Vietnam's Economic Policy and Business. structures for venture capital setup will be discussed in the market entrance plan. There are also types of risks that we should not ignore.

4. Tax Structure on Vietnam High Tech industries.

• The new Vietnam tax system is made of several taxes and fees, for all businesses in Vietnam, there is an annual business licensing tax is imposed on business with a rate of VND 650.000.
• The standard tax rate for profits made is 25%, Vietnam government is now encouraging foreign company to reinvest their profit, if a foreign enterprise reinvest their profits earned more than 3 years, all profits tax paid on reinvest amount will be refunded.
• Foreigners may import equipment, machinery or other materials into Vietnam, as long as the items are for the purpose of capital contribution for foreign enterprise establishment or under cooperation contract, the import tax is exempted.
• An encouraging tax package is made for high tech investment in Vietnam, which includes a 4-year tax exemption (from the first profitable year), followed by a 9-year 50% tax reduction (from subsequent years of operation) and only 10% corporation income tax on project duration, and there won`t be any Value Added Tax (VAT) or Withholding Tax on profit repatriation.
• When investors transfer their profits abroad, a tax equal to 3%-7% of transferred profits will be charged by the Vietnam government.

2. Demographic data and huge attractiveness of internet market

There are over 90 million people in Vietnam, according to US census Bureau, the latest population is around 90,549,390, and the number is growing at 2.85% per year. Their Gross National Income (GNI) is about US$ 2,760 in 2010.

Having come late to internet, Vietnam has a relatively low internet penetration rate, which was 0.3% in 2000 but the rate grows very quickly and there are now 34% of the population using internet. From the world internet statistics, China has an internet penetration of 50%, and 78% in US. So we can expect that internet penetration in Vietnam will keep increasing for the next a few years.

(international internet usage statistic)

This table illustrates the great potential for Vietnam internet market, there would be about 1 million new internet users soon and people have just begun to looking for higher internet access speed. In 2007, the Vietnam Data Communication Company (VDC) received 140,000 new subscribers to its internet services and that is 200% over its target. The existing providers` ability is far from enough.

3. Market entrance plan

Vietnam is one of the N-11 countries and has great opportunities in the internet market. Vietnam is late to internet and its internet industry is still in early-stage, but as what we discussed previously, Vietnam internet industry has explosive demand and is growing rapidly. Besides, Vietnam government offers encouraging package for foreign investors. Obviously it`s a perfect potential for venture capital, Macquarie is aiming at this opportunity and trying to bring sound return to their limited-partners as what they usually did before.  

 

1. Setup venture capital and raising 3rd party finance.

Illustrate this opportunity to long-term investors such as pension funds, insurance company or fund-of-fund who will finance the capital commitment or further investment. A Vietnam internet space Venture Capital Fund is then founded with investors and Macquarie bank (general partner) who provides experienced and entrepreneurial management. Macquarie bank earns 2.5% basic management fee and 20% of the return over 8%. Limited partners (investors) will have the ownership of the fund or the investment portfolios.

Market price for Vietnam internet is still unaffordable for many people, so some low price Australian internet providers such as TPG are ideal co-investors, as they can also provide better expert, technology and equipment if necessary. And their low price internet usage package will be welcomed by a huge demand.

Structure 1---Offshore Fund

(graph from Tuck School of Business at Dartmouth)

The offshore fund structure is most commonly used by venture capital business around the world, it benefits management by helping appeal to large pool of foreign capital, enjoying tax and regulation package, but this structure may make due diligence more difficult (without Vietnam personal network) and bring limitations to the investment.

Structure 2---Onshore Fund

(graph from Tuck School of Business at Dartmouth)

Raising domestic (Vietnam) capital to fund the company is made possible in Onshore Fund structure, it can reduce part of the foreign exchange risk. And this model can make company operate with fewer restrictions, but the tradeoff is that the company will lose some of the control over the fund and it takes time for approval.

2. Source investments (locate seed company), Due Diligence

This is the second step of a venture capital lifecycle, we have found the great opportunities in Vietnam internet market and more research and analysis is needed for individual company and existing Venture Capitals. After that we will locate the source and make initial investments.

