How investors invest in startups

Through Startup-Pitching and Business-Matching, potential startups will have the opportunity to present their ideas to more than 100 investment funds.

Thirty-three investment funds that attended the Vietnam Venture Summit 2020 (VVS) with the theme “Going Digital” on November 25 have committed to pour US$815 million into innovation start-ups in Vietnam in the 2021-2025 period.

The signing ceremony was held at the Vietnam Venture Summit 2020 on November 25. Photo: Khanh Khanh

Some typical investment funds are VinaCapital Ventures, 500 Startups, AlphaJWC, BeeNext, CyberAgent Capital, Do Ventures, FEBE Ventures, Genesia Ventures, Monk’s Hill Ventures, Insignia Ventures, Patamar Capital, Smilegate, Vietnam Investment Group, and Viet Capital Ventures.

Speaking at the Summit, Deputy Prime Minister Vu Duc Dam said that if last year there was a sudden increase in the capital of investment funds poured into new Vietnamese companies, with $800 million, the investment capital is just US$200-plus million by 2020.

“However, the startup community of Vietnam has some notable highlights such as many startups being at the forefront together with foreign enterprises in providing solutions in transportation services, e-commerce, and creating co-working spaces,” Deputy PM Dam affirmed.

Mr. Nguyen Chi Dung, minister of Planning and Investment, pointed out that the Covid-19 pandemic has undermined creative start-up investment in 2020 and revealed that many startups have shortcomings, including those faring well in the international market.

In the long term, Mr. Dung stated that Vietnam is determined to implement innovation, reform and development policies, proactively and actively restructure the economy to improve the productivity, quality, efficiency and competitiveness of the economy.

“Considering innovation and creativity as an important driving force and the key to rapid and sustainable growth,” Mr. Dung added.

“The Ministry of Planning and Investgment is presiding over building a draft of the socio-economic development strategy for the 2021-2030 period, which identifies two important pillars to create a breakthrough which are science and technology; innovation and human development,” the minister said.

The summit included activities designed to connect innovative businesses. Through Startup-Pitching and Business-Matching, potential startups will connect with more than 100 investment funds to present their ideas.

An overview of the Vietnam Venture Summit 2020. Photo: Khanh Khanh

The summit had the attendance of about 800-1,000 delegates, leaders from several ministries and branches, nearly 50 international and domestic speakers, leaders of technology groups, investors, startups both from home and abroad, as well as representatives of institutions and universities across the country.

VVS 2020 has a significant objective which is to motivate the development of digital enterprises, as well as to find solutions and opportunities for Vietnam’s innovation ecosystem to integrate into the global market.

It creates opportunities to bridge investors with startups and innovators who have unique and potential ideas. Through the summit, with the support of ministries, key industry players, domestic and foreign digital experts, Vietnamese enterprises discussed the way forward to drive innovation in the country and work collaboratively to achieve success.

Last year’s summit gathered 18 domestic and international investment funds who pledged investment worth of US$425 million in driving startups growth and innovation in Vietnam in 2019-2021. Until the beginning of this year, over US$220 million, which equals to 50% of the total amount pledged, has been disbursed.

Vietnam is a destination for international investors in both FDI and innovative startup. In 2019, investment in innovative startups in Vietnam increased significantly compared to 2018. And the growth potential of Vietnamese innovative startups remains positive.

A new report by McKinsey & Company finds that Vietnam could capture US$100 billion by 2025 through the formation of 12 large digital ecosystems across retail and institutional services. These digital ecosystems constitute interconnected services from different industries that enable automation on a large scale and integrate purchasing pathways, giving customers access to a variety of products and services on a single platform.

By cooperating with startups, major enterprises could accelerate their development process by having access to new technologies and solutions, which otherwise would take long time to develop by themselves.

In the past three months, a growing number of local startups in various fields including electronics, logistics to financial services has successfully raised funds of up to millions of dollars from local investors, who in the past was less active compared to their foreign peers in the search for a hidden gem in the market.

