Initial coin offerings (ICO) have started to stir up action in the fledgling tech startup ecosystem in Vietnam.
With the surge of tokenization, Vietnam has seen a small number of tech companies launch ICOs over the last several months with targets exceeding a typical series A venture capital round value.
While local venture capitalists are still skeptical about fundraising with cryptocurrencies, ICOs might find its sweet spot at some stages.
Even the most enthusiastic of blockchain is underestimating how quickly it’s going to change venture capital,” Kendrick Nguyen, co-founder and CEO of US-based crowdfunding platform Republic.co and founding advisor for Coinlist, said at TECHFEST, the annual startup showcase by the Vietnam Ministry of Science and Technology.
Nguyen pointed out two advantages of ICOs over venture capital – higher liquidity and a higher possibility of proving product-market fit.
“All you need is the adoption within the blockchain community. And with the distributed nature of it, people around the world will help you build on it,” he added.
Nguyen sees ICO as an unprecedented opportunity for well-trained engineers to bring their products to the market, especially given the tech talent pool of Vietnam.
Yet, it cannot go without anxiety about market manipulation as well as fraud as there is no equity taken to protect investor rights.
Eddie Thai, venture partner at 500 Startups Vietnam, addressed his concerns over liquidity, given the “pump and dump” practice, a Wall Street-style scam that is spreading fear among investors.
While placing his faith in the blockchain technology in the long term, Thai emphasized on other traditional yet fundamental benefits VC investors could support that an ICO might fail to deliver.
“Don’t give up on the due diligence that traditional investors do,” he said.
The American early stage fund manager is an early backer in bitcoin players ChangeCoin and Gyft.
Ryusuke Hirota, principal at Spiral Ventures, said: “If you think about going for an ICO, the question would be ‘Do you really need only money, or do you need other support from the investors?”
However, Hirota also asserted that ICO would fit second-time founders or serial entrepreneurs who know how to use money. The tool is also workable for the series B round onwards, where the company does not get to go through the product-market fit process.
For the early stage, he said, “too much money at the beginning of the company will kill the hunger of the founders.”
Yet, fundraising through ICOs (fetching $3 billion in 2017 according to CoinMarketCap) is only a tiny fraction compared to the $127 billion VC money raised last year.
The trend might continue to grow, as Nguyen described blockchain technology “as impactful as the Internet has been to human civilization”.
Not being sidelined by the hype, VC funds themselves are being involved in tapping digital coins. Most recently, Russia’s Pulsar Venture Capital started a $30 million ICO sale of its Pulsar tokens to raise funds for investing in tech companies worldwide.
Earlier this year, Blockchain Capital completed its $10 million ICO target within only six hours, distributing for its $50 million Digital Liquid Venture Fund.
VC funding to remain the mainstay
Venture capital continues to remain the most popular fundraising method for Vietnamese startups, with deal flow expected to remain stable and an increase in average check size as well as the participation of more high profile investors, experts at the round table concurred. Meanwhile, venture capitalists said it was difficult for them to raise funds.
“For funds which target to raise about $50 million, the average time taken to raise the first close has moved from 12 months to 18 months,” said 500 Startups’ Eddie Thai.
He attributed the extension to a more competitive landscape and a halt from limited partners as they wanted to wait for results from the funds they previously invested in.
Institutional investors like pension funds and banks are still reluctant to invest in startups because there is no cash flow or real assets to guarantee they will get their investments back, according to Hirota.
“But I’m seeing changes in the corporate mindset towards startups. When raising funds three years ago, the check size from LPs was up to the tune of $1 million, now it’s up to $10 million.”
Vietnam has witnessed more engagement from international VC firms. In addition to the likes of Cyberagent Ventures, 500 Startups, Spiral Ventures or Monk’s Hill Ventures, KK Fund and Fenox Ventures are also looking at this market. Earlier this year, seasoned entrepreneurs in the country announced the $20 million ESP Capital to invest in early stage tech companies.
According to data put together by Topica Founder Institute, investments into Vietnamese startups amounted to more than $200 million in 2016, compared to $150 million in 2015 while deal counts last year were slightly fewer. Angel investors and VC funds still made up the largest buyers.
Meanwhile, Hanoi-headquartered NextTech Group was the first Vietnamese company to launch an ICO for its STEM education unit TEKY. Two precedents that also announced their coin offerings were companies either founded by a Vietnamese or having operation in the country.