Academic report actual state of and recommendation for the development of venture capital funds in vietnam

FOREIGN TRADE UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION o0o ACADEMIC REPORT ACTUAL STATE OF AND RECOMMENDATION FOR THE DEVELOPMENT OF VENTURE CAPITAL FUNDS IN VIETNAM Instructor Dr Tang Thi Thanh[.]

FOREIGN TRADE UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION …… o0o…… ACADEMIC REPORT ACTUAL STATE OF AND RECOMMENDATION FOR THE DEVELOPMENT OF VENTURE CAPITAL FUNDS IN VIETNAM Instructor : Dr Tang Thi Thanh Thuy Course : Financial Management Class : KETE307(GD1-HK2-2223).1 Group : 10 Group members : Nguyễn Thanh Hằng 2112250032 Trịnh Thị Tiểu Mai 2112250058 Trần Tố Quyên 2112250080 Dương Ngọc Diễm Thu 2112250090 Nguyễn Anh Thư 2113250046 Vũ Lê Ngọc Trâm 2112250099 Hanoi, March 2023 TABLE OF CONTENTS TABLE OF CONTENTS LIST OF FIGURES LIST OF TABLES INTRODUCTION CHAPTER 1: THEORETICAL OVERVIEW 1.1 Definition of venture capital funds 1.2 Venture capital fund structure 1.2.1 General Partners (GPs) 1.2.2 Limited Partners (LPs) 1.2.3 Invested companies 1.3 Stages of venture capital financing 1.3.1.Stage 1: Seed Stage 1.3.2.Stage 2: Startup Stage 1.3.3.Stage 3: Early Stage 1.3.4.Stage 4: Expansion Stage 1.3.5.Stage 5: Mezzanine Stage CHAPTER 2: ACTUAL STATE OF VENTURE CAPITAL FUNDS IN VIETNAM 10 2.1 Activities of venture capital funds in Vietnam 10 2.1.1 The development process 10 2.1.2.Some outstanding venture capital funds 14 2.2 Opportunities and challenges to develop in Vietnam 17 2.2.1 Opportunities 17 2.2.2 Challenges 19 CHAPTER 3: RECOMMENDATIONS 21 3.1 Governmental supports 21 3.2 Venture capital funds 21 3.3 International cooperations and partnerships 24 CONCLUSION 26 REFERENCES 27 APPENDICES 30 LIST OF FIGURES Figure 1: Venture Capital Fund Structure Figure 2: Vietnam Tech Investment Report H1 2019 11 Figure 3: Vietnam Tech Investment Report H1 2019 12 Figure 4: Vietnam Innovation & Tech Investment Report 2021 12 Figure 5: Vietnam Innovation & Tech Investment Report 2020 of DO Ventures 14 Figure 6: Investors Continued Flocking To Vietnam 19 Figure 7: Global Funding Monthly Averages By Half Year 20 LIST OF TABLES Table 1: The assessment of individual contribution 30 INTRODUCTION Venture capital industry have proven its necessity as an important source of funding for start-ups and emerging businesses, motivation for innovation and one of the key contributors to the sustainable economic growth, as they provide startups with the necessary capital to develop products, scale up and expand their businesses, offer expertise, resources, networks, and mentorship to help startups accumulate more experience and turn their ideas into reality In many countries, there is a close link between the growth of the venture capital industry and the development of a vibrant start-up ecosystem, which encourages entrepreneurship and innovation Vietnam, characterised by the rapidly growing economy, young, dynamic and tech-savvy population and high internet accessibility, is providing a fertile ground for the development of new businesses and industries to thrive, especially the innovative startups in the technology sector In recent years, the Vietnamese startup ecosystem shows signs of promise and fast growth Simultaneously, the emphasis on promoting social entrepreneurship also requires the development of the venture capital industry as an irreversible trend In recent years Vietnam’s government has shown active support towards the development of venture capital funds, reflected in the improvement of legal framework, tax incentives and the openness to the international investors However, the venture capital industry in Vietnam is still relatively young, the amount of venture capital investment in Vietnam remains relatively low compared to other countries in the region and requires more support and investment to fully reach its potential The aforementioned factors are the reasons why we choose the topic “Actual state and solutions for the development of venture capital funds in Vietnam” This report aims to provide an overview about the current state of venture capital funds in Vietnam and elaborate the opportunities and challenges that the venture capital industry in Vietnam is facing before mentioning some suggestions for improvement We would like to express our gratitude to our lecturer for providing us with the opportunity to explore this practical topic The knowledge and insights gained from the Financial Management course that you provide us have been valuable throughout the preparation of this report CHAPTER 1: THEORETICAL OVERVIEW 1.1 Definition of venture capital funds Venture capital (VC) funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small - to medium sized enterprises with strong growth potential These investments are generally characterized as very high-risk/high-return