28 Jul Strategizing for the funding winter in Vietnam
Funding winter is a global macro event and is already happening across various financial and tech centers of the world including Silicon Valley, India, and Singapore. According to CB Insights, global venture funding for startups fell 23 percent in Q2 2022, marking the biggest quarterly percentage drop in deals in a decade. The U.S saw a 27% drop from the previous quarter and the lowest in any quarter since 2020 while the startup funding volume in India dipped 37% in Q2. In June, DealStreetAsia reported that dealmaking in SEA dropped by almost 30% month-on-month in May.
However, preparing for a slowdown in investments may not be top of mind for Vietnamese entrepreneurs as the country still boasts economic growth and a healthy tech scene with little indication of macroeconomic recession signals being experienced in other parts of the world.
Is the funding winter here?
This is the first market downturn for the tech ecosystem in Vietnam. While the cold has been felt in developed markets, its impact on the local ecosystem has been relatively modest.
“Part of it is a lagging effect”, shared Eddie Thai, General Partner, Ascend Vietnam Ventures. Late-stage startups often need tens, if not hundreds of millions to retain market penetration and growth. As a result, they are more likely to suffer from market gyration. Meanwhile, seed-stage startups are many years away from reaching scale and often raise smaller amounts so are somewhat insulated from global turmoil. “With a younger startup scene, most of the venture capital (VC) opportunities in Vietnam are in the early stage. The majority of VC firms here, therefore, are investing in companies that are expected to reach maturity in five to ten years. Meanwhile, there is plenty of available capital in the market. This funding winter is just part of the normal cycles we have already seen”, added Binh Tran, General Partner, Ascend Vietnam Ventures.
“Gravity” also plays a role, shared Thai. Whereas valuations in markets like the US were often untethered from fundamentals, valuations in Vietnam were less inflated by comparison. Thus, while valuations increased here, they did not do so drastically and the valuation correction is expected to be less severe.
Technology disruption is nascent but inevitable. Per the International Monetary Fund’s latest World Economic Outlook report released in April, Vietnam’s GDP is forecasted to grow at least 5 percent this year and 7 percent next year. Within that growth forecast, technology is going to be a significant component due to the inevitable adoption of technology across all industries here.
Gearing up for the winter
While the funding winter itself has yet to make a huge impact in Vietnam, its notion alone has forced companies to step off their previously planned growth paths and make pre-emptive measures in anticipation of a tougher fundraising climate. Several growth-stage companies in Vietnam that are adapting include regional e-commerce player Shopee and SoftBank-backed proptech startup Propzy. In particular, Shopee laid off staff across Southeast Asia, including Indonesia, Thailand, and Vietnam, to “rationalize its e-commerce business”. In an attempt to reduce burn, Propzy announced the dissolution of one of its Vietnam legal entities related to direct sales just two years after raising a $25M Series A round.
Early-stage startups are also making critical changes. Co-Founder & CEO of Aitomatic, Christopher Nguyen, saw the potential of the public-market correction early. In mid-September 2021, Christopher observed risks in the combination of the China Evergrande liquidity crisis, US fiscal stimuli cooldown, and an “irrationally exuberant stock market”. He started to plan for a potentially challenging fundraising scenario in 2022. When the correction came, instead of staying with a strategy of aggressive revenue growth, which comes with high burn and a shorter runway, Aitomatic adopted a plan that prioritizes capital efficiency, in preparation for the bearish environment. “We traded away the aggressive-growth, high-burn strategy in favor of a prudent-growth, low-burn strategy. This has turned out to be very beneficial to the business in the current funding environment”, said Nguyen.
Virtual Internships, a Vietnam-based remote internship placement & management startup with operations in over 70 markets worldwide, has experienced a higher level of scrutiny and due diligence from investors. They are now more cautious and moderate in their spending in anticipation of a longer fundraising cycle. While their fundraising campaign has generally gone as planned, the team removed what they call the “zombie products” or non-core products. “It is difficult because you often think about possible opportunities that you are losing, but I would like to think about what we will gain by having the extra time. These extra products can be a distraction at a time when we need to be sensible and cautious”, shared Daniel Nivern, Co-Founder and CEO of Virtual Internships.
Meanwhile, Foodmap (agritech e-commerce platform connecting farmers and food producers directly to B2B and B2C customers) has also adjusted its product strategy to focus on categories that generate higher profits and ensure stable cash flow according to its Founder and CEO, Tung Pham.
Challenges and opportunities in crisis
“Startups should not be caught off guard. Instead, founders should be increasingly focused on unit economics and build a strong foundation for sustainable growth”, said Thao Nguyen, Senior Investment Manager, Ascend Vietnam Ventures. Previously, it was easy for startups to raise money, and many companies were burning cash to grow at any cost. This is no longer the case. As fundraising slows down globally, even those with a clear path to profitability and a shorter runway will struggle. Startups that have not reached product-market fit or do not have capital-efficient strategies will struggle the most in finding investors. “Startups need to prove that they have strong unit economics, an effective and sustainable growth engine that is built on product market fit, not just burning cash to buy growth”, said Nguyen.
“However, as much as we are concerned about what the funding winter entails, we are positive about the opportunities that come along in the crisis,” added Nguyen. We have seen in past downturns that the best companies will stand out and continue to attract capital. As fewer companies are able to fundraise, the best companies will rise to the top, so the so-called winter to some people can actually be “spring” to others.
Kartick Narayan, Founder & CEO of Kilo, perceives the funding winter as an opportunity. Kilo is a SaaS & wholesale marketplace for over 30,000 MSME retailers across Vietnam. This company raised a total of $8M as part of our pre-Series A in November 2021 resulting in several years of runway left. “We have not seen any negative impact of the so-called funding winter. Internally, we are taking this opportunity to double down on customer experience metrics. We are perfectly comfortable with trading off growth for better customer experience and this is even more pronounced in 2022. We still get plenty of interest and as always, we are picky about who we let into our cap table. This means we have minimal distractions from focusing on our mission of bringing millions of traditional businesses online through a friction-free marketplace”, said Narayan.
A natural benefit of the current conditions is that well-funded startups can acquire talent more easily as hiring freezes are implemented and layoffs increase. Also, as the value of employees’ stock options at large public companies shrinks significantly, they will begin thinking about opportunity costs, and many may jump ship to start their own companies or join earlier-stage startups.
“While we are saddened by the people who have seen their savings shrink and the many who will lose their jobs, the tech ecosystem in Vietnam holds many exciting opportunities for people who exist through good times and bad. There are still plenty of sectors where technology and innovation have yet to positively transform the lives of those in Southeast Asia. We are ready to invest and will continue to deploy capital through this downturn”, said Tran.
Similar to startups, VC funds are wary about the current situation, but they will continue to invest – of course with higher selectivity and prudent investment practice. Perhaps the road to recovery won’t be as long as one might expect and those who can survive through the winter will enjoy a stronger position to thrive.