Vietnam has been a host to several social enterprises in the recent years. The trend that started with pioneers like the Centre for Social Initiatives Promotion (CSIP), is now being followed by foreign philanthropists, who are supporting the establishment of many such social enterprises in the country; one of them being LGT Venture Philanthropy (LGT VP).
LGT VP is an impact investor that supports organisations with outstanding social and environmental impact in Latin America, Africa, India, Southeast Asia, Europe and China. The fund invested in two Vietnam-based enterprises, Tohe and Ecolink.
According to a recent investment needs survey conducted by LGT VP and CSIP, there are a number of barriers to securing investment for Vietnamese social enterprises. These barriers include, the modest amount of external funding requested (typically well below the $1 million threshold that most impact investors apply), uncertainty among social enterprises about available funding sources, funding requirements, and uncertain standards of the financial statements and operation plans.
These barriers are clearly evident in almost 95 per cent of all Vietnamese social enterprises surveyed, who believe that securing investment is a major challenge moving forward.
For its two investee projects in Vietnam, both of which are businesses with social impacts, LGT VP is helping with the early stage development and in building more facilities in the local market.
DEALSTREETASIA spoke to Tuan Pham, Vietnamese accelerator manager for LGT VP. Edited excerpts.
Tell us about the social enterprises that LGT VP is investing in?
LGT VP is now an investor in Tohe and Ecolink. Tohe is a project that offers art classes for disadvantaged children. Selected artworks from the children will be used as prints for lifestyle products such as T-shirt, bags, cushion cases or laptop cases, and part of the sales profits are re-invested into the art development programs. CSIP and LGT VP invested in Tohe, which has been operated for three years. So far, it has opened two shops in Hanoi and Hoi An, and exported its products to Germany.
Meanwhile, Ecolink is a company that produces organic tea. It helps create jobs for ethnic families in remote areas of Vietnam, while providing training in globally accepted organic farming techniques.
These companies have a relatively small scale, therefore our investments are not substantial. Ecolink has received $35,000 in convertible loan, aiming to obtain ecological certification and expand tea processing facilities. Our engagement in Tohe is $40,000. These are just seed funds, because giving them a big sum of money will be less efficient as they do not know how to allocate, considering their scale of operation.
What are your criteria for new investments in companies? Is it more about revenue or potential?
The first criterion is to the extend the businesses have social impact. Next, they have to develop to a certain phase so that they can rapidly grow after being invested in. They do not necessarily have to show an immediate profit, but they must show the right path that will lead to profitability.
The founders of the companies should see social impact as the major ingredient of their business model. I have seen lots of companies which forget that they are social enterprises as they develop, and are interested only in profit. However, as we are an investor, we would not want them to operate as non-profit or non-government organisations (NGOs). For NGOs, when sponsors pull out, they will also terminate existence. But we want to see if after our investment term, let’s say some five years, ends, the companies will still be working in that orientation.
Will you continue to invest in Tohe and Ecolink after you exit the initial investment?
Currently, we have not thought about this. Further investment depends on the future direction of the companies i.e. if they are well-developed and manage to find new markets, which I think is the biggest challenge. While Ecolink has many potential markets, there are fewer options for Tohe. However, both companies are great social enterprises that are doing fantastic work in addressing social issues, and we will continue to support their management team in their work.
So re-investment is a decision for the future, and we will look into it when that decision needs to be considered.
Why does LGT VP choose to bolster social enterprises? Why not startups in general?
LGT VP was founded on the initiative of the Princely Family of Lichtenstein to make tangible and sustainable difference to the lives of disadvantaged people, people on the Base of the Pyramid who are subsisting on $2 a day. While the underprivileged class is incremented, most of Vietnamese companies serve the middle and upper class.
We do not invest in startup in general if it does not have a social impact story, and we also prefer to invest in growing companies with defined markets and products.
The potential of social enterprises are plenty, because their objectives, the people living with less than $2 per day, account for some 60-70 per cent of Vietnam’s population.