONEX floor has increased
approximately 7.5 times, reaching about $ 3.7 billion and 150 listed companies (compared to 29 listed
companies at the time of establishment). The market capitalization of the first 29 listed companies increased
by an average of 20%annually. With an average capitalization of $ 45 million, even though these companies
are still in the startup business, the size is large enough to attract investors (Kang, 2017).
Second, issuing of tax incentives policies
In 2014, Korea has introduced regulations on tax exemptions, reductions and refunds for startups
operating in all sectors. For example, for small businesses, depending on the circumstances and specific
operating conditions in accordance with the law, they will be reduced from 5% to 30% or exempt from
certain taxes such as VAT and registration tax (OECD, 2018).
3. LESSONS LEARNT FOR VIETNAMESE GOVERNMENT
In general, based on the Israeli and Korean business support policies, the Vietnamese government should
support startups to have a closed process to mobilize capital for their respective development phases. In the
initial stage, startup businesses can use government funds through investment funds to assist them survive.
When they reach a sufficiently large size, they can raise capital through stock exchange for startups. Until
maturity, the company can move to mobilize capital at the stock exchange for large enterprises.
Below are some specific recommendations:
First, develop venture capital funds.Vietnamese government needs to provide capital to startups
through venture capital funds. Government-funded investment funds will be the backbone for attracting
venture capital flows domestically and internationally. In the long term, the government will divest from
these funds.
Second, the government venture capital funds should provide capital through business incubators.
According to Isenberg (2010), it would be wrong to let startup businesses get financing easily. Therefore, it is
important to develop a rigorous process for appraising projects to ensure that capital is invested effectively.
Third, develop the stock market for small and medium enterprises. The idea of building a stock
market specialized for startups based on KONEX model is a good idea to help startup companies to access
capital with lower standards. The market is more flexible, benefiting both businesses and investors.
Fourth, promote the development of corporate bond market. In addition to capital mobilization from
the stock exchanges, bonds are also an important means of raising capital. Therefore, developing the bond
market will make it easier for startups to raise capital.
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CONCLUSIONS
One of the biggest obstacles for startups is access to funding. Having a proper funding mechanism will
boost the efficiency of creative startup businesses. In the context of Vietnam, when the policies on startup
support have not been fully developed, learning experience of other countries is very necessary. Based on
the study of the experience of two countries, Israel and Korea, the paper has proposed a number of policies
to support capital for startup businesses such as developing venture capital industry, enterprise incubators,
establishing specialized stock exchanges for startup enterprises, as well as developing the bond market. Due
to time limitation, the detailed solutions can be elaborated. This may be the direction for further research.
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