Vietnam startups lack government support when it matters most

The lack of institutional support is one of major factors behind the failure of many startups to take off and thrive, experts say.

“80-90 percent of startups fail in the early stages because they don’t have enough funding to move on to the expansion stage,” said Phan Hoang Lan, head of the Financial Planning Division under the Ministry of Science and Technology's Market Development Department. 

Funding for startups mostly comes from venture capital funds, businesses and angel investors, not from the government, experts said at a recent conference.

There are three periods in the development of a startup - discovery, validation and expansion, said Lan.

It is in the first two periods that startups need funding the most, Lan said, adding that they end up raising money from family and friends or spending their own.

This situation is very different from other countries like Singapore, where the government offers a variety of grants that can support up to 70 percent of a company’s costs, according to Tech in Asia.

The U.S. News and World ranks Singapore as the 8th best country for starting a business in its 2018 Best Countries Rankings.

Vietnam was ranked 52nd, behind other countries in Asia like Japan (2nd), South Korea (12th), Malaysia (34th), Thailand (38th) and the Philippines (45th).

Since 2015, the government has only been investing in startups in the middle stage of their development, not in the earlier ones, said Lan, who is also the head researcher of the Vietnam-Finland Innovation Partnership Program (IPP2), which seeks to improve local support mechanisms for new innovative companies.

“Government funding for startups should start in the early period. The government needs to be willing to accept failures in their investments, which could also bring a lot of benefits,” she said.

IPP2 research shows that early government funding will reduce the “crowding out effects,” which is when the government’s involvement in a sector substantially affects private companies by reducing their investment spending.

When a business has overcome the difficult period, it will no longer be dependent on the government’s capital and can source investment from other private companies.

Echoing Lan, Nguyen Tri Hieu, an economist with over 30 years of experience working in the U.S. and Vietnam, said startups in Vietnam mostly receive funding from family and friends in their earlier stages, not from the government.

In the U.S., startups can find financial support from the Small Business Administration (SBA), which has an annual budget approved by Congress to enable their establishment, Hieu told VnExpress International.

“But this is not the case in Vietnam, where they get very limited government budget support in some cities and provinces like Hanoi, Ho Chi Minh City, Da Nang and Can Tho,” he said.

Jouko Ahvenainen, CEO of digital finance firm Grow VC Group, affirmed the vital role of the government in supporting startups.

The government needs to build an ecosystem to help local and international investors connect with entrepreneurs and help them expand internationally, he said.

There should be good database of local startups so that investors can make their choices with greater ease, he added.

The number of startups in Vietnam has seen an increasing trend in recent years, reaching 92 last year, a 45 percent increase over 2016, according to the Topica Founder Institute (TFI), which has an annual program that trains and connects startups with potential investors.

These startups raised $291 million last year, up 42 percent from 2016, TFI said.

Startups in Southeast Asia attracted $7.86 billion in total last year, a threefold plus increase over 2016, Tech in Asia data shows.

Vietnam accounted for only 0.7 percent of that figure, lower than Thailand (2.2 percent), Malaysia (3.1) and Indonesia (22).

Without government support, some potential economic development will be weakened, said economist Hieu.

About 90 percent of Vietnamese businesses are of small and medium scale, but they create jobs for a majority of the labor force, he said.

“The future of the economy depends on the success of startups.”