(Dec 13): Investments in Vietnam have been gaining traction in recent years, but the biggest story may lie in its private markets. In just two short years, the country has jumped to the third most active start-up ecosystem from the second least active among the six largest Asean nations, lagging only behind Indonesia and Singapore, according to a report by Cento Ventures and ESP Capital in August.
More venture capitalists (VCs) are eyeing the market as they believe that is where the action is. “We see enormous potential in Vietnam, with strong socioeconomic macro [factors] driving the growth of a large, young, digital-first, consuming middle class. This alone would catch the attention of any investor. But coupled with the magic ingredient of a large, experienced, returning diaspora, these factors make the country super interesting,” says Justin Nguyen, partner at Monk’s Hill Ventures in Vietnam.
The country saw its first unicorn in 2016, when online entertainment and e-commerce portal VNG Corp reached a valuation of US$1 billion ($1.4 billion). It counts Singapore’s state investor Temasek and Tencent Holdings among its investors. Other notable and well-funded start-ups include e-commerce site Tiki, e-payments start-up VNpay and e-wallet service provider Momo.
According to the Cento Ventures and ESP Capital report, the amount of capital invested and number of technology deals done grew sixfold from 2017 to 1H2019. Foreign investors, especially those from South Korea and Singapore, have been pouring funds into Vietnam.
“The Singaporean and Malaysian markets are mature and saturated. Indonesia’s is not quite as saturated yet, but it is getting there. With the big influx of capital into Indonesia over the past few years, valuations have been frothy and deal flow has been difficult. So, Vietnam has become the ‘next’ market [to invest in] in Southeast Asia,” says Eddie Thai, partner at 500 Startups Vietnam, which launched a Vietnam-focused fund in 2016.
“Vietnam has a fairly unique place in the world in that there is a high quantity of STEM [science, technology, engineering and maths] talent in an emerging market context. That makes the country a potential innovation hub, not just for its own market but also for other emerging markets around the world.”
Another driving factor is the Vietnamese government, which has been actively supporting start-ups. Last year, it directed ministries to explore how regulations could accommodate new business models, such as those in the sharing economy.
“The government is very supportive of new business models because it understands these will be an integral part of the economic development going forward if it wants to sustain the 7% GDP growth. That is why I am very bullish on the coun- try,” says Khanh Tran, a partner at Vietnam-based VinaCapital Ventures, which was set up last year.
Factors driving flood of private money
Many VCs point out that Vietnam’s huge pool of young talent is one of its unique features. The country has a large, educated talent base as well as a returning diaspora equipped with experience from abroad.
“Look at international maths and science competitions and you will find a disproportionate number of Vietnamese students on top. A lot of these students end up furthering their studies overseas. However, unlike a lot of countries, where the best and brightest go to school abroad and stay there, these Vietnamese students return,” says Monk’s Hill’s Nguyen.
“Along with them, people like me — who left as children — are returning to the country. And along with me, millennials who were born overseas are also returning to the land of their parents. They all bring rich experiences and perspectives from abroad.”
This group of people represent a generation of start-up founders that VinaCapital Ventures’ Tran likes. “These are young guys who come back with the awareness of the gap between Vietnam and the rest of the world. They are bringing their knowledge to fix the gap,” he says.
Another wave of start-up founders that he likes are those who founded companies about five years ago and most likely failed in building up their ventures. “They failed because the infrastructure and adoption of technology were not there. These guys are probably second or third timers in starting something new. To be honest, Vietnam five years ago was very different from what it is today,” says Tran.
VinaCapital Ventures comes under multi-asset investment firm VinaCapital, whose prominent funds include the London Stock Exchange-listed Vietnam Opportunity Fund. VinaCapital was among the first wave of investors in Vietnam’s private markets in the 2000s.
“Back when IDG Ventures Vietnam [the first venture capital firm in the country] came in, there were only about four million internet users, GDP per capita was US$1,000, e-commerce was virtually non-existent and Facebook had not expanded internationally. But when it did a couple of years later, it was blocked in Vietnam. There were few technology entrepreneurs and they were relatively inexperienced and disparate,” says 500 Startups’ Thai.
Now, there are 10 times the number of internet users and two times the GDP per capita, widespread use of technology and better founders, he adds.
When was the turning point? Tran thinks it was when Uber and Grab ventured into the country. For the first time, the Vietnamese started performing utility functions on their smartphones instead of just using their devices to text or scroll through the web.
“It was the first time people started to book rides via their smartphones. Very quickly after that, they started to pay [for things] with their phones. Then, many new business models came up in Vietnam, whether it was replicated from China or Southeast Asia. That is why this is the best time for these experienced founders to start [businesses] again,” says Tran.
Attractive sectors in private markets
There are a lot of inefficiencies in industries across Vietnam that can be solved with technology, according to the investors. For Tran, the biggest opportunities are in logistics, retail and financial technology (fintech).