• Indentify and source opportunity (locate seed company from Vietnam internet space)

1. Major Vietnam internet service providers

FPT Telecom (Financing and Promoting Technology) provides internet exchange and internet service, and the corporation is Vietnam`s largest information technology group.

VDC (Vietnam Data Communications Company) is a state owned under the Vietnam Post and Telecommunications Company, their internet services have 65% market share of Vietnam.

NetNam is created in 1994, it is a not-for-profit organization who only charge a fee for expanding the system.

Viettel is third largest mobile phone company which also provide internet services. Viettel group have remarkable revenue (28%) even during the GFC, but Viettel is currently owned by Vietnam military.

2. Opportunities in online advertising.  Online shopping is still “neglectable” according to industry research, however we can`t expect online shopping in Vietnam will remain this small size. Recently, some food delivery websites in Vietnam become popular for 9 to 5 business people, that is a nice signal for Vietnamese to gradually recognize online shopping.
3. Vietnam job search websites. There are not so many job search webs in Vietnam, Monster Vietnam () is founded by US investors in 2010. It is listed on New York stock exchange as MWW (NYSE) but their performance is not that good.

(google finance)

Gigajob () is another job search web, it belongs to an internet service company in Germany (Netzmarkt).

Macquarie has lots of successful business in job search webpage, such as ZHAOPIN and SEEK, investing Vietnam jobsearch should give similar results as ZHAOPIN, as market condition is quite close.

Comments: investing in Vietnam`s big internet providers seems hard, they are owned by government or even under military control, it could be impossible for foreign venture capital company to have main management power. Furthermore they are not in the range of “early stage growth companies”. So we need to focus on new Vietnam internet service companies, invest in them by taking parts of their shares (49% is the upper limit set by Vietnam government) as initial investment. OR we may found a new internet company by ourselves. Vietnam`s online advertise and job search are still in prototype, and it is the right time for angel financing. Macquarie would consider one or some food delivery web at the beginning. Furthermore, an Internet Service Provider (ISP) license will be required by Vietnam Ministry of Culture and Information.

• Due diligence on the company.

Due diligence is an important process to confirm the reliability of the information from target company that we have chosen. This process is divided into several areas, crucial parts are financial audit, management audit and product & market audit.

Macquarie need to know the detailed financial condition of the seed company, and work out how much investment would be need. Venture capital usually step in the management team after merge & acquisition, seed company`s management structure and how much control Macquarie could have, will influence the decision making. Besides, expert team from Macquarie or co-investors should study seed company`s products and market demand, and find out possible method to upgrade product quality and expand its market.  

• Investments (Initial investment further round investment).

   After due diligence, final decision would be made and Macquarie will then start the initial investment, this involves cost of purchasing seed company`s share or other kind of acquisition permitted by Vietnam business law. “cash burning” would be possible at the beginning. And Macquarie may consider further investment during the portfolio management.

   

3. Portfolio management

Portfolio management is the process that investors use to analyze information of the company, make decision and certain moves to improve or protect the value of their portfolio. This involves portfolio monitoring and value adding based on company analysis.

• Portfolio monitoring

Under Law on Foreign Investment in Vietnam (article 11), each party to a joint venture capital shall appoint members to the board of management in proportion to its capital distribution to the legal capital. And it is Board members` responsibility to ensure that the company is running in the shareholders` best interest. Members also have rights to offer strategic advice to management team

• Company analysis and Add Value

Venture capital company need to locate their the stage of their company from all information the Board provides, they should know whether the company is still in early stage and burning cash, whether it begins to rollout and generate profit, or if the company is on expansion or closed to maturity. Then relevant financial decision will be made.

Macquarie bank, as most venture capital companies, have the insight in understanding current stage and trends of the investing company, they are always ready for managing the portfolio by an second or third round of financing, adding value by recruiting or building senior management team and utilizing the network and domain knowledge.

In some cases, venture capital can replace management or decide to exit the market if they think it`s necessary or it is the right time.

4. Exit options

We expect the growth of Vietnam internet industry will slow down or reach its maturity in 10 year, Macquarie will choose the exit Vietnam internet market and realize the cost and “Add Value” they have achieved. Exits options are initial public offering (IPO), Mergers and Acquisitions, Winding up or Built to Last.