opportunities In the past, venture capital investments were only accessible to professional venture capitalists, but now accredited investors have a greater ability to take part in venture capital investments Still, VC funds remain largely out of reach to ordinary investors Venture capital is a type of equity financing that gives entrepreneurial or other small companies the ability to raise funding before they have begun operations or started earning revenues or profits Venture capital funds are private equity investment vehicles that seek to invest in firms that have high-risk/high-return profiles, based on a company's size, assets, and stage of product development Venture capital funds differ fundamentally from mutual funds and hedge funds in that they focus on a very specific type of early-stage investment All firms that receive venture capital investments have high-growth potential, are risky, and have a long investment horizon Venture capital funds take a more active role in their investments by providing guidance and often holding a board seat VC funds therefore play an active and hands-on role in the management and operations of the companies in their portfolio 1.2 Venture capital fund structure 1.2.1 General Partners (GPs) Typically, the GP of a venture capital fund is a legal entity established and run by people employed by the VC firm In any limited partnership, the GP manages the partnership As a result, the GP has unlimited liability for the partnership’s business operations In other words, the GP assumes full responsibility for any business debts or legal liabilities 1.2.2 Limited Partners (LPs) With a venture capital fund, an LP is the investor who supplies the capital These LPs can be individuals or legal entities Often, LPs are institutional investors, such as pension funds, college endowments, trusts, insurance companies, health care systems, family offices, and sovereign wealth funds Sometimes, venture capital firms also make investments into outside venture funds as LPs Figure 1: Venture Capital Fund Structure LPs have limited liability in the partnership because they don’t take part in directing its business operations and remain passive investors When a limited partnership has debts or legal liabilities, the amount that LPs are responsible for is typically limited to their investment stakes in the partnership, and does not extend to their assets outside the partnership (The GP, on the other hand, would be on the hook for the full amount.) 1.2.3 Invested companies There are the actual startups and investments that a venture fund is making For a startup to be deemed venture - worthy they generally have to operate in a large market, have promising economics, and the ability to create a massive return for their investors (and their LPs) Venture capital investments are considered either seed capital, early-stage capital, or expansion-stage financing depending on the maturity of the business at the time of the investment However, regardless of the investment stage, all venture capital funds operate in much the same way Like all pooled investment funds, venture capital funds must raise money from outside investors prior to making any investments of their own A prospectus is given to potential investors of the fund who then commit money to that fund All potential investors who make a commitment are called by the fund's operators and individual investment amounts are finalized From there, the venture capital fund seeks private equity investments that have the potential of generating large positive returns for its investors This normally means the fund's manager or managers review hundreds of business plans in search of potentially high-growth companies The fund managers make investment decisions based on the prospectus' mandates and the expectations of the fund's investors After an investment is made, the fund charges an annual management fee, usually around 2% of assets under management (AUM), but some funds may not charge a fee except as a percentage of returns earned The management fees help pay for the salaries and expenses of the general partner Sometimes, fees for large funds may only be charged on invested capital or decline after a certain number of years 1.3 Stages of venture capital financing Venture capital is one source of financing for startups and is an important source of funding for startups that not have access to other capital or the ability to generate sufficient operating cash flows through revenue from launch Venture capital is offered with the expectation of generating a return on investment, typically through an exit event such as an initial public offering (IPO) or acquisition of the company Smaller ventures sometimes will first rely on family funding, loans from friends, personal bank loans, or crowd funding Larger projects or more experienced entrepreneurs