Touchstone Partners, a newly-established Vietnamese venture capital firm, believes value can be created in embedding environmental, social, and corporate governance (ESG) elements in businesses, without compromising on financial returns.
The Ho Chi Minh City-based VC — which secured the first close of its debut $50 million fund this week, raising more than half of its targeted corpus — aims to help Vietnamese startups develop their ESG framework from an early stage, top executives of the firm told DealStreetAsia.
“It’s not a requirement, but we prefer founders who already have an ESG focus and have built that into their products,” Khanh Tran, Touchstone’s managing partner told DealStreetAsia.
“There’s no ESG framework yet for early-stage tech startups. Therefore, we have our own scoring framework to see whether the core business of a startup will solve a major social problem in Vietnam,” added Tu Ngo, the firm’s general partner.
The executives opined that there is a lot of inefficiency and lack of transparency in Vietnam’s major industries such as education, healthcare, and financial services. It is still too early, and also too expensive, for nascent Vietnamese tech businesses to track every ESG-related issue, said Ngo. She stressed on the need for investors to help startups measure environmental and social metrics, and improve the overall governance of companies.
“In Vietnam, governance is something that people don’t pay enough attention to. That’s something we hope to fix from early on,” added Tran.
He was part of the founding team of the $100 million, tech-focussed VinaCapital Ventures — Vietnam’s largest VC investment vehicle — after stints at investment bank Goldman Sachs and the Southeast Asian ride-hailing decacorn Grab.
Tran’s partner, Ngo, is currently the chairwoman at YOLA Education, a private equity-backed English and skill training business. She co-founded VietAbroader, a non-profit association to empower Vietnamese youth.
No compromise on financial returns
Tran and Ngo believe there is a good opportunity for VC investors to marry financial returns and social impacts.
“As a fund, we do not compromise financial returns. We can find both returns and impacts in various facets of tech. For example, we try to stay away from P2P platforms that facilitate loan sharks, but we do look for solutions to bring people into the mainstream financial services industry, using alternative credit scoring, or improving the KYC process,” Tran said.
Limited partners in Touchstone Partners’s debut fund include Pavilion Capital, Vulcan Capital, and other institutional investors and family offices. In terms of the pipeline, the firm is closing a couple of investments, and the related announcements “will come in due course”.
“Before COVID-19, there were a lot of investments in startups that had business models similar to that in China or Indonesia. But now, there’s a new crop of startups that are proving that they can solve domestic problems, looking at the missing links in the value chain of local industries. And they are the hidden gems,” Tran said.
Touchstone Partners is focused on early-stage investments, as the firm does not find diversity in late-stage startups. “When the later-stage investors make their investments, they also look at local investors in the previous round and what kind of value these local investors have brought to the company,” Tran explained.
ESG is a big theme for investment among larger, more matured investors. “In Asia, where ESG investing has historically lagged, assets in ESG funds reached $25.4 billion in 2020, up from only $810 million in 2019,” Rong Ren Goh, assistant director at Eastspring Investments, wrote in a recent commentary.
In Vietnam, several growth private equity funds like Mekong Capital and VinaCapital were early adopters of ESG.
“The investment manager views ESG as an important factor contributing to the growth of shareholder value and engages a third party to perform ESG audits where possible. These reviews typically result in the setting up of clear KPIs for changes and improvements…,” VinaCapital’s flagship fund Vietnam Opportunity Fund said in a recent statement.