“There is a huge asymmetry of information between supply and demand. For example, 70% of trucks will return empty [to their stations]. This creates pollution [and lost opportunities to maximise utilisation of resources]. The cost of logistics also becomes high, at about 25% of GDP. Compare that with Singapore or Malaysia, where it is about 10%, and China, where it is at 15%,” he says.
That is the reason he invested in Logivan. “It is like Uber for trucks. It matches supply and demand in the trucking business. Another company we invested in — An Vui — does the same for long-haul buses on which people commute,” he adds.
In retail, the opportunities lie in bringing modern trade to rural villages, many of which still rely on mom-and-pop stores. As for fintech, the more than 60% of unbanked population in Vietnam represents a prime target for tech solution providers.
One of Tran’s portfolio companies, Wee Digital, addresses this pain point by providing biometric solutions for banking services. Using this technology, the unbanked who live in rural areas no longer have to make long trips to bank branches just to open an account.
“They are working closely with the state bank to make sure biometrics is part of the know-your-customer methods. In the future, the farmers just need to take a picture [of themselves] using their phone and send it to the bank,” says Tran.
As at November, VinaCapital Ventures had US$100 billion under management and 10 companies in its portfolio. It plans to start its second round of fundraising next year.
Healthcare is another major sector for investors in Vietnam. Most hospitals are located in big cities and the stretched healthcare system results in long commutes and crowded clinics.
Monk’s Hill invested in digital health start-up Jio Health to tackle this issue. The company’s app allows patients to input their symptoms, order a consultation and receive an in-home visit by a physician. Medicines can be prescribed and delivered immediately for simple diagnoses.
“Jio Health is one of our portfolio companies as its founder, Raghu Rai, is solving a big problem by bringing quality healthcare and convenience to a large population that is still paying high out-of-pocket costs,” says Nguyen.
While many of the investment themes in Vietnam are similar to those in the region, education is one sector that stands out, according to the Cento Ventures and ESP Capital report. For instance, ELSA (English Language Speaking Assistant) is a start-up that uses technology to help users improve their pronunciation and train them to modify their accents so as to be better understood. It was one of Monk’s Hill’s maiden investments in the country last year.
“We were very inspired by its founder, Vu Van. When she left Vietnam to study at Stanford’s Graduate School of Business, she realised that although she was extremely proficient in English, she had a difficult time being understood when she spoke because of her accent,” says Nguyen.
“She dug deeper and realised accents not only discouraged speaking and further learning but also — equally, if not more harmful — created disparities and distrust in the workplace. Dissatisfied with the only solution she found, which was one-on-one accent coaches, she set out to solve this huge problem using tech.”
Google’s artificial intelligence fund and 500 Startups Vietnam has also invested in ELSA.
Trusting Social, an alternative credit scoring start-up that also operates in Indonesia, India and several other emerging markets, is another of 500 Startups Vietnam’s portfolio companies. 500 Startups Vietnam closed its US$14 million fund last year. It had 50 portfolio companies and two exits as at September.
There are still many overlooked sectors in Vietnam, Thai observes. “This includes second-order business-to-consumer players in fintech that do lending, insurance and investment, as well as those in edtech, healthtech and business-to-business SaaS [software as a service].”
Looking for the next unicorn
The primary channel for exits in Vietnam is currently mergers and acquisitions (M&A). There is an appetite to acquire smaller businesses among the conglomerates in the country and the region, say the VCs.
“It is not just local conglomerates but also South Korean, Japanese and Singaporean companies. They want to penetrate the Vietnamese market and the only way they can get access and reach is through M&A,” says Tran.
There is also a growing number of regional investors who want to invest in later-stage start-ups.
VinaCapital’s first venture capital set-up — DFJ VinaCapital — delivered a gross internal rate of return of 24% for the 10 years since 2007, according to Tran. He thinks VCs in Vietnam can achieve similar returns in a shorter time frame and he hopes to achieve that target with the current fund.
But will the influx of money into the market distort the valuations of start-ups? Tran admits that there is currently a lot of hot capital. “Every time there is a foreign investor in my office, I tell them that they need a local partner. You can partner anyone local, just make sure you do not overvalue or overpay [for a start-up]. If you do, it is not good for anyone,” he says.
Similarly, Thai believes that VCs need to get on the ground by hiring local staff or visiting Vietnam frequently. They need to avoid the hype. “Valuations have got out of hand largely because foreign VCs are crowding towards just a handful of start-ups,” he says, adding that these are his personal views and not necessarily those of 500 Startups.
Regulations can also pose a risk to investors. Thai points out that the process to approve and close a foreign investment in a local company can take two to three months. The time frame is longer for companies in regulated industries.
Regardless, the Vietnamese market is considered to be at a nascent stage, with a small but growing number of exits and an increasing number of start-ups approaching later stages, says Thai. “Despite the recent influx of venture capital interest, it is still fairly early in Vietnam’s start-up scene with a lot of upside potential. And this is happening in the midst of a broader rising tide in the country. The minister of planning and investment has recognised this as a ‘once in a millennium opportunity’ for the economy.”
Tan Zhai Yun is a writer with Personal Wealth at The Edge Malaysia