may turn to “angel” investors or venture capital companies that specialize in financing new ventures There are five common stages of venture capital financing: 1.3.1 Stage 1: Seed Stage The seed stage is when a startup approaches an angel investor or a venture capital firm to seek funding for their idea or prototype At this stage, the startup may not have a commercially available product yet and is instead focused on convincing the potential investors why their ideas are worthy of venture capital support The entrepreneur must convince the investors why the ultimate product or service will be viable and successful in the market The potential investor will then investigate the technical aspects of the product or service, and the economic feasibility of the idea Seed-stage financing is usually modest in comparison to later stage financing An initial seed investment round made by a venture capital firm typically ranges from $250,000 to $1 million The financing may go towards product development, market research, and/or building a management team 1.3.2 Stage 2: Startup Stage If the idea or product appears to warrant further investigation or investment, the new company will advance to the startup stage Startups typically have a sample product available at this stage but will need funding for further product development Additionally, a management team will be formed, and a business plan prepared The startup will also use funding to conduct initial market research on the product The venture capital firm wants to see results of market research in order to determine whether the market size is big enough and if there are enough consumers to buy the product Investors also want to create a realistic forecast of the investment needed to push the venture into the next stage Venture capital funding at this stage might also include spending money on acquiring additional management personnel, fine-tuning the product, or conducting additional research 1.3.3 Stage 3: Early Stage This stage is also known as the first stage or second stage capital Though called “first stage,” this stage usually only comes after the seed and startup stages At this stage, the product or service has been developed and is being sold in the market This is the first opportunity the investors have to see how the product fairs with its competitors in the market Funding received at this stage will often go towards manufacturing, sales and additional marketing The amount invested here can be significantly higher than prior stages At this stage, the company could also be moving toward profitability, depending on its share of the marketplace If the startup and its product can hold their own against the competition, the venture capital firm will probably give a green light for the next stage 1.3.4 Stage 4: Expansion Stage The fourth stage also called second stage or third stage capital At this stage, the startup should be growing, the product selling, and the company taking in significant revenue The goal of funding at this stage is to scale the business and expand market share The venture capital funding could be used to invest in overseas manufacturing facilities, start a new marketing campaign, or take steps to reduce production and other costs The funding should help enable expansion into additional markets, such as other cities or countries, and also increase diversification and differentiation of product lines The venture capital firm will then evaluate if the management team has made the expected cost reductions and how the startup fares against the competitors 1.3.5 Stage 5: Mezzanine Stage Bridge or pre-IPO stage are also the other names for the fifth stage This is commonly the last stage of the venture capital financing process The primary goal of this stage is for the startup to go public so that investors can exit the venture and make a profit Funds received at this stage are generally used for activities such as merging with or acquiring other companies, taking measures to eliminate competitors or keep new competitors from the market, or financing the steps involved with an IPO CHAPTER 2: ACTUAL STATE OF VENTURE CAPITAL FUNDS IN VIETNAM 2.1 Activities of venture capital funds in Vietnam 2.1.1 The development process The late 1990s witnessed the seed stage of the venture capital industry in Vietnam in response to the demand for investment of startup companies, as the accessibility to bank loans posed numerous obstacles and many small enterprises having insufficient assets faced difficulties securing loans However, in this period, searching for sources of capital was a challenging task for startups due to the private investment sector being relatively new and not clearly regulated by laws The early stage started in the 2000s, when the market-based economy model began to be widely adopted and implemented in Vietnam, accelerating