500 Startups Vietnam is actively rolling out its play in Vietnam’s early-stage investment space with its recent announcement of an oversubscribed fundraise and an accelerator programme that will invest $100,000 in each incubated company – being the largest accelerator commitment to date.
The country-focused fund was closed at $14 million, exceeding the original target of $10 million. It has for the first time revealed its investors, which include S Korea’s GS Shop, HUMAX and NCORE, along with individuals and family offices in Asia, Europe and the US.
Sharing his views with DEALSTREETASIA, Eddie Thai, one of the two partners operating 500 Startups Vietnam, said, limited partners (LPs) today see less risk [investing] in Southeast Asia, after the region has shown that it can produce several unicorns.
He asserted: “The in-region dynamics have shifted; Singapore and Malaysia are more saturated and mature, and Indonesia has perhaps been too hot. It’s natural for LPs to wonder, “Where’s the next place?”
The magnet that Vietnam possesses, according to Thai, is a combination of a strong economy, exciting demographics, low-cost tech talent and a position as a trade war winner amid the US-China tension.
As the Vietnam tech ecosystem is several years behind regional peers, a lot of work will need to be done to focus on enhancing the quality of startups, Thai said.
“We believe in the transformative power of entrepreneurship, so our global mission includes ‘building thriving startup ecosystems.’ It explains why we set up thematic funds in frontier markets like Vietnam, and also why we work on events and programmes around founder education, investor education, policy advisory and corporate startup engagement.”
How do you see the appetite of LPs for Vietnam change over time? What led to the success of your fundraising exercise?
LP interest has certainly increased since I started talking with potential investors a few years ago. Back then, the startup ecosystems in Vietnam and broader Southeast Asia were quite young, and several of today’s most active VCs were only just getting started. Some LPs saw potential but preferred regional funds for diversification purposes.
Today, Southeast Asia has shown that it can produce several unicorns, so LPs perceive less risk in the region. At the same time, the in-region dynamics have shifted. Singapore and Malaysia are more saturated and mature, and Indonesia has perhaps been too hot. It’s natural for LPs to wonder, “Where’s the next place?”
The answer, for many, ends up being “Vietnam”, due to the strong economy, demographics, and talent. The World Bank recently revised upward its forecast of Vietnam’s GDP growth to 6.8 per cent in 2018 and 6.6 per cent in 2019. Vietnam’s population of nearly 100 million people, a median age of 30, and 97 per cent literacy rate is a foundation for future growth. Vietnam currently has around 250,000 engineers, and the number of tech jobs have doubled over the last three years. Despite salaries “shooting up” recently, Vietnam’s IT labour costs are estimated to be 40 per cent less expensive than in China and India. In addition, Vietnamese companies are emerging as key winners of the trade war between the US and China, according to a new survey of companies from the two nations.
Some potential LPs believed that exposure from a regional fund is enough. Others believed that a country-focused fund manager would be better for finding and supporting entrepreneurs. We had a chance to validate this with our first 30-plus investments and the impressive progress by several of our portfolio companies.
Do you have any Vietnamese LPs? Most of the money invested in Vietnamese startups come from international investors. Why do you think Vietnamese investors are not investing in syndicates?
Yes, we have some LPs from Vietnam. There are also a number of Vietnamese investors joining other funds as well, like ESP Capital, Startup Viet Partners, etc., and I think more will become involved over time. It probably takes some time for two reasons. One, most wealthy Vietnamese people made their money in traditional industries, not tech businesses, so they are not yet familiar with how to assess tech opportunities. Two, Vietnamese people overall are not as familiar with having money invested by third-party managers. 500 Startups Vietnam is helping educate Vietnamese investors, but in any case I expect the majority of money to come from outside of Vietnam than in Vietnam, simply because all together, there’s more capital in other countries than there is in Vietnam.
South Korean investors seem to be very keen on this market. How do you assess their increasing interest?
Korean investors have been interested in Vietnam for a very long time, so this is a natural extension of that. Koreans see that Vietnam is following a trajectory of economic success that is similar to Korea’s from decades ago. They also see a lot of similarities between Korean culture and Vietnamese culture, which makes it easier to do business here.
Although the local ecosystem has made some noise in the regional market, the total funding is still much smaller than other countries. What are your views on the dynamics of the Vietnam tech ecosystem?
I think this is due to ecosystem maturity levels. Singapore and Malaysia’s startup ecosystems may be considered 5-7 years ahead of Vietnam; Indonesia’s perhaps 2-5 years ahead. Indeed, as Google and Temasek recently reported, most of the money has been going to the region’s unicorns in Singapore and Indonesia. But the silver lining here is that this relatively limited capital means that Vietnamese entrepreneurs need to learn how to be lean, agile and sustainable. This may make them more competitive in the long-run than their counterparts in more cash-rich ecosystems.
The number of bigger deals is increasing with new investors participating, such as Sequoia, Northstar, JD, SparkLabs, etc. Is it fair to say the ecosystem is maturing?
The ecosystem has been maturing since 2015: better founders, more deals, deals shifting to later stages, etc. However, I believe the ecosystem is still nascent. There’s still too much noise and quantity rather than a focus on quality. 500 wants to continue working with various stakeholders to improve quality.
What do you think is the mandate of VCs in building an ecosystem?
The baseline is simply investing in and supporting high-potential entrepreneurs. By helping develop “wins”, more talent and capital will flow to the ecosystem.
But 500 Startups aims to do more than that. We believe in the transformative power of entrepreneurship, so our global mission includes “building thriving startup ecosystems.” It explains why we set up thematic funds in frontier markets like Vietnam, and also why we work on events and programmes around founder education, investor education, policy advisory and corporate startup engagement. In the short run it’s a heavy lift, but in the long run there is a virtuous cycle between these efforts and our investing activity.
At the early stage, what’s the hardest part in finding and knowing it’s an investable company?
We invest in founders and their potential. What we wrestle with the most, and what has been the most rewarding heuristic, is the strength of character of the founders. Beyond a good product and large market opportunity, it’s important to find strong founding teams with the hustle, resilience and integrity to make incredible things happen. We have to learn a lifetime’s complexity about individuals in the span of several meetings. It’s definitely an art rather than a science, and we don’t always get it right.
Can you tell us an example of your portfolio that well managed seed money and successfully raised more?
Among companies we invested in more than a year ago, around 75 per cent have raised downstream capital or exited. Some examples include ELSA (raising $3.2 million after 500 Startups Vietnam’s first round), Leflair ($3 million), and Base ($1.3 million). All together, our companies have reported raising more than $80 million in downstream capital already.
You said the 500 Startups Vietnam fund’s median check size will increase. What led to the higher valuation? Higher valuation has been a concern to others, is it the same to you?
Our comment was about our investment amount, not valuation. That said, like other professional investors, we are mindful about investing in companies at appropriate valuations. Building startups is a long-term game. Too-high or too-low valuations can ruin a startup’s trajectory in the long-run. We hope founders and investors in Vietnam don’t get too carried away.
A lot of investors are betting on fintech, e-commerce and logistics. Where do you see VC capital going from now in Vietnam?
We expect to see that in Vietnam as well. Vietnam’s largest VC deals of 2018 were in those areas, and I would guess that 2019 would be the same. But we hope also to see investment into deep solutions to other emerging markets problems.