[Are you an investor interested in investing in Vietnam, especially in startups? This blog post comes from conversations with visiting investors from other countries and answering a lot of questions they had in common.]

For years, tech startups in Vietnam operated in a sort of vacuum, with no local ecosystem to help them.

Of course, this didn't stop them. Maybe there were even benefits with less scene distractions.

Now there is something we can call a scene, like a subculture of startup. There are wannabe entrepreneurs (wantrepreneurs), kids who dream of startups or want to experience working for one. There are serial events (Startup Weekend Ho Chi Minh City, the Start Me Up series, even Barcamp Saigon which I'm most personally attached to) as well as larger traditional conferences with international involvement. There are hackathons. There are training programs. There are incubators. There are angels and venture capitalists, although so few that finding appropriate investment among them is challenging for many reasons. There are online forums (in Vietnamese) and there is now coverage of the country in the three largest regional tech news journals out of Singapore (e27, SGE, TechInAsia) as well as local PR mouthpiece Action.vn.

And there are even some startups within Vietnam's startup scene!

(Though there is confusion about what is or isn't a startup)

What kind of startups you'll find in Vietnam

You'll find mostly web startups rather than hardware companies or biotechnology or clean energy or transportation. Even within the domain of web, the breadth of companies isn't so wide either. Most Vietnamese sites are either content or e-commerce with few web applications or even desktop, server, or mobile application companies. Almost all Vietnamese startups target the Vietnamese market and the same goes for most Vietnamese technology (read: software) companies with the obvious and huge exception of outsourced software development companies. Outsourcing and consulting services companies are by definition not startups.

There are also scores of websites which are only focused on eking out an existence rather than focusing on scaling. Often these get mixed into the startup community. But for a startup, any outcome aside from high growth is a failure by definition.

CHALLENGES, ADVANTAGES

What problems do Vietnamese startups face? (Yes, it does matter where you start your startup.)

The answers help explain why many kinds of startups don't exist in Vietnam.

1. Lack of: (large) industries and experts. This is why many foreign companies can come into this market, even if corruption, bureaucracy, and lack of transparency make it difficult for unexperienced foreigners here.

2. Lack of: experienced startup entrepreneurs. There are lots of entrepreneurs in Vietnam, the streets are teeming with entrepreneurs using any marginal piece of real estate, private or public, to do business on. But they won't be able to give relevant advice to most tech entrepreneurs. There are some (even successful) tech entrepreneurs but few who have taken a company to IPO. OTOH, there is a huge population of ethnic Vietnamese living and working in Silicon Valley, who would be a windfall resource for the high tech economy in Vietnam if the Vietnamese leaders would be willing to admit it.

3. Lack of: research universities, lack of research that could be commercialized. Original research out of Vietnam is nearly nonexistent. This is not true for all poor or developing economies.

4. Local startups also face legal hurdles, poor infrastructure (slow Internet, frequent power outages, an unfriendly banking system, an unreliable mail system)

5. Content serving companies now have access to ad networks but online ad spend is still relatively low. Total aggregate ad spend is high enough to see the potential here. The websites with the highest traffic (mostly news sites) get the lion's share of online ad spending, so it's still hard for new content-based sites to monetize above marginal levels. You see sites (like forums) that grow big get desperate to make money.

6. For e-commerce companies the most obvious hurdles compared with developed countries are with delivery and payment. Most Vietnamese people don't have credit cards or even bank accounts. Mobile payment, which is being used successfully in other parts of the developing world like sub-Saharan Africa, is rare in Vietnam. Telecom providers offer mobile payment solutions but ask for around 50% of the total transaction giving companies strong incentive to find any other possible way to collect payment. For example, game companies like VNG sell their own scratch off cards.

7. Funding is another challenge for any wannabe startups. It's hard to find funding at any level from seed to series A. Deal sizes will be much smaller and if you have to limit yourself to the local investors you're limiting yourself to a handful of funds which are out of money or are running out or have mixed motives. While the cost of bootstrapping in Vietnam is attractively low, sometimes what matters more is what you can spend your money on - and there are things in Vietnam you either can't buy or are not going to be good enough, in which case it doesn't matter if you have extra cash.

Which brings us to...

Why Start Up in Vietnam? (Read: Bootstrap Abroad: Cheaply Bootstrap Your Startup from Vietnam)

Points for Vietnam:

There are advantages too: a large and under-served/poorly-served population which is ethnically homogenous (there are ethnic minorities who make up a small percentage of the population) and monolingual (except for the minorities who are able to hold onto their cultures).

Market size. It's a big population at 90 million but for any given product the actual market will be much smaller.

There's a growing middle class which combines with the low cost of living leaving an attractive and growing segment of the population with significant disposable income to consume things like motorbikes and smart phones. But even if they have the money they won't necessarily have the sophistication, trust, or desire to do many kinds of transactions online.

And as I said above, bootstrapping in Vietnam is orders of magnitude cheaper than other locales.

How do Vietnamese startups achieve exits?

The legal system in Vietnam is what you should expect any frontier market to be with seemingly arbitrary decisions in courts and anything involving government bureaucracy (leaving as an exercise to the reader to find out how necessary bribes are when doing business in Vietnam). Lack of well-developed precedence for case law, as the Vietnamese legal system is weak. Can the courts be bought? Good question.

More to the point, foreign companies are severely limited in what kinds of business they can own in Vietnam, with looser restrictions on software companies which can be fully foreign-owned. This is more of a problem for MNCs wanting to break int Vietnam's larger, established industries where private ownership might be limited to less than 50%. It's thus difficult or impossible for foreign companies to acquire Vietnamese companies, even when there is appetite for such acquisitions. However, large private equity deals do happen.

There is a local stock exchange with sub exchanges in Saigon (HOSE, Ho Chi Minh Stock Exchange) and HNX (Hanoi). This is overwhelmingly former state owned enterprises. An IPO is therefore possible on these markets but it's not clear that either retail or institutional investors would be interested in tech IPOs, at least enough for them to raise significant capital. Listing in Singapore or Hong Kong are other options.

Future topics

Saigon vs Hanoi: Where are the Vietnamese startups? Mostly in Saigon, but Hanoi comes in as a strong second place.

Who is a starting them? Expats, Viet Kieu, locals, mixed teams?

To be continued...