Please read this post first: What’s a start-up under Vietnamese law and does it really matter from a VC’s perspective?
3 – Who decides an SME is a startup and how?
Because neither innovativeness nor a rapid scale-up potential are easily measurable, the first question would be who will do the measurement job. In other words, who will decide whether an SME is a startup or not and how?
Without a clear regulatory guidance, it is generally argued that the decision should be vested with the investor and its target themselves. This is simply because that no one could be expected to understand an investment better than the insiders.
But a new question then arises: what happens if a target is considered a startup by the investor but, by all accounts, it lacks both novelties and a rapid scale-up potential? For example, a VC, for some reasons, decided to invest in a conventional farming SME. After few years of the SME’s ill operations, conflicts arise between the founders and the VC. The VC who wishes to walk away from the distressed business seeks a court decision to invalidate their investment. Their argument is that because VCs’ portfolio limits to startups and the targets is nowhere near this status, the investment was wrong at the outset. As such, things must be restored to its original state (e.g. – the VC taking back investment and SME removing them from its corporate documents including the shareholders’ register). In the opposite direction, the same risk may also come from the founders if the SME makes a good fortune.
While this scenario is quite unlikely in practice, it cannot be simply ruled out.
4 – So, how to mitigate, or ideally, eliminate the risk?
You may simply wait until further guidance by the Government.
However, if the investment cannot be delayed (you’re a venture capitalist, aren’t you?), just go ahead. Frankly speaking, the risk is, albeit potential, relatively small.
Still hesitant? then consider a practical way to mitigate the risk. Under that scheme, the VC may request the target SME to apply for joining a Government-sponsored startup support scheme (đề án hỗ trợ doanh nghiệp khởi nghiệp sáng tạo) launched by a Governmental ministry or a provincial people’s committee.
A startup support scheme (or the Scheme for short), as its name indicates, aims to provide startups with non-tax supports. Such supports may include the Government’s financial assistance in technology transfer, working space, training programs for startups, etc. (further details of these non-tax support and tax incentives applicable to startups to be discussed in the next post).
4 – How a startup could join the Scheme?
A ‘deemed’ startup may join the Scheme if it is:
- selected or invested by a co-working space, qualified incubator or invested by a localVC[5]
- a winner in startup contest, holder of patent license or acknowledged as a ‘high-tech’ or ‘scientific and technology’ company; or;
- selected by a council formed by the body in charge of the Scheme.
It however remains unclear as to whether an SME which has already satisfied the above conditions is still required to be further ‘official’ acknowledged by the body in charge of the Scheme (i.e. – qualified for participating the Scheme). This question is expected to be addressed in a specific Scheme. Unfortunately, to the best of our knowledge, no such scheme has been issued yet.
5 – Any take-way?
If you are a non-Vietnam VC/investment vehicle[6] which is designed to directly invest local targets, then you should not care about the above complicated stuff. Go investing!
If you, however, seek to invest in Vietnamese startups via a local VC or SIC, a little care should be taken. Unless you are willing to bear the above theoretical risks, investment in software, ‘high-tech’ or ‘scientific and technology’ companies could be a prudent and relatively choice. Why? this is the ‘startup’ DNA of these entities cannot be easily challenged regardless of whatever the laws require what a startup must be. The downside is that, other than software companies, the number of scientific and technology companies and high-tech ones is approximately 300 and 30 only respectively throughout Vietnam.
(With contribution of Ms. Phan Hoang Lan)
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[5] We do not understand why a SIC is not entitled to the same treatment given its similarities with a local VC.
[6] Quite a few foreign private equity fund/VC create a special investment vehicle in the form of a company for each Vietnamese target. These vehicles are often set up in tax heavens (BVI, Cayman Islands) or regional hubs (mainly Singapore).
