VinaCapital Executive: Venture Capital Will Be a New Asset Class

Hoang Duc Trung believes that when the State takes the lead and large organizations and enterprises spread the momentum together, venture capital will fulfill its role as a driver of growth and innovation for the economy.

Technology, data and artificial intelligence (AI) are the hot topics dominating every aspect of the economy. This shift is not only drawing the attention of the public and the business community, but has also become the focus of regulators’ strategies and, in particular, of investment funds.

Within that current, VinaCapital Ventures has been regarded as a pioneering organization since 2006. The fund has 20 years of experience in Vietnam, having gone through many boom-and-bust cycles of the market and witnessed the birth, screening and eventual maturing of many generations of startups.

The lessons drawn from VinaCapital’s investment practice hold value not only for the startup community, but also open up many insights into governance thinking, people, and how venture capital flows can truly work for the economy.

In a conversation with TheLEADER, Hoang Duc Trung, Deputy General Director of the VinaCapital venture capital fund (VinaCapital Ventures), was open and enthusiastic when talking about “people.” In particular, the expert also emphasized the trend of venture capital gradually becoming a new asset class in Vietnam.

Looking back at the 20-year journey in the Vietnamese market, having witnessed the ecosystem from its earliest, embryonic days through to its boom, how do you assess the overall picture of venture capital activity at this point?

Hoang Duc Trung: Over 20 years, Vietnam’s startup ecosystem can be said to have taken shape and to be approaching regional standards. Within it, we clearly see five important pillars: the State, leading enterprises, the startup community, universities/research institutes, and capital.

Take the capital pillar as an example. Previously, startup capital came mainly from foreign players; today, we see much greater participation from large enterprises and corporations, domestic funds and, in particular, the entry of the State.

Among the leading enterprises, the emergence of the likes of Vingroup, Viettel, Masan and VNG is becoming a “launchpad” for startups. The growth of these enterprises creates major challenges that help the innovation ecosystem become ever more complete.

Moreover, mid-level personnel working in large corporations, once they have accumulated enough experience, can confidently start their own ventures. This creates a new, elite generation of founders who solve real-world problems arising from the difficulties enterprises are facing.

And most importantly, there is the “unshackling” of the legal and policy framework. In the past, it was very difficult for the State to disburse funds into innovation because the mechanism required capital preservation. But now, from the central to the local level, everyone recognizes that innovation is a must and is willing to accept controlled risk.

The convergence of all five pillars is proof that Vietnam’s ecosystem is truly ready. Within Southeast Asia, we are by no means lagging behind Thailand, the Philippines or Indonesia.

Having gone through many market cycles and witnessed business models replace one another, which technology-related deal has impressed you the most?

Hoang Duc Trung: What I find most rewarding is not the success of a specific deal, but the transformation in the mindset and working style of the generations of founders we have accompanied.

The first generation of founders was tied to the 2006–2016 period, when the internet wave first arrived in Vietnam. We approached investment in companies operating in online services and content aimed at end users. Notable examples were YeaH1 and Chicilon Media.

The second generation covered the 2016–2023 period. By then the market’s problems had changed, and founders often focused on solving the inefficiencies of the domestic economy. For instance, our logistics costs were among the highest in the world (19% of GDP), and the food-spoilage rate reached 4–5% of GDP. Capital in this period poured into logistics platforms, digital transformation, financial inclusion, and so on.

Now, we are entering the third wave with the rise of high technologies such as artificial intelligence (AI), semiconductors and blockchain. Whereas in the past it took Vietnam up to 14 years to produce a unicorn startup in VNG, in this third generation of founders, Sky Mavis took less than 2.5 years to reach that milestone.

What impresses me most is the flexible approach to technology and the execution speed of this new generation of founders. They solve market problems faster and access the global economy better, thereby raising the standing of Vietnam’s ecosystem on the world technology map.

Each generation faces a different context as technology changes by the day. From the perspective of a venture capital fund, is there any common formula running throughout for evaluating founders?

Hoang Duc Trung: Yes, there is. Personally, I have distilled a formula in six words: “People, people, people and execution, execution, execution.” Six words, but really it revolves around just two: people and execution.

We have sat down with companies whose initial products were absolutely perfect. Put on the scale, those products had nothing to fault. But when the market changed — most recently the Covid-19 pandemic — if the founding team could not adapt and their execution was inflexible, the company could not survive either.

Starting a business in Vietnam is already hard; starting a technology business is even harder. Therefore, the most essential factor is always the founding team and how they face the “storms.”

