Early-stage investors in Vietnam are training their sights on sectors that remain resilient in the face of the pandemic even as the country slowly opens up to what was normal activity before the virus outbreak.
However, rather than picking up new investments, their immediate priority is follow-on investments in portfolio companies that demonstrate capital efficiency.
Take the case of Next100, a $10-million fund launched by NextTech Group of Technopreneurs last year. It has injected an additional $2.5 million in existing portfolio companies over the last few months.
NextTech Group chairman Nguyen Hoa Binh says new investments in this period are risky because startups in the early stages are unlikely to survive without reaching a certain scale.
Through follow-on investments, Next1oo aims to help its portfolio companies expand to other markets, and develop new products that will serve the needs of the post-COVID economy.
Investors betting on domestic consumption have reasons to cheer as Vietnamese flocked to cafes and shops after staying cooped up at home under the COVID-19 restrictions. The country’s macroeconomic advantage got further validation when Vietnamese prime minister Nguyen Xuan Phuc declared recently that the country was targeting economic growth of 5 per cent this year despite the bleak outlook everywhere else.
“Next100 is seeking investments in portfolio companies that are profitable and apply omnichannel model business,” Binh said. Its portfolio companies that additional capital has gone to include food and delivery service platform Heyu, which witnessed a growth of 30 per cent in transactions during the pandemic, digital transformation platform PushSale, and payment platform NextPay.
Meanwhile, Japanese venture capital firm Genesia Ventures, which has seven Vietnamese companies in its portfolio, is considering two follow-on investments in edtech and foodtech companies that have the potential to expand their businesses after the pandemic.
These follow-on investments have a ticket size of about $1 million, higher than previous rounds to help them extend their runway, accelerate and expand to new business models that meet consumer demands after COVID-19.
“While reaching new investors is quite difficult and time-consuming, startups need existing investors to help them prolong their runway and carry out their expansion plans,” Hoang Thi Kim Dzung, Head of Genesia Ventures in Vietnam, told DealStreetAsia in an interview, adding that companies with online-merge-offline (OMO) business model are the firm’s priority at this time.
James Vuong, Founder and CEO of TekAngels, a local angel investor network with three investments to date, believes that COVID-19 will make it harder or longer for the firm’s portfolio companies to raise funds. But the situation could also be an opportunity.
“If one of our portfolio companies had been doing well pre-COVID, such as having found product-market fit and growing, then the slow fundraising environment provides us the opportunity to continue our support of the company with additional funding and increase our ownership,” he said.
TekAngels has re-invested in half of its portfolio to help them through the pandemic, he added.
Meanwhile, Olivier Raussin, Managing Partner of FEBE Ventures, said that the new normal after COVID-19 will be different and the pandemic will leave a permanent impact on trends like remote work, telemedicine, online education, and digital transformation of businesses.
“We are bullish and actively looking for investment opportunities in these sectors,” he said. “FEBE is more cautious when considering deals in impacted sectors such as travel and online to offline (O2O).”
FEBE Ventures is the newly-established venture capital firm to join the tech investment arena in Vietnam with a $25-million early-stage fund. The fund, which invests in early-stage startup companies, has made its first close after securing the backing of entrepreneurs and family offices from Asia, the US and Europe, as well as senior executives at LinkedIn, Goldman Sachs and Jardine Matheson.
Additional evaluation factors
Most products or services that are mainly online or have been digitised are geographically agnostic and will benefit most coming out of the COVID-19 crisis, according to VC investors.
While COVID-19 may not have changed the fundamentals of what some VCs are looking at, it has added digitalisation as a new assessment criterion.
Pre-pandemic, Vuong said, digitalisation was a means to scalability and cost-effectiveness, using data and machine learning, but not quite for survival. “But overnight, it has become vital if a company wants to stay in business. Not only do companies have to digitalise their offering to customers, internally they have to digitalize their own operation as well, including letting employees work from home.”
The pandemic also brings to the fore two more factors related to product relevance in the post COVID world and the ability of startups to breakeven or raise another round, both of which could take much longer than before.
“Post COVID, however, we would be very disciplined about capital efficiency,” Vuong said.
Dzung of Genesia Ventures said the firm has observed uptake in e-learning, grocery and food delivery, and game and movie streaming services, as consumers are conditioned to stay home. Also observed to be on the rise are cashless payment services, and telemedicine, which require less physical interaction.
“As an investor, I am searching for investment opportunities applying the new business model, that can provide value at any time and anywhere with both online and offline channels for users,” Dzung said.
During the pandemic, offline health care services witnessed a drop of 16 per cent due to the limited access to hospitals and clinics. Meanwhile, online shopping and delivery services increased by 20 per cent and 12 per cent respectively, according to a report on the impact of Covid-19 in Vietnam released by Adsota, an advertising agency under Appota Group.
Meanwhile, FEBE Ventures’s investment thesis has not changed much. The investment firm still prioritises strong teams who are building businesses that are proven and capital-efficient.
“However after the pandemic, we are pickier to invest in business models that have strong unit economics, low capex requirement, low working capital and a clear path to profitability. The growth-at-all-cost mindset no longer applies,” Raussin added.
More dry powder but cautious approach
DealStreetAsia’s latest report on SEA-focused funds showed that they raised more than $1.3 billion in the first three months of 2020. That was more than triple the value recorded in the same period last year, but down by 47 per cent from the immediately preceding quarter.
Industry observers expect capital raising for venture funds to weaken for the remainder of the year, particularly for early-stage funds as investors hold off new fund commitments.
In the short-term, investors across the board are more conservative about deploying capital now. Corporate VCs investing out of a company’s balance sheets will most likely halt investments because the parent itself might be hurting financially.
For some experts, it is better for startups to approach local investors instead of foreign investors.
“Overseas investors – those without any person ‘on the ground’ – would be harder to win over due to travel restrictions as most would not invest without at least a few in-person meetings,” Vuong said, adding that angel investors might be easier to approach.
Meanwhile, Binh recommended that startups should rely on domestic investors who are knowledgeable about the market and have their own ecosystem.