Vietnam startup scene poised to take off as ecosystem comes together

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Visual from Techfest.vn

For almost a decade, Vietnam’s startup scene has faced shortage of quality startups, lack of legal support and inadequate funding.

All this is set to change with a new wave of entrepreneurs  and investors re-shaping the country’s  startup ecosystem. Several changes were already visible during Techfest, the first national event for startups (or say Vietnam’s DLD Innovation Festival or Echelon).

While the connection between venture capitalists (VCs) and startups in other countries across Asia is far more evolved, fundraising is still a challenge in Vietnam. “Without the investors, there would be no ecosystem at all,” says Thuy Truong, CEO and co-founder of GreenGar, the first Vietnam-based company to get accepted into the 500 Startups Accelerator Program.

According to Nam Do, co-founder and CEO of SeeSpace (Silicon Valley), the creator of InAiR, the world’s first augmented television experience, there is no such (startup) ecosystem in Vietnam; but the country is building it.

In fact, several new innovations and initiatives are already in the fray, says the government. This coupled with supportive changes in the legal framework and entry of several incubators, accelerators and VCs is providing a strong foundation for the nascent startups in the country- the results are already visible.

Also read: Hanoi’s Techfest 2015 to promote Vietnam’s startup ecosystem

Applying Israel model?

2015 will be the first year Vietnam is invited to Start Tel Aviv, the global competition for startups, held by the Israeli Ministry of Foreign Affairs and the city’s Mayor Office’s initiative, Tel Aviv Global.

Meanwhile, Vietnam is aiming to connect its research and development (R&D) centres in universities to businesses and investors.

Vietnam’s Minister of Science and Technology Nguyen Quan said he believed startups should grow from universities or research institutes. “The country can now start with a start-up university, then a start-up city, to gradually become a start-up nation,” he emphasized. Quan revealed the goal of having 5,000 tech companies by 2020.

Many universities are doing entrepreneurship courses. The private sector and government are also involved, but there is no connection between them, according to Oren Simanian, founder of StarTau – the Tel Aviv University Entrepreneurship Centre, who is dubbed as the “Entrepreneur of Entrepreneurs”.

Israel is the top spender on R&D as a percentage of GDP, Simanian said. Global giants from the private sector, like Intel, Ebay, Apple, IBM, Google and Microsoft, have come to Israel and invested in starups and R&D. If Microsoft launched its own R&D centre in the Middle Eastern country, Apple acquired two startups within only two years, and Intel invested in 64 startups.

What makes Israel’s startup ecosystem so flourishing, according to Simanian, is that the country must grow and keep pace with the developing. “Once you are in the situation that you do not have other options, you will do the best thing that you could,” he told DEALSTREETASIA. In addition, the multilingual culture and the ability to take risks of Israel people contribute to the success. “If you are not going to create a good economy, you are isolated from the neighbours,” he said.

Also read: Israeli startups a fertile ground for Asian investment: Avi Winter

Innovation creates the next big things

Innovation will help Vietnam grow from a middle-income nation to a prosperous country. To achieve that, leadership from the government is important for the growth of young entrepreneurs.

An innovative ecosystem is designed to address two things: growing competition and unemployment. Thus, the involvement of the private sector and the assistance from the government are top priorities.

Currently, startups and spinoff companies take the major proportion of tech firms in Vietnam. However, minister Quan said the legal framework has not been encouraging for startups, so the ecosystem did not progress as what he expected.

Funding still a problem

The biggest challenges when VCs enter the Vietnamese market, not surprisingly, include finding the teams that can execute their projects, mostly due to their mindset; legal issues; and the support from the community.

Most of the VCs that have come to Vietnam said that they have not seen enough strong founders.

And very often, it takes months to close a deal in Vietnam. In addition, other types of investment might also occur, such as buyouts or acquisition, rather than start a new business, due to legal issues in the country. Experts attending the Techfest acknowledged that Vietnam was among the most difficult countries to do business in, while others are opened for business. But they also believed Vietnam could change.

Also read: Seed funding hard to come by in Vietnam: George Vozikis

Meanwhile, most VCs want landmark deals. If the value of the companies goes up, more investment will go in. Although the startup scene in Vietnam is comparatively young, it is going faster than other countries in the SEA region and can pose exponential growth. Experts expect small exits will happen in Vietnam.

“Within the next three to five years, Vietnamese startups will expand outside of the country. It will be a nice opportunity for investment,” IDG Ventures Vietnam vice president Truong Nguyen predicted. “The sophistication of the evolving ecosystem will help Vietnam go ahead of other markets. Vietnamese entrepreneurs are today more innovated to compete with the world,” he added.

Also read: VCs in Vietnam: Scope for domestic development

Right now, Vietnamese startups are still focusing too much on the local market. Meanwhile, typical startups will potentially become regional companies, said Dzung Nguyen, Cyberagent Ventures’ head of Vietnam and Thailand. Besides, global VCs have entered Asia and invested millions of dollars recently. “That trend will support the activities of VCs and the startup ecosystem as a whole. And it is why we are looking for further investment in SEA. We seek 15 investments in the next five years.”

Domestically, according to Ronnie Wee, co-founder and managing partner at Incuvest, Singapore tech investment firm, there will be a good possibility of local funding in collaboration with global VCs, following the partnership between 500 Startups and FPT Corporation. Wee told DEAL STREET ASIA that he has been travelling a lot to Vietnam hunting for investment opportunities. The fund does not have any Vietnamese firm in its portfolio so far.

Also read: FPT Corp, 500 Startups to set up incubator for startups in Vietnam

ASEAN expansion

A number of Vietnamese startups have expanded operations to other countries in SEA, such as Appota, CleverAds and Peacesoft. Vietnamese firms have the advantage while foraying into Southeast Asian markets, because the countries in the region share plenty in common.

However, to easily penetrate a foreign market, Appota and Peacesoft told the younger generation of businessmen to partner with local firms. There are many ways a startup can cooperate with native companies, such as outsourcing payment service, rather than shaking hands with a firm in the same industry.

The successful startups and global VC funds also advised young entrepreneurs to test and evaluate each country’s model and choose the suitable products to develop.

If Cyberagent Ventures has to point out its most fruitful operation, it is not the SEA market. However, if investors look for a long-term return, it is now time to be in Southeast Asia, Dzung said. The Japanese fund has been present in the region for six years, and some of its investees have brought about 20x – 30x return.

Foody.vn, a food search and review website, for example, is moving fast in SEA (including Singapore, Malaysia and Thailand). However, it will take another three to five years’ time for the Cyberagent Ventures’ investee firm to be a unicorn (a company that has reached to a $1 billion valuation), like VNG Corp.

Vietnam to be the next powerhouse for startups

The startup ecosystem could be on the threshold of something huge, according to Eryadi K. Masli, lecturer in international business at Swinburne University of Technology and advisor to Manifex Pty Ltd, a Melbourne-based private investment firm investing in Australian start-ups.

Several years ago, the world had not noticed the Vietnamese startup scene. But Flappy Bird, invented by Nguyen Ha Dong, was the turning point, Masli said. Many of Vietnamese startup companies are moving fast. For businesses like Appota, after a series C round will soon come an IPO, he noted.

“People here are smart, the government is more supportive and more VCs are coming in. After this event (Techfest), Vietnam will be one of the hottest places for startups,” he said, adding that he, as well as other evangelists, are inviting investors to Vietnam. Hopefully, Australian investment firms will be interested.

Also read: Startup Review 2014: Vietnam tech firms find success, expand overseas