Vietnam: Just Getting Started
64.233.167.104
There aren't enough VCs to play bridge, but private equity firms already know the score.
Red Herring
June 26, 2006 / Print Issue
Chris Freund, managing director of Mekong Capital, says he’s lukewarm to tech, although his firm is looking at a possible manufacturing investment. The problem is tech really needs good project management and there’s not much of that in Vietnam. “China is about 10 years ahead of Vietnam on a per capita GDP basis,” he says, “and management skills in Vietnam are about 10 years behind China’s.”
The opinion seems odd coming from him. Mr. Freund was a co-founder of Management Consulting Group, which owned a piece of VietnamWorks.com, the country’s big online recruiter and an RH100 company. He was also on the board of advisors of TMA Solutions, which billed itself as the country’s largest software outsourcing company.
The other odd thing was the number of investors connected with VietnamWorks. There was Mr. Freund, Henry Nguyen, managing general partner of IDG Ventures, which owns a piece of the startup, and Peter Ryder, CEO of Indochina Capital, which just bought a 20 percent stake. And you could also count VinaCapital’s Louis Nguyen, Henry’s predecessor who had worked with IDG boss Pat McGovern setting up IDG Ventures in 2003.
The fact is, a dozen spring rolls and half a dozen beers would cover lunch for the country’s entire venture community, which huddles for the most part in Ho Chi Minh City, the Saigon of old. Take IDG out of it, and the community comes down to a few offshoots of private equity funds. If the country’s startup pickings are slim, at least the VC population is, too.
Do Van Loc, acting director general of IT at the Ministry of Science and Technology, says different government panels have puzzled over how to get VC activity going since the mid-’90s. At one point, he recalls, Texas Pacific was going to be involved in a high-tech park venture project. But as with other efforts, this one also foundered. Mr. Loc recalls there was another problem that came up in 1998. “It was decided it was too early for venture capital because Vietnam did not have a stock market yet.”
A share market finally opened in 2000. But Mr. Loc says nothing really got off the ground till IDG Ventures established its $100-million fund in 2003. Only a small portion of even that has been invested to date, typically in angel rounds—or first-round fundings that rarely exceed $1 million.
And while Vietnam welcomes more investors from afar, Mr. Loc and his colleagues continue a debate that perplexes many people both inside and outside government: The role public funding might play in getting an IT industry off the ground while still managing to nurture risk-taking and not plunge everyone into a culture of handouts.
Ready for Growing
With 60 percent of its 84 million under 30 years old, Vietnam is a young country ready for growing—a compact Germany, without a pension problem, a high energy economy where the stock market cap can climb 60 percent between the beginning of the year and mid-April. Vietnam is a hopping place, but it is also a single-party state whose managers like it that way. And already one hears echoes of China as VCs salute Hanoi’s benign Internet controls—the same song one heard in China before the Internet began to matter and Yahoo was enlisted by Beijing to help it pack offenders off to jail.
The broader private equity sector, which has powered much of the country’s exploding real estate developments and industrial expansion, certainly testifies to the pace here. Indochina Capital, for example, is split 50-50 between equity and real estate funds, according to Mr. Ryder, who describes his investors as the world’s largest institutional investors—including U.S. and European pension funds, funds of funds, and university endowments—anything or anyone with big money, you might say.
“Indochina Capital is going to go from having under $100 million in assets under management to well over half a billion this year,” he says. “The fact of the matter is, there’s a fantastic amount of interest right now in Vietnam in the global investment community.”
At least a portion of that money will end up in tech ventures somewhere along the line. “It may not be our main focus but technology is an area we’re certainly interested in,” he says, suddenly flashing his own tech credentials. Back in 1996, Mr. Ryder and two partners started up a systems integrator called Communications Power and Design—the third wholly foreign tech enterprise in Vietnam, after IBM and Hewlett-Packard. Two years later, they sold the startup; Mr. Ryder remembers the sale as “a very nice exit.”
The pace is unlikely to slow down. On May 9, U.S. and Vietnamese negotiators agreed on the terms of Vietnam’s entry into the World Trade Organization, clearing the way for joining this year. Entry was a long-foregone conclusion, in fact, the only question being when. So America’s tech nobility had already started parading through: Intel CEO Craig Barrett, in February, to make official plans to build a $300-million chip assembly and test plant in Ho Chi Minh City; Microsoft Chairman Bill Gates in April in Hanoi, to talk up university cooperation; and Motorola CEO Ed Zander in June to sing the praises of telecom deregulation.
“This place has so much going for it in terms of human and natural resources—despite the bureaucracy, Vietnam will gain its spot at the head of the pack in Southeast Asia by 2020,” Mr. Ryder says, noting that was just where Vietnam was at the beginning of the last century.
As with Mr. Ryder and any other fund manager touting Vietnam, fundraising is on Louis Nguyen’s mind too. The managing director of VinaCapital’s soon to be launched Technology Fund is targeting $50 million to $100 million. “We don’t know what the end is because no one has ever done this,” says Mr. Nguyen, who before moving to VinaCapital 15 months ago was a founding general partner with IDG Ventures.