The move came as a surprise given the fact that domestic venture investment funds only make up one fifth of the total 100 currently operating in Vietnam, in turn raising the question of whether such movement could become a trend in the coming time.

Got It receives US$6 million from VNG.

Among major deals, local B2B logistics startup EcoTruck received VND100 billion (US$4.3 million) in its Series A funding in late 2020 from major IT firm VNG. A few months later, VNG continued to invest US$6 million in Got It – a digital gifting platform.

In January, VinaCapital Ventures poured US$1 million into GoStream, a startup providing platform for livestream in Series A funding, while Phu Nhuan Jewelry Company (PNJ) acquired 30% stake at Nguoi Ban Vang, a startup operating in the field of financial services, in a deal worth around VND3 billion (US$130,000).

Meanwhile, Vietnam’s major payment apps MoMo has set up its own investment arm to support local startups called MoMo Innovation Ventures.

CEO of EcoTruck Le Hoang Anh said as the firm is operating in a field with a foreign ownership cap of 49%, raising domestic fund would help EcoTruck keeping its working capital flowing and ensure business running smoothly.

“During the process of raising funds, domestic investors would face less legal hurdles compared to foreign peers,” said Anh, adding there would be more added value for local investors, including a potential partnership in the future.

Win-win situation

As the pandemic is wreaking havoc on global economy, more business leaders feel stronger confidence in technological advancement as an irreversible trend, therefore, the market expects more startup deals to come.

Nguyen Ba Diep, executive vice chairman and co-founder of MoMo, said most innovative startups face difficulties during their early phase of development, especially in the search for customers and accessing capital.

“For sustainable development, MoMo could not go alone, as such, we would use our venture investment fund to support enterprises growing in terms technologies and system upgrade,” Diep continued.

CEO of PNJ Le Tri Thong said “by cooperating with startups, major enterprises could accelerate their development process by accessing new technologies and solutions, which otherwise would take long time to develop by themselves.”

For years, investors were willing to back losing businesses to gain market share. But now, there is more scrutiny of new investments.

Vietnamese startups have been heavily invested in recent years, but experts are concerned about a bubble in the sector after some companies got burned last year.

Mon Hue had to close the door last year after so much buildup.

Local startups received more than US$800 million in funding last year, which included an investment of US$300 million into fintech firm VNPay, the largest deal for a fintech firm in Southeast Asia in 2019.

However, investors are becoming more cautious while investing in Vietnamese startups as they see some foreign and domestic companies, such as Mon Hue and WeWork, disappointed investors last year for failing to make a profit after so much buildup.

Investment fund Mekong Capital, which was set up in 2001 and manages hundreds of millions of US dollars, is keeping itself cautious and finds more value in old economy investments than the tech startups that have driven much of the deal flow.

Chris Freund, a partner at Mekong Capital, told the media that some of the tech business models don’t make sense, warning that the sector is starting to resemble a bubble.

One example is food delivery startups, which handle inexpensive items like coffee and yet are facing off against local super-apps such as Grab — which even though it is a market leader is widely perceived to be losing money.

“I don’t see how they will ever be profitable. If venture capital money dries up, the whole industry will collapse,” Freund said.

Nguyen Hoa Binh, chairman of tech startup NextTech Group, said that many startups in Vietnam collapsed last year, which has left great adverse impacts on investors’ sentiment.

More scrutiny of new investments

For years, investors were willing to back losing businesses to gain market share. But now, there is more scrutiny of new investments.

Vietnam Innovative Startup Accelerator (VIISA), for example, requires its tech startups to meet a list of benchmarks throughout their time in the program.

“Apart from very intuitive selection criteria that all applying startups have to go through, the program has introduced a new development measurement method, which helps us to capture the progress of startups that are accepted into VIISA,” Vo Hieu, a board member and chief financial officer at VIISA, said, adding that this process will bring out the best in each person for the particular business they have founded and committed to.

To find investors, Pham Ngoc Huy from Vietnam Silicon Valley, suggested that Vietnamese startups should call for capital from South Korean investment funds.

