A software engineer just quit a well-paid but boring job to start a new venture somewhere in Ho Chi Minh City, Vietnam. He heard if his company is treated as a startup, it can be funded by local VCs. Also, being a startup means a chance for the company to be massively ‘subsidized’ by the Government. However, he is not sure if his company would qualify for that ‘startup’ status.
A Singaporean investor just received an offer from a Vietnamese VC. Before that, he was told about a new rule in Vietnam that generally allows foreign investment in local VC-style funds and ultimately startups. While he feels there should be no issues with the investment generally, he still needs to know more both law and practice before accepting the offer.
The above hypothetical situations reflect real-life issues and questions that start-ups and their backers are now facing in Vietnam. Obviously, more to be discussed before any final decisions are made.
1 – First thing first, what is a Vietnamese ‘startup’ by the way?
Sometime confused with an early-stage company or small and medium enterprise (SME) and very often with an ‘entrepreneur’, a start-up in Vietnamese law context carries a different meaning.
At the broadest level, a start-up (or literally an innovative SME) must concurrently be:
- an SME;[1]
- established to implement ‘business ideas based on the exploitation of intellectual property, technology and new business models and is able to grow quickly’.
Simply put, a startup is an SME which is able to bring innovativeness (with respect to, for example, products, services, models, etc.) to today’s markets and has a strong potential quick scale-up. In such sense, a startup is not necessarily a software/tech-related company. Rather, it can be a coffee shop or a restaurant as long as it is able to offer a superior business model to operate these establishments.
2 – Does it matter to be labelled as a startup and why?
Yes, because
- Vietnam-based VCs, expectedly the most active funding platform in near future, are permitted to invest in startups only;
- investment by foreign-involved VCs[2] or startup investment companies (SIC) may enjoy a potential ‘fast-track’ licensing process;[3]
- foreign investors may avoid ‘market access’ restrictions if investing in startups via local VCs or SIC first;[4] and
- investment in startups are entitled to a variety of incentives including preferential taxes and Government’s subsidies.
(With contribution of Ms. Nguyen Thi Le Quyen)
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[1] Again, an SME is defined as the one having (i) not more than 200 contractual employees and (ii) owner’s equity of less than VND100 billion (around US$4.4 mil) or revenue of the preceding year being less than VND300 billion (US$13.2 mil).
[2] A foreign-involved VC and a Vietnam-based VC (just said above) can be the same because as noted in the previous post, foreign investors are now permitted to be participate in a VC established under Vietnamese law.
[3] As a matter of Vietnamese law, a foreign investor has to either form a brand-new corporate entity in Vietnam or just acquire shares of an existing one. In case of greenfield investment, the investor has to obtain an investment registration certificate for the ‘investment project (or plan)’ and an enterprise registration certificate for the local project company. If that investor however decides to acquire shares in an existing target, the proposed acquisition must be, in most cases, first approved in writing by the local licensing authority.
[4] For its entry to some international investment treaties (IIT), especially the WTO, Vietnam commits to open up its service sectors to foreign investors of these treaties’ members. Essentially, Vietnam still uses the ‘positive approach’ meaning that foreign businesses were only allowed to operate in a list of specific sectors outlined by IIT. If the relevant ITT is silent on the applying sector but Vietnamese law expressly permit the same, the foreign investor may refer to Vietnamese law. In the worst scenario where no such permission under Vietnamese law is available, opinions of in-charge State bodies must be sought on a case by case basis.
