While investors are betting heavily on the consumer internet or healthcare sectors, Vietnam-based asset management firm VinaCapital believes that the opportunities in logistics are enormous and could spawn the next Vietnamese unicorn.
“We believe the opportunities in logistics are enormous – which is why our first two investments (LOGIVAN and FastGo) were in the sector. The costs of logistics are among the highest in the region, if not the highest, and startups that aim to change that should do well,” according to VinaCapital founding partner and CEO Don Lam.
VinaCapital also believes that the fintech sector offered a lot of potential given relatively low levels of penetration of banking in Vietnam. Vietnamese banks tend to be very traditional and slow-moving when it comes to tech, so the segment is ripe for disruption and innovation, Lam opined.
“Finally, digital media/entertainment could [also] spawn the next unicorn as the sector is thriving among Vietnam’s digitally native and increasingly affluent youth,” he told DEALSTREETASIA on the sidelines of Singapore Fintech Festival 2018.
Vietnam produced its first unicorn startup in 2016 when internet company VNG Corporation hit the $1-billion valuation.
According to a recent report by Bain & Co, the south-east Asian region is entering a new growth phase which could see it produce at least 10 new unicorns by 2024. In addition, Indonesia and Vietnam are voted as the hottest markets in Southeast Asia outside Singapore.
In a move to boost the local startup ecosystem, VinaCapital had, in August, launched a $100-million tech-focused venture capital fund – VinaCapital Ventures – to invest $2 million to $10 million into each startup, with an unlimited holding time.
The reason that the fund is taking a non-traditional path where it has no lifespan, is that VinaCapital realises that some things take time to realise their potential, added Lam.
Although $100 million is a sizeable corpus, Lam is optimistic that deal flow in the Vietnamese market is capable to support the capital. The fund will focus on investing in Vietnamese companies with proven revenue streams, especially those with concepts that can be scaled up to a regional or global level.
It will also form joint ventures and partnerships when appropriate, said Lam.
“VinaCapital Ventures launched just four months ago, and we already have announced two investments, and have signed term sheets for three others, with several more currently being evaluated. There is a lot of deal flow in the market, a clear sign of how active this space now is. Also, to provide some perspective, when we launched our DFJV fund back in 2007, the average investment was less than $1 million; today, the average investments are $3-5 million, and we’re likely to see some that are more than $20 million,” he said.
VinaCapital is one of the earliest VCs in Vietnam investing through its first VC fund, DFJV, which was part of the Draper Fisher Jurvetson (DFJ) network. The firm is currently divesting the assets from the fund.
“DFJV has divested some assets in full and others partially. The remaining assets should be fully divested in the next 12 months. The investors are very happy with the fund’s performance to date in terms of the cash returned and the value of the remaining assets held,” said Lam.
Founded in 2003, VinaCapital currently has $1.8 billion in AUM, with assets across capital markets, private equity, real estate, venture capital and fixed income.
As an experienced VC investor in Vietnam, what are some of the key trends that you see in the Vietnamese startup space? Also, what are the challenges faced by the local startups?
We’re seeing a lot more startups – young Vietnamese are seeing tech as an attractive career choice, and now the environment is evolving to support them, via incubators and accelerators, and co-working spaces. Additionally, the government recognizes that supporting the tech industry is critical to Vietnam’s continued development and has announced a range of initiatives and reforms to help do that.
We’re also seeing startup founders who already have some degree of experience, whether from previously starting companies, or from having worked in startups overseas. Overseas Vietnamese are also coming to Vietnam to start businesses, not only because of its large market, but also because of the low cost of doing business. The outside education, work experience, and exposure to the larger world can be very valuable when thinking about a business idea.
I think the challenges here are essentially the same as anywhere else: there’s going to be increasingly intense competition, and it may take some time for the market to embrace an idea. Founders need to have some level of patience – startups take a lot of work and time. Also, while Vietnam’s stock markets have grown a great deal over the last 2-3 years, they need to continue to evolve to facilitate the listing of smaller startups – the current regulations make it extremely difficult for them to do so.
One of your partners have said that VinaCapital Ventures will look to do co-investment deals – how do you select your co-investment partner?