Personally, I am very taken with the human story. Having met many founders, I understand that they all have talent, but their character and ethics can also be very complex. So what qualities converge in a founder who bears the “style” of VinaCapital and catches the fund’s eye?

Hoang Duc Trung: That is a really good question! And it is also our guiding principle. When we look at a company, we never evaluate a single individual; we want to evaluate a team.

It is hard for one outstanding individual to build the product, sell, directly support customers and shoulder operations all at once. The ideal is a team of 2–4 people, and three is the most perfect. Those three people must be able to sit down, talk frankly and complement one another’s shortcomings.

Within that team, despite different professional backgrounds, they must share one prerequisite in common: absolute transparency.

Many companies fail not because of the market, but because the founders fall into conflict. Therefore, before deciding to invest, we always have to check whether they truly understand their partners.

For example, do they know each other’s homes, spouses, children and family circumstances (laughs). What is the reason they came together? Is it a hunger to make money, a passion for solving a big problem, or a moment of impulse out of deference to one person or persuasion by another?

Next, we also cross-check within the community. We do not just listen to the founders’ pitch; we look into their partners and acquaintances. This process usually takes a great deal of time. A deal may take 2–4 months, and vetting the founders is usually the most time-consuming stage.

Many people think startups are like “instant noodles.” For us, however, accompanying a startup can last 5–10 years, so focusing on due diligence of people is mandatory. We want to know: if the company grows large tomorrow, are you still trustworthy? Or when the market is difficult, are you willing to be flexible? If a founder is very strong technically but always complains, it is very hard to go the distance together.

As for the remaining issues such as finance and governance, we can readily send in experts to help, as well as prepare for later funding rounds.

And there is this: failure is not a minus. If a founder comes to me and says, “Mr. Trung, I’ve failed three or four times already,” then I actually feel more interested and more eager to talk than with someone who beats their chest claiming they have never failed.

What matters is what lessons they drew and whether they dare to continue. In my view, the “fail fast, do fast” culture very much needs to be encouraged in Vietnam, instead of clinging to pride and wasting society’s resources.

Besides the human factor, what percentage does the role of technology currently account for in an investment decision?

Hoang Duc Trung: It must be made clear that a startup is not formed from technology alone. It is the result of three factors: execution capability, market demand and effective use of capital.

We do not mind whether it is core technology or applied technology, as long as the business has two of the three factors above. For example, a traditional retail business that previously had no technology element at all, but which, when it applied the SAP management system, comprehensively optimized its network and managed everything on the system to make business decisions and strategy — that is something we value very highly.

If a company focuses on researching core technology, then technology is the most important factor. But if the company uses that technology to create products and services to sell to consumers, then the issues to focus on become the business model and market size.

Speaking specifically of the high-tech group represented by the current generation of founders, we give priority to investing in AI, semiconductors and biotechnology. However, investing in high technology requires large costs and time.

For example, Gene Solutions, a healthcare company we invested in from the first round, is currently raising more than USD 50 million in its present funding round. They spent 7–8 years at the start just researching the technology, consuming a great deal of resources before officially launching commercialized products and services to the market and achieving success.

Besides your role at VinaCapital, you have reportedly recently taken on the position of Director of the Ho Chi Minh City venture capital fund, which operates under a public–private venture capital model. So how does this model differ from private funds?

Hoang Duc Trung: Before the City People’s Committee approved the establishment of the Ho Chi Minh City venture capital fund, we studied three successful models in Israel, South Korea and China.

Although the context and structures of these three countries differ in many respects, they share one common point: the State accepts and genuinely regards venture capital as an important “asset class” of the economy.

In Vietnam, we have never viewed venture capital as an asset class. When people have idle money, the first thing they think of is putting it into savings. With more money to spare, they buy gold, land or stocks. As for putting money into startups, people immediately think of the possibility of losing money because of the two words “venture/risk.” Therefore, no one dares to see it as a legitimate asset channel.

Hence, the recent formation of the public–private fund is a symbolic step, affirming to society as a whole that: “Venture capital is now an official asset class, and the State accepts investing in it.”

However, because Vietnam’s current legal framework has no dedicated regulation on a “venture capital fund,” we introduced the concept of a “fund company.” That is, establishing a company operating under the framework of the Enterprise Law, but with the functions, roles and core operations of an investment fund.

If venture capital is called an asset class, then who are the investors in this asset class? And what is the ultimate goal of this investment activity?

Hoang Duc Trung: I really like this question. It is also a question I personally have discussed many times with leaders and departments of Ho Chi Minh City.

I said that in developed countries, entrepreneurs who become successful always want to give back to society. But for them to be able to contribute, we need a mechanism — and here that is precisely the public–private fund model.

