Vietnam pioneers new venture capital law

Venture capital fills a void

A niche for venture capital funds exists in the country because of the structure and rules of capital markets.

A start-up company that has an innovative idea or a new technology most often has no financial institution that it can turn to for the funds needed to get the business off the ground and up and running.

Financial institutions such as investment banks exist to finance ongoing established businesses. They will only provide financing for a new business to the extent that there are hard assets such as residential or commercial real estate owned by the start-up against which to collateralize the debt.

Since most start-ups have few hard assets they must look elsewhere for financing.

Venture capital fills this void. Contrary to popular myth, however, the venture capitalist – doesn’t fund innovation – but rather buys a stake in a start-up company’s idea. It then provides short term financing for costs such as marketing, equipment purchases, working capital and sales.

Venture capital money is not long-term money. In substance, the venture capitalist nurtures the start-up business for a relatively short period until it reaches a sufficient size and credibility so that it can be sold to an established corporation.

Or in the alternative, until the start-up can obtain financing from a financial institution such as an investment banker on an equal footing with other well-established businesses.

Sufficient returns at acceptable risk

Investors in venture capital funds are typically very large institutions such as pension funds, financial firms, insurance companies, and university endowments that set aside a small fraction of their total funds for high-risk start-up ventures.

In exchange for the higher risk they expect a rate of return of between 25 and 35% per year over the lifetime of the investment, which as previously stated, is generally a very short period (often only two to three years).

Mai Duy Quang, director at Topica Founder Institute and vice president of the Vietnam Software and IT Service Association, has praised the new law saying it will be instrumental in facilitating innovation and start-up companies.

Although no one realistically thinks the new law will be earth shattering in any respect, it certainly is a good step in the right direction to modernize the laws and make the country friendlier to start-up businesses.

The early stage investment scene in Vietnam has experienced some limited action, with a small but growing number of investors. Active venture capital funds include IDG Ventures, VinaCapital DFJ and Cyberagent Ventures, among others.

VinaCapital DFJ, a joint venture between fund management company VinaCapital and global venture capital firm Draper Fisher Jurvetson, will see its second fund next year, while later-stage funds like NSI Ventures, Vertex Ventures and Monks’ Hill Ventures have all been looking at deals in the market.