Mr. Nguyen focuses on exclusively Internet opportunities, and in that, he contends he’s on a different path from IDG. When a reporter suggests IDG is pursuing online games and online recruiting, Mr. Nguyen cuts in: “That’s only part of it.”
Whatever Henry Nguyen might have to say on the subject, this Nguyen sees his old firm on more of a software bent and for him, that’s missing the main chance—which is anticipating the gorillas—and firing up companies that would make good fits with Yahoo, Google, eBay, and others like Expedia in Vietnam. “They have been coming to Vietnam and, according to them, Vietnam is one of the top destinations in Southeast Asia in terms of competing for new users and markets.”
Indeed, VinaCapital has just invested in its first company, which is on the verge of signing a contract—for what specifically, he won’t say—with an unnamed gorilla. “Our position is, get these guys early so when exit/IPO comes, it will be pretty straightforward,” he says.
Louis Nguyen left Vietnam in 1975 at age 12 and didn’t set eyes on his homeland again until he returned in 2003 with IDG. He did his growing up in Virginia, near Washington D.C., went to school at San Jose State, and worked at a bunch of places, including KPMG, Apple, and NEC, before landing at Osprey Ventures and eventually IDG. Between Redwood City, California-based Osprey and his time in Vietnam, Mr. Nguyen has learned about the difference between working as a VC in the Valley and in Vietnam, and it is this: “In the U.S., you are so concerned about disruptive tech and IP—here it’s first-mover advantage that’s so critical.”
Getting at the Money
To secure the advantage on the Internet requires knowing how to scoop money from broadband and mobile networks, and Mr. Nguyen thinks he may be onto something. “We’re now looking at a company that has a pre-paid card just like a Visa card, and with its mobile component, any kid can use it.” Essentially, it’s a debit card that can be used on the Internet and mobile phones, with a nice extra: parents can control outgoings. In Vietnam there is a big impetus to get electronic payments sorted, Mr. Nguyen says. He says California has one of the largest concentrations of overseas Vietnamese anywhere—about 4 million, by his reckoning—and they remit anywhere from $5 billion to $7 billion a year. “If you can capture a percentage of that, it’s a pretty big market.”
Payment systems are very much on Henry Nguyen’s mind, too, over at IDG. “If somebody can build an e-payments system with the appropriate security, trust, and escrow type services for buyers and sellers, I’ll invest in it,” Mr. Nguyen says. “I say that almost everywhere I go—because when that ‘PayPal’ comes, you can build things off it.”
It’s fair to say Mr. Nguyen has a bee in his bonnet about payments and it won’t stop buzzing till he has the question figured out—either by finding the startup with the ability to put a robust system together or by devising a structure that will pull two or three companies together to do it. “Right now, we’re really the only VC and we’re a monopoly in that sense—so we’re able to force things,” Mr. Nguyen says. “There’s nothing wrong with a monopoly when you are the monopolist.”
It’s all part of what he calls his “Internet land grab” and there’s no better example of a monopoly in action than IDG portfolio company VinaGame. According to Mr. Nguyen, the company’s games are now installed in about three-quarters of Vietnam’s 5,000 Internet cafés—which adds up to 75 percent of maybe 50,000 desktops since the cafés are overwhelmingly mom and pop shops of around 10 desktops.
Café owners, encouraged by commissions of 3 to 5 percent on the scratch cards they sell—and earnings from VinaGame's popular fare—usually have the games, weighing in at 7 gigabytes each, installed on all their PCs. That effectively locks out competitors because café owners are reluctant to consume any more storage than VinaGames already take up—and equally, they are reluctant to remove a proven money earner to accommodate an unknown product.
Mr. Nguyen introduces more companies, ones he hopes will turn into Vietnam’s MySpace (“without the chaos” of its American cousin) and take social networking as far as it will go.
But overall, Henry Nguyen views Vietnam as virgin territory, especially when his mind turns to wireless technology. Teledensity is only reaching 20 percent of the population, he says, leaving Vietnam free to take a leap into the future, unfettered by commitments to 3G and other platforms. In other words, it is as free as China was in its hyper-development phase to leapfrog established technologies. That’s why it’s important for Vietnam, he says, not to spend a lot of time mimicking what was and get on with exploring what’s possible in the longer term.
Mr. Nguyen, who grew up in Philadelphia, came to venture capital by an odd route. Like his three brothers, he is an M.D., a useful degree for a VC backing biotech or medical device startups, but not desperately relevant training, you might think, for a VC chasing Internet opportunities in a land he first left at the age of three. But it happened that a young player collapsed after a hard session over a VinaGame at an Internet café. As the newspapers reported in word and picture, the boy had slipped into a coma and had to be rushed to hospital. Suspecting it was all a story put out by a competitor, Mr. Nguyen revealed his medical credentials and begged to be allowed to see the boy—a request denied on privacy grounds. “But his name and picture have been in all the papers,” he protested.
It was the cry of a monopolist begging to be allowed in.
Contact the writer: JMcCormick@RedHerring.com |