However, one fund alone is not enough. In essence, we need a bigger and more far-reaching goal: to turn venture capital and investment in innovation into an asset class, meaning that anyone can understand it, invest in it, succeed and create a ripple effect in society.

Initially, the investors may be large enterprises and corporations, and domestic and foreign investment funds. Later come institutions and even individuals participating in investment.

To achieve that, we must change from mindset to action — that venture capital is a good thing, contributing to the community and locality, driving the shared development of enterprises, creating more wealth for society and making individuals prosperous.

When the State takes the lead and large organizations and enterprises spread the momentum together, I believe this “new asset” class will fulfill its role as a driver of growth and innovation for the economy.

When the State officially participates in venture capital, what do you assess to be the most important change?

Hoang Duc Trung: For me, it is the fact that the State is willing to accept risk within a certain framework, instead of a capital-preservation mindset.

For a long time, the State has owned a great deal of financial resources but has been unable to disburse them into innovation, because the mechanism required that no losses be allowed. Engaging in venture capital and losing money meant bearing legal responsibility. Therefore, public capital always stood outside this game.

Now, through the public–private venture capital fund model, the State defines “risk/venture” in line with the market mechanism. Put simply, in the past you could not incur losses on an investment. Now, if you invest 10 dong, you may lose 3, but the remaining 7 win and generate a large profit margin, so overall the fund still delivers financial benefit and is considered a success. Risk here will be managed on an overall probability basis, rather than being confined and rigid at each individual project.

Moreover, the public–private venture capital fund will target areas the private sector is not yet keen on, or not yet strong enough to shoulder, such as chip research and manufacturing or building artificial intelligence infrastructure. These industries require patience of 10–20 years, and there is no guarantee a product will result.

In reality, calling on the private sector to invest at the early stage is unthinkable. In that case, the State will pioneer first, then call on the private sector to participate at a later stage. That is the real value of seed capital from the State.

In terms of structure, this fund is designed with the State contributing 40% as seed capital. Seeing the State take the lead and share the risk, corporations and private investment funds will have the confidence to gather the remaining 60% of capital.

The most breakthrough point lies in the governance mechanism. Precisely because it contributes only 40%, the State will not take part in management. The private sector, holding a larger share of capital, will hold governance and decision-making power. All startup valuations follow the market mechanism and are not simply imposed by administrative constraints.

Since the Ho Chi Minh City venture capital fund was established, which entities have signaled their intention to participate, and have any startup applications been submitted awaiting appraisal?

Hoang Duc Trung: (laughs) I think the fund was launched at just the right time. We have received interest not only from startups, but also from investors and large domestic corporations.

At present, although the fund is expected to officially begin receiving applications only in the third quarter, four startup incubators have already “signaled” to us. They are compiling lists of their most promising companies to send to the fund for consideration.

In addition, two large-scale startup accelerators have also expressed a desire to cooperate. They see Vietnam as an attractive destination and want to contribute to the startup ecosystem.

From the investor side, three foreign organizations are already in contact to learn about the fund’s mechanism. Of course, receiving foreign investment still requires some procedures to be resolved, but the signals are very positive.

On the startup side, three projects have proactively reached out and invited us to visit their businesses. One works in high-tech healthcare, one specializes in manufacturing camera lines for unmanned aerial vehicles (drones), and one works in educational technology in the aerospace field.

How do you feel now that the fund has received such strong interest?

Hoang Duc Trung: Personally, I feel very grateful. On the startup side, they come to us and confide that, until now, they had always heard about State investment funds but had never come knocking, for fear of administrative barriers.

When they heard that this fund has deep private-sector participation and is run under the market mechanism, they were delighted and open. For some startups, this is the first time they have boldly brought their research projects to the outside world.

As the fund’s operating representative, we are truly moved. Take the educational-technology project in the aerospace field — that is an extremely new and sophisticated technology that I personally previously never thought Vietnamese people could build with their own hands.

Many young people today like to use the word “wow,” but I think that does not quite capture it. If we speak of joy, though, I am extremely happy — happy because there are signs that Vietnamese people are fully capable of keeping pace with the world’s high-tech industry.

With these changes in mindset and governance, we have every right to expect venture capital to become a new asset class in the coming decade. The presence of the public–private fund will be a driver of growth, while also attracting large-scale foreign capital into Vietnam’s innovation ecosystem.

Thank you very much!

---

Source: TheLeader — theleader.vn. This article is republished to share knowledge with the community of founders and investors in the HCM VIF ecosystem.