the development of venture capital industry to facilitate the increasing capital needs of startups Mekong Capital, IDG Ventures Vietnam, VIISA and other representative names took shape and invested in a diverse range of fields, namely real estate, consumer goods, technology, services and other areas It is also notable that the Vietnamese government began to consider promoting venture capital funds as an indicator of long-term economic growth and developed policies to encourage their establishment, regulate venture capital activities and created government-backed funds to boost entrepreneurship The government’s support was one of the prominent reasons why this period saw the substantial increases in the number of venture capital funds and the foreign funds entering the Vietnamese market, albeit with numerous limitations that investing in startups in Vietnam had to face due to lack of experience Starting from the mid-2000s, the Vietnamese venture capital market began to gain momentum, driven by a growing interest in technology startups and the increasing availability of funds However, this boom was followed by a slowdown in the late 2000s due to the global financial crisis, the lack of clear regulations for venture capital activities, the immaturity of the startup ecosystem, the lack of exits for investors and other factors The business environment also had disadvantageous factors such as 10 profitability In 2014, VNG Corporation became the first Vietnamese tech company to list on the NASDAQ stock exchange, with a valuation of over $1 billion 2.1.2.3 500 Startups Vietnam 500 Startups Vietnam (500 Global) is a venture capital firm and startup accelerator that prioritizes seed-stage investments in Vietnam's emerging startup ecosystem, especially the promising Vietnam-connected startups with an emphasis on technology companies Their investment philosophy targets companies characterised by a strong team with complementary skills, a clear and differentiated business model, and a large addressable market Since its launch in 2010, 500 Startups Vietnam has invested in more than 40 Vietnamese startups particularly in the areas of e-commerce, fintech, healthcare and edtech with some notable names, including Tiki, one of the leading e-commerce platforms in Vietnam, and Appota, a mobile content platform One of the outstanding investment cases of 500 Startups Vietnam is Tiki, one of Vietnam's largest e-commerce platforms offering a wide range of products and services, including books, electronics, fashion, beauty products, and others The company raised $54 million in its Series C funding round in 2017, which was led by JD.com and participated by VNG Corporation and CyberAgent Ventures With the help of this funding, Tiki expanded its operations and improved its services, logistics and delivery capabilities, continued to grow and expand its market share in Vietnam's highly competitive e-commerce space 2.1.2.4 VinaCapital Ventures: Founded in 2018, VinaCapital Ventures is a subsidiary of VinaCapital, one of the leading investment management and real estate development firms in Vietnam They show a strong focus on early-stage investments in Vietnam's technology sector, with a highlight on businesses with high growth potential to become market leaders in their respective fields They prioritize companies that have a strong team, a proven product or service and a scalable business model The fund has invested in a range of startups in sectors such as e-commerce, fintech, and software Their investment portfolio involves some outstanding names: Tiki (the 16 Vietnamese e-commerce platform), Smartly (the Singapore fintech startup) , and the Vietnamese software enterprise Base.vn One notable case that VinaCapital Ventures invested is Base.vn in 2019 as part of the company's Series A funding round Founded in 2016, Base.vn is a Vietnamese enterprise software company that offers cloud-based solutions for HR management, accounting, and customer relationship management and has become one of the leading enterprise software providers in Vietnam With VinaCapital Ventures' investment, Base.vn was able to expand its operations and product offerings The company has since launched new solutions, such as its BasePay platform, which provides online payment and transaction management services to businesses Base.vn has also expanded its customer base to include a diverse range of industries, including manufacturing, hospitality, and logistics Besides the aforementioned successful investment cases for venture capital funds in Vietnam, there have also been some notable failures Vatgia.com was an e-commerce platform that aimed to connect buyers and sellers in Vietnam and received a significant amount of funds from various investors, including CyberAgent Ventures, IDG Ventures Vietnam, and SoftBank Ventures Asia However, with the exponential