Vietnam to launch venture capital regulation in 2017

A Vietnamese national flag is seen at the Flag Tower of Hanoi in Hanoi November 13, 2014. REUTERS/Kham

Vietnam is committed to launching detailed guidelines on the establishment of venture capital (VC) funds by the end of this year, DEALSTREETASIA has learned.

The Ministry of Planning and Investment will issue a decree to instruct the establishment and operation of investment funds under the country’s law on supporting small and medium enterprises (SMEs). The law was approved in June this year and will take effect at the beginning of next year.

Details of the decree could not be obtained as it is still in the discussion stage. To enforce laws in Vietnam, it requires guiding documents including the so-called Decrees and Circulars.

The need to introduce a legal framework for investment in startups embarked as part of the country’s agenda in late 2015, as the ecosystem gained increasing interest from both local and overseas investors.

VC funding into Vietnamese startups increased year by year, reaching over $200 million in 2016. However, the size is still very small compared to regional peers. A lot of Vietnamese startups are registering their businesses in Singapore to easily attract funding due to tax and other cumbersome issues back home. ESP Capital, the newly launched VC fund by Vietnamese partners, is also incorporated in the island state.

“A strong legal environment means that it has to be effective not just for the near term, but also for the long term. If an ecosystem doesn’t have a strong legal environment that encourages productive investment activities, the growth of the market will be limited because there will be too many uncertainties that discourage local and foreign investors to participate in local opportunities,” commented Victor Chua, vice president of Gobi Partners.

While it remains unclear as to what extent the planned norms will be supportive, Victor believes the decree will boost the participation of local investors, which will in turn encourage foreign investors to join in the ecosystem.

“I believe the Vietnamese government will not opt to choose the scenario that will be a constraint to how investments can be done,” he added.

The Decree will monitor investment firms and venture capital funds, which will be likely managed by securities investment companies, an advisor for the investment ministry in building the regulations told DEALSTREETASIA.

Investor expectations

Under the legal perspective, Attorney Nguyen Van Loc, chairman at law firm LP Group, said the availability of the regulations will facilitate investors to easily use or entrust their funds to invest in startups, as well as specify some forms of new funding to avoid legal risks for startup founders.

In addition, he hopes the country will cut down the current lengthy procedures of licensing, and offer a special tax regime for startups.

Meanwhile, Gobi Partners’ Chua expects sizeable changes in investor protection as well as more flexibility in capital movement. “Foreign investors, especially early stage investors, are generally wary of the fact that there is no clear guideline on how foreign investor interest can be protected, especially when most of them are unfamiliar with Vietnam laws,” he said.

“If there is sufficient flexibility for investors to participate and move capital around, you create more movements in the market and the rest will really depend on the invisible hand of economics,” he added.

For angel investment, Loc said there needs to be more support for individual investors on issues such as entry and exit, and declaration and transfer of personal profits.

However, Loc emphasized that the new legal changes will not matter if they are not effectively implemented.

“The regulations on venture capital investment have been prepared and shall be promulgated, but how to effectively apply these in practice is still a difficult question amid the current picture of investment in Vietnam,” he said.

Funding landscape

Venture capital is still treated as a normal type of investment in Vietnam, hence without any privilege or special support, according to Loc.

Other impediments to the growth of VC funding into the country include a lack of investing culture by local investors and little international exposure of Vietnamese startups.

The number of deals in 2015 recorded by local accelerator Topica Founder Institute showed 67 investments, increasing 130 per cent over 2014 in volume terms. In 2016, while the deal count remained on par with the previous year, investment value jumped around 60 per cent.

The year 2016 also marked the entrance of 500 Startups, the most active VC investor in Southeast Asia, as well as more active players from the region such as Captii Ventures, Gobi Partners and Spiral Ventures, in addition to existing ones like IDG Ventures and Cyberagent Ventures.

Goals have been set that by 2025, the government’s scheme on developing the startup ecosystem will lend support to 2,000 startup projects, a number of 100 companies of which are expected to raise VND2 trillion ($88 million) through venture capital funds and M&A activity.

Also read:

Vietnam plans new law for venture capital investments

Vietnamese government VC fund plans to co-invest with private VCs

Vietnam 2016: Startups see M&A action from overseas buyers

Captii Ventures bullish about Vietnam’s startup ecosystem