VinaCapital is the only experienced venture capital firm operating in Vietnam today. We have a track record and network in the country that makes us a valuable investment partner for overseas investors. Ultimately selecting a co-investment partner comes down to three things. Does the partner bring anything to the table apart from capital – what value might they be able to add? Second, do they share our vision for the investment? And third, are they trustworthy?
What sectors would the fund will look to invest in?
There’s virtually no sector that technology is not having (or will not have) an impact. Whether it’s fintech, logistics, healthcare, education, media, agriculture, retail, or manufacturing, all are being transformed by tech.
For the first time in Vietnam, we are now seeing companies that are operating at a higher level on the value chain. While Vietnamese engineers have always been well-regarded for their skills, they were primarily used as outsourced solutions for tech companies elsewhere. Now, we’re seeing Vietnamese companies that are involved in AI, machine learning, and cloud-based solutions – the so-called “deep-tech” sectors that are being applied across a range of industries. These are higher-end solutions that enable clients to operate in a more cost-effective and efficient way. The result is Vietnamese engineers are feeling more inspired and appreciated, which is helping to further drive the tech scene.
How do you select the companies that VinaCapital Ventures would like to invest in?
First and foremost is the founder. If he or she is motivated, focused, and knows what they want, they are going to build a good team and execute according to plan. Vietnam’s tech scene now has a group of founders who have already launched one or more businesses, and they’ve no doubt learned valuable lessons. FastGo, one of our initial investees, is one such company – we believe in the idea, but importantly, we value the founder’s experience and drive.
Next is the concept – is the product or service the company is pursuing innovative, and does it have the potential to scale up, potentially to a regional level? Can an idea be transformed into a viable and profitable business? FastGo, which launched in June of this year, is already expanding across Vietnam, and will launch its service in Myanmar in December.
How do you view exit strategies for VinaCapital Ventures, as the public market in the region isn’t as dynamic in the US and Hong Kong?
A local IPO is one option. Vietnam’s stock markets are growing rapidly, both in terms of depth and breadth. A number of private companies have gone public this past year, including Yeah1, a digital media company, which did an IPO earlier this year – the largest media and tech IPO in the market’s history.
Another option is a trade sale to a conglomerate or to other regional VC players.
High valuations are usually a concern among investors when it comes to tech investments – are you worried about that?
We are the only locally-based VC firm in the country, so we’ve had a look at most of the interesting companies seeking capital, and at this point, the valuations aren’t that high.
Large players like Warburg Pincus are cutting huge checks for Vietnamese businesses – do you see that as a competition for VinaCapital?
Not at all. In fact, we have a joint venture with Warburg in the hospitality sector, a company called Lodgis. They and other global players value our on-the-ground experience and expertise in Vietnam, and we often partner with such players.
As an asset management company – how do you see the PE and VC space? Are these two completely different or do you see any overlapping between these two?
There is some overlap in that they are both private investments, and we’re helping promising businesses grow. Most of our PE deals occur through our flagship fund VOF (Vietnam Opportunity Fund), which trades on the London Stock Exchange. Its PE investments tend to be in more traditional companies such as hospitals, F&B, banks, etc. More brick-and-mortar, more established, and less tech-focused.
Examples are An Cuong Woodworking, which we’ve helped grow to become the leading laminates manufacturer in Vietnam, and which now has customers from across Asia, Europe and North America, as well as Tam Tri Medical, which aims to become the country’s leading private healthcare system, to name just a few.
With VC, we are betting on startups and young companies, that are focused on providing tech-driven services and products. We also have greater flexibility through our VinaCapital Ventures structure with respect to timing, funding, etc.
On the PE side, is it more challenging for VinaCapital to close PE deals as the space is getting more crowded? How has the space evolved in the last 2-3 years?
PE in Vietnam has indeed changed over the past few years. As the stock market has grown in breadth and depth, more companies view an IPO as the preferred path for capital raising, at least when the market is strong. We are seeing more players in PE, but the global players tend to invest at bigger tickets, whereas we look to invest in the $10-40 million range.
VinaCapital is among a handful of firms based in Vietnam that do PE; we understand the market and the culture. The result is we get a look at nearly every PE opportunity, and they continue to remain abundant. Between January and October, more than 109,000 new private companies were registered in Vietnam, suggesting that the deal flow of potential PE investments should be strong for years to come.