A version of this article was first published on FinanceAsia.
Venture investors are eyeing Vietnam as the latest destination for their capital. Vietnamese start-ups raised a record $1.4 billion across 165 deals last year, according to Vietnam’s National Innovation Centre (NIC). The year finished up from $894 million and 126 deals in 2019 – an indication that dealmaking in the market has regained momentum following a small Covid-19-induced dip in 2020.
Start-up founders across the region – not just from Vietnam – are eyeing the Southeast Asian nation as an ideal launchpad for their regional businesses, explained Ascend Vietnam Ventures (AVV) co-founder and managing partner, Binh Tran.
“Vietnam's tech ecosystem is relatively young, clocking in at six to seven years old, so VC opportunities are mostly seed based,” Tran said, citing a 2016 government stated target of one million start-ups by 2020, as a turning point.
While the target may have been overambitious, it set out an intention to promote and support the nascent start-up ecosystem, and to create hype about the digital economy, he explained.
But Vietnam’s population of 100 million – small relative to Indonesia’s 280 million or China’s 1.4 billion – means that firms will need to look beyond the domestic market to gain scale, suggested Tran.
“The solutions coming out of Vietnam aren't going to just serve emerging Asia, some of these solutions are going to be globally leading companies that will beat Silicon Valley,” he told FinanceAsia.
AVV, which closed its debut fund in June this year in excess of its $50 million target, is among the wave of new venture capital investors turning to the market. These also include GGV Capital, which opened two offices in Vietnam in May this year; Mekong Capital, which closed a $246 million fund last year; and VinaCapital, present in Vietnam since 2003.
Factors which make the country appealing to foreign investors include strong GDP growth – which was in the area of 7% per year for two decades prior to Covid-19 and is forecasted at 7.5% in 2022 – and its English-proficient and skilled youthful workforce.
Additionally, Tran highlighted the absence of large conglomerates or families acting as barriers to entry, for new start-ups. In contrast, such “gatekeepers” are prominent in other markets including Indonesia.
“97% of the enterprises in Vietnam are SMEs, and so you have this very accessible, equitable playing field,” he explained.
Canadian-born Marina Tran-Vu, founder of Vietnam-based sustainable start-up brand, Equo, also noted the county’s young population, growing middle class, and investment into land and infrastructure, which she sees as drawing parallels with China. In April this year, Equo raised $1.3 million in seed funding from NextGenVentures, East Ventures and others.
In fact, in the context of global supply-chain woes exacerbated by pandemic restrictions and geopolitical trade tensions between China and the US, Vietnam is drawing increased interest for its potential to develop further as an international trading and manufacturing hub. This has led many corporations to adopt a ‘China Plus One’ strategy for the diversification and management of global supply chains: reducing their dependence on China and instead turning to Southeast Asian markets.
“I think people are looking outside of that powerhouse of a country [China] for other opportunities. Vietnam just seems like a natural ‘next in line’ country based on the same sort of trajectory or path,” she said.
Compared to Indonesia and China, which over past years have attracted the bulk of US capital going into Asia, valuations in Vietnam remain “appropriate”, said Vinnie Lauria, managing partner of Golden Gate Ventures (GGV). Earlier this year, he relocated to Ho Chi Minh in tandem with the firm’s two new office openings.
Lauria and the GGV team see opportunity in the market across three key sectors: edtech, healthtech, and fintech, in addition to B2C and B2 “Small b” services. He referred to Vietnam as one of the vertices of the Southeast Asia “Start-up Golden Triangle,” the others being Singapore and Indonesia. He cited “firms to watch” in Vietnam as including electric vehicle maker, VinFast; gaming unicorn, VNG; and e-wallet, Momo.
Series B and beyond
However, a lack of what Tran-Vu called “founder education” is responsible for Vietnam’s relatively small cheque sizes, and this explains why start-ups often fail to make it past Series A.
“A lot of Vietnamese start-ups are at a disadvantage because they don't know how to value their company, or they don't value it as aggressively as other companies in the same space in different countries. I think there's a little lack of experience or education on that front,” she told FA.
When it comes to exit options for investors in Vietnam’s start-up ecosystem, an acquisition is likely to be preferred over a domestic stock exchange listing, Tran-Vu suggested. A lack of perceived prestige compared to a New York listing could be one factor, she explained.
But listing on the local exchange is slowly becoming more appealing as an exit option and we are likely to see dual listings for start-ups that have a broader regional footprint, explained Lauria.
“The Vietnamese government has continued to update its strategy with the exchanges, which started in 2016 and this still continues to sharpen. This is a long-term view from the government which clearly recognises that its exchanges need to become more sophisticated and competitive in order to support the rapid growth of start-ups,” he noted.
A new securities law enacted in 2021 has eased conditions including profitability requirements, for listing on the Ho Chi Minh Stock Exchange (HOSE). But uncertainty remains around how markets would react to a large domestic listing. “No-one wants to be the guinea pig”, Lauria said.
“In this sense, we are five to six years behind Indonesia. No one is looking to go public [on HOSE] right now, but later yes. We are optimistic,” he concluded.