Valuation mismatch, lack of scale & exit options remain key challenges in Vietnam startup space

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Vietnam witnessed another year of robust startup funding activities in 2017 marked by major rounds and also the entry of new regional venture capital players.

Some of the key deals include Sunlife Financial acquiring Timo, internet firm Appota raising a Series C round, TNB Ventures investing an eight-digit amount into an e-commerce startup and Vntrip raising $10 million from a Hong Kong investor. The year was also abuzz with news that e-commerce major Tiki landed more than VND1 trillion investment from in perhaps the year’s biggest deal.

On the venture capital side, existing investors such as 500 Startups, Cyberagent Ventures and Gobi Partners continued to bet on early-stage Vietnamese companies while regional VCs TNB Ventures, Monk’s Hill Ventures and Cocoon Capital scored their maiden investments last year. Meanwhile, new names including Fenox Ventures, KK Fund, Leonie Hill and Innoven Capital are actively scouting for deals from this Southeast Asian country.

Vietnam offers many opportunities to investors, thanks to its tech-savvy population but it may not always be easy to navigate this small country. Venture capital players share the following four insights with DEALSTREETASIA on investing in Vietnamese startups.

Founders are strong in consumer-driven sectors

Startup founders in this dynamic 90-plus million population country are generally strong in consumer-driven industries where the majority of the target users is the up-and-coming middle class, according to Victor Chua, vice president at Gobi Partners, the investor in and OnOnPay.

Having invested in the travel and fintech sectors, Chua asserted that these areas, along with vertical retail such as beauty and other female demand-driven segments, tend to create the most competent founders.

While it has been assumed that most of the founders are people with technology background with a product idea, Chua said up to 90 per cent were business founders and most startups were consumer tech companies. “We are slowly seeing some change to this with more startups focusing on serving the small merchants,” he said.

Meanwhile, Ryu Hirota, Principal at Spiral Ventures, observes that Vietnamese founders are strong in technology development. “In this sense, I see SaaS business serving developed markets such as the US makes sense as the founders can take advantage of low cost of development and high price points in those markets.”

Founders have a valuation fantasy

Company valuation mismatch is common between sellers and buyers in Vietnam. A lot of pre-seed and seed stage companies in Vietnam are asking for a big check with unreasonable valuation by just citing market potential and international finance examples, according to Hirota.

Chua added: “I do sometimes find it difficult when startups focus too much on the big picture without having done enough homework on getting the processes and details ironed out.”

Founders, who secured funding, were generally those with sufficient regional exposure that allows them to take a step back and digest faster than others. But, they constitute only a small fraction of Vietnam-based entrepreneur community.

As for the check size, investors foresee a potential “inflation” in valuation when Vietnam is getting so much attention from the outside, but internally, the companies are still struggling to justify the numbers. “This might create some sort of barrier that discourages smaller investors and VCs to invest,” Chua said.

Scaling up vs dealing with growth

“The “Blue Ocean” status of Vietnam market makes founders just focus on its home market rather than thinking about expanding into other countries. As often quoted, language is also another barrier as they have to always customize the product into English and also hire English speaking or foreign talent, who are generally more costly, when expanding into overseas markets,” said Hirota.

Scaling up becomes a puzzle for local startups also in the sense that a company can handle the growth or not. “Making sure there is sufficient understanding on how the industry works and how a startup should operate is very important. The main issue to overcome is really to go deeper into your business model – making sure you not only have the framework but also the nuts and bolts that tie everything together,” Chua emphasized.

Exits look more promising

First-generation technology companies like VNG Corporation, Appota, Vatgia and others have become great examples of firms who have received external funding from larger companies as well as investors in the subsequent generation startups. Overseas giants like Chinese unicorns and SEA Limited are looking at the market. “It’s a matter of time before they start to strategically invest in the Vietnam market,” said Ryu.

In addition, the government is also looking at removing some obstacles for overseas investors. “If the decree and policies are favourable in allowing better liquidity into and out of the market, this will encourage more exits or M&A with foreign players. I believe Vietnam is on the right track to be an attractive investment destination for international investors,” Chua added.