• Going IPO.   HoChiMinh City Stock Exchange (HOSE) is largest exchange in Vietnam, to exit from Vietnam market, venture capital can list in HOSE or Hong Kong stock exchange or NASDAQ, and sell the shares of the company.
• Merger and Trade Sell.  After the business reaches an appropriate size to exit, we may contact other Vietnam internet providers to merge the business for a reasonable price. Or simply sell it to some other investors. The price accounts for not only market value but also control premium.
• Winding up involves liquating current assets, paying off creditors and close down the business. This is the method if the business is not successful or creditors suddenly require their capital back.
• We can even “Built to Last” after paying off investors and become Vietnam`s home grown companies, such as FPT Vietnam and Vina Milk (HOSE: VNM)

4. Existing Venture Capital players and competitors

Dragon Capital Fund, is the UK`s largest fund, they establish their business in Vietnam since 1994, and have invest $100 million in over 40 companies in Vietnam.

IDG Venture Vietnam is one of the largest global venture capital players, it has $6.8 billion asset and over $100 million in Vietnam, IDG Venture Vietnam now focus on software development and wireless equipments.

Vina Capital was founded in 2003, they are the major players in Vietnam and have over $2 billion in management, they focus on technology, media, infrastructure and real estate.

Comments: there are several strong venture capital players in Vietnam, they have years of experience and huge amount of money and many of them are focusing on high tech industries. In order to catch up and share the pie of Vietnam`s internet market, we need accurate due diligence and take action before it`s too late.

5. Potential challenge and risk

Even though Vietnam and its internet market is a hot opportunity with unbelievable potentials, Vietnam remains a developing country and has problems and issues.

1. Vietnam government has very strong control over internet development as internet is still considered as a threat by “opening up access to views and opinions that are not always consistent with Vietnam government”.
2. Income inequality in Vietnam is growing, it makes lots of people can`t afford internet service even the price is low. The inflation is just under double digits and expected to quicken in 2013, this makes it more difficult to keep the price low.
3. There is a shortage of people with high internet or software skills, and higher salary must be paid to have component employees.
4. Corruption remains a problem for Vietnam, and activists rank Vietnam as the fifth-most corrupt country in Asia. Corruption has certainly influence the investment market and could give uneven chances and opportunities to foreigners.

Conclusion

Both macroeconomic and demographic data illustrate a huge market for Vietnam internet space especially as an internet provider. Macquarie bank can raise Vietnam local funds or capitals if they choose Onshore venture capital structure which may also make due diligence easier. Ideal targets are new internet companies who don`t have too much government control over it, after acquisition Macquarie can add value by applying better technology and advanced management. The strong performance of venture capital companies in Vietnam has demonstrated the necessity to join in this market as soon as possible. We should pay attention to potential risks in Vietnam such as the high inflation risk.

Reference

1. __ “Note on Venture Capital Portfolio Management”, Center for private equity and entrepreneurship, Tuck School of Dartmouth, August 12, 2003.
2. Allens Arthur Robinson, “Vietnam Legal Update”, Allens Vietnam Laws, June 2007,
3. ___ “opportunities & challenges in Vietnam” US-ASIA technology management center, Stanford University-School of Engineering, may 6th 2008.
4. Tim Kelly and Michael Mings, “Vietnam Internet Case Study”, International Telecommunication Union (ITU) Geneva, Switzerland, March 2002. “”
5. ___ “Law on Foreign Investment In Vietnam”, National Assembly, SOCIALIST REPUBLIC OF VIETNAM, Hanoi, 9 June 2000.” ”
6. Allens Arthur Robinson, “Legal Guide to Invest in Vietnam”, Allens , HoChiMinh City Vietnam, 2010.
7. Adam Sack and John McKenzie, “Establishing a Venture Capital Firm in Vietnam”, Private Sector Discussions, Mekong Project Development Facility (MPDF), Hanoi, Vietnam September,1998,” ”
8. Miniwatts Market Group, “Vietnam Internet Usage Statisitc and Marketing Report”, Internet World Stats (usage and population statistics), April 10, 2012. “”
9. Viet Tuan Dinh, Noritaka Akamasu, Peter Rosner, “Taking Stock, an Update on Vietnam`s Recent Economic Development”, the World Bank, Sapa, June 5-6,2008.” ”