According to Huy, in the thoughts of many Vietnamese, Singapore is the nearest market for Vietnamese businesses to find investors. Vietnam’s startups also tend to call for capital from the US. However, Vietnam is still not a targeted market for investment funds from these countries, except for highly promising projects.

Meanwhile, South Korean investors have big money and are competing fiercely with each other to find startups to invest in. As the number of good startups in South Korea is limited, they tend to look for startups in other countries. Vietnam is a major choice partly because of business culture similarities.

According to Huy, the good time for startups to call for capital is when startups have developed for a certain time, and can define their business model, strategy and business structure. At that time, the value of businesses begins to increase.

Young entrepreneurs will play a key role in the post Covid-19 socio-economic recovery journey, even accelerating it in the Southeast Asian region, stated a senior UNDP official.

The Southeast Asian region has one of the highest young startup rates across the globe, and 40% of these startups are creating jobs, according to Caitlin Wiesen, UNDP Resident Representative in Vietnam.

UNDP Resident Representative in Vietnam. Caitlin Wiesen.

In countries like Indonesia, Malaysia, Vietnam and Thailand, micro, small and medium enterprises (MSMEs) generate over 70% of the jobs in the private sector, stated Mrs. Wiesen at the ASEAN Startup Forum 2020 organized by the ASEAN Business Advisory Council on October 16.

This is particular important as Asia is home to more than 60% of the world’s youth or about 700 million young people. It is estimated that they account for half of the jobless people in the region, said Mrs. Wiesen.

“It is the young business owner, investor and worker who are often the more socially and environmentally conscious and want to pursue more sustainable ways of producing and consuming that is better for people and the planet,” stated. Mrs. Wiesen.

According to Mrs. Wiesen, they are the ones who have better access to data and information about the markets, in terms of good and bad practices on corporate governance, human rights, climate change and new technology.

Overview of the forum.

Therefore, investing in them and helping to carry them through this period of crisis is an investment in the next generation of investors and job creators, and the future of doing business in the region, stressed Mrs. Wiesen.

Additionally, as the ASEAN countries prepare for the transition to Industry 4.0 and the next development stage, transparency and digital transformation are critical aspects to ensure good governance, a  fair business environment and firm competitiveness.

In the context of Covid-19, the impetus for digital transformation has taken center stage, Mrs. Wiesen said, adding online services and digital transformation can ensure smooth and quality service delivery amid restrictive measures on social distancing.

The ASEAN Summit that was recently organized in Hanoi was also the first annual ASEAN Summit held virtually throughout 53 years of its history, she noted.

Given the high rates of startups in the ASEAN region, and their drive for innovation and enterprise, there is little doubt that these young entrepreneurs will play a key role in the Covid-19 socio-economic recovery journey, even accelerating it in this region, stated Mrs. Wiesen.

“By supporting them in ensuring business integrity and driving sustainable business, we will contribute not only to rebuilding our economies, but also to achieving a societal culture that puts a premium on caring and protecting a more sustainable future for all,” she concluded.

UK Ambassador to Vietnam Gareth Ward.

Sharing Mrs. Wiesen’s view on the huge potential of ASEAN startups, especially those in Vietnam, UK Ambassador to Vietnam Gareth Ward said current Vietnamese startups are still facing legal barrier in forms of cumbersome administrative procedures and sub-licenses.

Mr. Ward suggested that policy makers should adopt a more open mindset in addressing startups’ concerns while speeding up the decision-making process for those related to startups activities.

The ambassador referred to the UK’s experience as saying the strong development of the business community is thanks to a favorable legal environment.

Moreover, Mr. Ward expected Vietnamese startups to continue applying technologies to raise productivity and eventually their competitiveness.

Country Manager for Swiss Entrepreneurship Program (Swiss EP) Hub Langstaff said the startup community in Vietnam is in need of venture capital.

Mr. Lang Staff said the Swiss EP is committed to cooperating with partners in Vietnam for better nurturing startups, in turn forming a platform for them to develop.