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An abundance of low-cost engineers coupled with a fast-growing economy make Vietnam an attractive place for startups, founders say. There are challenges ahead.
On a recent morning, Vinnie Lauria found himself winding through the congested, narrow streets of Ho Chi Minh City with his three-year-old son on a motorcycle as they navigated through the morning rush hour to school. If he still lived in Silicon Valley, the commute would have been less adventurous, but here was the action.
Lauria, an American expatriate and co-founder of Golden Gate Ventures, moved to Ho Chi Minh City in 2022 after previous spells in Singapore and San Francisco, joining a growing number of foreigners lured there by the belief that the densely populated metropolis is a new mecca for start-ups.
Photo: Olivier Ochanine
“Southeast Asia will be a global growth engine in the next 10 years and Vietnam will be the center of it,” said Lauria, ponytailed and dressed in tech casual in a printed shirt and white shorts.
For many Westerners, the lasting image of Vietnam is that of a war-torn, impoverished country where Nike makes its shoes. Today, programmers are moving to the commercial hub of the country, Ho Chi Minh City, to launch startups targeting everything from insomnia to microloans. But becoming Asia’s next start-up hub will require overhauling existing regulations and facing significant economic headwinds.
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The number of startups in the country has nearly doubled from the start of the pandemic to mid-2022, according to a July report from KPMG International Ltd. and HSBC Holdings Plc. Some of the world’s largest investors, including uSequoia Capital, Warburg Pincus LLC and Alibaba Group Holding Ltd., support those who offer promising solutions.
In 2021, Vietnam raised a record $2.6 billion through 233 private deals, up from $700 million through 140 deals a year earlier, according to a Google, Temasek Holdings Pte. and the report of Bain & Co. Local firms also compete with their Southeast Asian counterparts, which Do Ventures estimates will account for 13% of total venture capital flows to the region by 2021, behind Indonesia and Singapore.
Magnet for VCs
Number of funds supporting Vietnamese startups
Officials want more. By 2030, they want to turn Ho Chi Minh City into a magnet for technology finance and target a digital economy that accounts for 40% of the city’s gross domestic product. Last month, the government ordered city officials to prioritize attracting foreign investment for high-tech projects while providing other incentives to lure global talent and international companies to establish innovation research centers.
It has already yielded some results. Gaming developer VNG Corp., the country’s first unicorn, is expected to pursue a US listing in the coming months. The money is pouring in, with a salary payment company and another farming platform becoming the latest startups to receive millions in rounds of funding in recent weeks.
Industry insiders say Ho Chi Minh City has the foundation for the next Silicon Valley lite: a heavy math and science education system, a decades-old software outsourcing industry that has created a plethora of low-cost and talented engineers and the benefits of Vietnam’s economic expansion, which was one of the fastest in all of Asia last year.
A decade ago, financiers could spend six months considering an investment, said Vy Le, co-founder of Do Ventures. Now she said, “If we don’t make a decision in one or two months, other funds will definitely accept the deal.” It meets on average ten foreign funds every month.
The road ahead will be bumpy. A global venture capital slowdown, combined with a local economy weighed down by a real estate crisis and falling factory orders, is compounding the challenges of the nascent industry.
There’s also the question of the uncertain ‘ecosystem’ as the country’s startup sector has only been around for a decade or two, the Asian Development Bank said in a 2022 survey. to create a conducive environment for the creation of innovative companies, foster the growth of tech startups and improve the availability of financing,” it said. ADB added that favorable government policies, such as strong intellectual property protections, will also be crucial.
The burgeoning startup sector in Vietnam has been in the making for years. In 2013, the launch of Flappy Bird was hailed as a gaming phenomenon that would increase the country’s takeoff weight. While that game was later retired, it pointed the way to a new generation of companies like VNPay, the mobile payment provider, which ADB said became the country’s second unicorn in 2020.
Founders say there are no more success stories because the government has not yet established a proper framework for stock options. Cumbersome regulations also hamper these companies’ ability to go public.
Requirements for tech companies to store user data in the country, whose internet is tightly controlled by the government, have raised concerns from US business groups. Regulatory backlogs have also slowed visa applications for foreigners, and establishing ownership for overseas entities is impractical. Vietnam limits foreign ownership of companies to more than 49% in some sectors.
Still, that hasn’t deterred foreigners like Lauria, whose fund began supporting local start-ups in 2014 and opened offices in both Ho Chi Minh City and Hanoi last year. He decided to take the plunge after seeing extraordinary per capita growth triple over the past decade. He thinks online spending could increase fivefold over the next six years.
Startups are also benefiting from an acceleration of Vietnamese citizens returning home, according to Nguyen Nguyen, who runs a Sequoia-backed artificial intelligence company that helps people with no credit history get loans.
“This is a big homecoming, or a reverse brain drain,” says Nguyen, who returned to Vietnam after earning his doctorate in economics from Rice University in Texas. About two-thirds of its employees at fintech startup Trusting Social have at least a master’s degree from abroad.
The industry has undergone a night-and-day transformation, says Le Hong Minh, co-founder of VNG, whose glass-walled headquarters overlooks the Saigon River, an area once known for textile making. High adoption of smartphones and the internet, a large young population and a rapidly growing middle class are now redefining the country.
“The new Vietnam goes far beyond what people outside of Vietnam understand,” said Binh Tran, co-founder of Ascend Vietnam Ventures, who returned from the Bay Area with his family in 2020. “This is a very accessible market and language is not a major barrier…you will find a lot of young, hungry talent eager to join your startup.”