growth of strong competitors (Shopee, Tiki, Lazada), Vatgia failed to gain traction in the competitive e-commerce market in Vietnam To conclude, the above-mentioned names have had significant achievements by pursuing different investment philosophies and targeting different models Their growth has contributed to the growth of the Vietnamese startup ecosystem, and helped to establish Vietnam as a hub for innovative entrepreneurship in Southeast Asia 2.2 Opportunities and challenges to develop in Vietnam 2.2.1 Opportunities It is undeniable that the form of investment through venture capital is becoming more and more popular in Vietnam these days In fact, the main sources of funding for startups in Vietnam mostly come from securities investment funds, 17 individual investors, non-governmental organizations, as well as venture capital funds According to Topica Founder Institute, from 2016 to 2018, the amount of venture capital and foreign capital invested in innovative start-up companies in Vietnam increased by more than three times, from $205 million to nearly $900 million The number of business affairs in this time period nearly doubled, from 50 deals in 2016 to 92 deals in 2018 Another source from the Journal of Echelon - Singapore, Vietnam now has approximately 3,000 innovative startups, nearly double the estimated figure of 1,800 businesses at the end of 2015 This also means a positive impact on the venture capital market in Vietnam Considering the global context, the development of science, technology, and innovation as well as the Fourth Industrial Revolution act as a motivator for the increasing number of startups in Vietnam Witnessing a rise in the number of startups, the government sees this trend as an opportunity to boost the country’s economy and starts to bring out policies, regulations, incentives, etc to support and encourage startups This course of action has been reflected in the Global Innovation Index (GII), from the 32nd rank out of 141 countries in 2015, Vietnam has made it to the 44th rank out of 132 countries in 2021, holding the 1st rank in the group of 29 countries with the same income level For foreign venture investors, Vietnam is a promising market as it is among the most populous countries in the world with a market of 100 million people considered as golden population The rate of purchasing power, the ability to absorb and welcome new products, especially technology, is higher than in other countries The Vietnam market, with the potential of the young market and the level of information receptivity, will meet the investors’ demand Moreover, globalization and international economic integration can also be counted as positive factors in the development of capital funding in Vietnam These trends help Vietnam approach global standards and make partnerships with other countries According to Vietnam Innovation & Tech Investment Report 2021 by DO Ventures, the number of foreign investors continued flocking to Vietnam for many years, with Singapore being the most active investor 18 As a result, there is no doubt that venture capital funding is growing day by day as startups need to raise capital for their business activities Figure 6: Investors Continued Flocking To Vietnam 2.2.2 Challenges The development of venture capital funding in Vietnam also faces some challenges in its growth These include the lack of legal corridors, the lack of angel investors, etc Legal corridors or policies in favor of venture capital funds need improving in the future The current procedures to establish member funds were rapid but the law still lacked specific regulations on definition, policy orientation, or preferential conditions for venture fund operation Another challenge, according to experts, is that the majority of domestic corporations have never invested in a venture capital fund model before For them, this type of investment model is quite risky compared to investing in stocks, bonds, or real estate Understandably, 97-98 startups out of 100 fail to continue their business activities To explain the number, domestic companies often face difficulties in accessing such venture capital due to the lack of innovative business ideas, and weak business and financial management skills 19 ... competitors from the market, or financing the steps involved with an IPO CHAPTER 2: ACTUAL STATE OF VENTURE CAPITAL FUNDS IN VIETNAM 2.1 Activities of venture capital funds in Vietnam 2.1.1 The development. .. expansion-stage financing depending on the maturity of the business at the time of the investment However, regardless of the investment stage, all venture capital funds operate in much the same way... are the reasons why we choose the topic ? ?Actual state and solutions for the development of venture capital funds in Vietnam? ?? This report aims to provide an overview about the current state of venture