Why Flappy Bird was just the start for Vietnam's startup scene

Road Trip 2015: The first in a two-part series on Vietnam's startup scene and how the government is trying to rev up investment and interest in businesses that hope to be the next viral hit.

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HANOI and HO CHI MINH CITY, Vietnam, and SAN FRANCISCO -- It was just supposed to be a casual cocktail meetup.

Before embarking on a 19-hour trip to Vietnam, I headed over to the Vietnamese General Consulate, a mere 15-minute cab ride away from the CNET offices in San Francisco. I imagined it as a fun way to ease into my assignment -- a few good drinks and conversation with folks who knew a thing or two about the country I was about to visit.

Instead I arrived at what appeared to be a formal business meeting between two-dozen or so black-suited Vietnamese ministry officials, Vietnamese startup types and Silicon Valley angel investors. My only drink: A mini bottle of water.

At first, I wasn't sure what I had wandered into. But it quickly became clear that I had been invited to observe a brainstorming session for Vietnamese officials to grill American angel investors on how the whole startup world works in the US. Their ultimate goal is to replicate what Silicon Valley has done very well: Building the next Facebook or Dropbox.

"I would like to bring the culture from Silicon Valley into Vietnam," said Thach Le Anh, the US-educated businesswoman who serves as head of Vietnam Silicon Valley, or VSV, a government-sponsored group that funds and mentors startups. "We want to bring the very different culture, very independent thinking and dreaming" to Vietnam.

Vietnam, which has a booming tech sector in places like Hanoi (pictured here), is trying to grow its startup industry. Shara Tibken/CNET

VSV is part of a broader push by the country to transform itself into a more technically savvy hub of innovation. The country is already home to a number of the world's largest consumer-electronics companies, which have brought manufacturing jobs and investment in resources. But Vietnam wants more: It's not enough that its citizens build televisions and smartphones; the country wants to foster the creation of billion-dollar startups that can change the world, while at the same time boosting the national economy.

"We're beginning the project to try to encourage investors to invest in startups and the entrepreneurship space in Vietnam," Tran Van Tung, Vietnam's deputy minister of science and technology, said through an interpreter. "We'd like to develop an ecosystem where it would be really rewarding for investors and angels, as well as contribute investments into the country."

Vietnam might succeed, if it can get out of its own way. Strict and often confusing regulations limit homegrown companies, while corruption -- such as extorting companies for money -- remains a reality. Venture capitalists are rare, as Vietnamese investors would rather plow their savings into real estate instead of startups. And there's not a good ecosystem for funding and expanding companies. Because of all this, few Vietnamese companies have been able to move outside Southeast Asia and become household names.

That doesn't mean Vietnam isn't trying.

Not just another cog in the wheel

Over the past decade, Vietnam has expanded beyond its traditional textiles and coffee businesses to become a big player in the electronics manufacturing supply chain. Many of the world's smartphones are now assembled in the country, and giants such as Samsung have been growing their operations in Vietnam. The country, still run by a conservative Communist government, is now trying to figure out how to move beyond being just another cog in the manufacturing wheel.

Enter VSV, an ambitious initiative backed by the Vietnamese government since mid-2013. It gives entrepreneurs funding to get their ideas off the ground, helps them make business plans and connects startups with potential customers and investors. VSV operates an accelerator that spawned nine consumer and business-centric startups in its first session last summer. Other batches will emerge this year.

To learn from the US, VSV sent 12 delegates from Vietnam -- including the deputy minister of science and technology -- on a weeklong "study tour" of the San Francisco Bay Area and New York. That included talking with investors, big corporations and startups about how to drum up interest in Vietnamese companies -- and what role the government should play in helping and funding them. The trip was a sort of scouting visit for another tour, a group that would include the head of Vietnam's ministry of science and technology.

After the nearly two-hour meeting in San Francisco ended, I caught up with Pham Hong Quat, director general of the National Agency for Technology Entrepreneurship and Commercialization, a branch of the Vietnam Ministry of Science and Technology. Why, I asked, is the government supporting startups? Isn't that basically the opposite of what the Vietnamese government has stood for?

He barely reacts to my questions -- he's clearly been asked this many times before.

"The young generation now in Vietnam, they have big dreams and ambitions to be successful entrepreneurs, to get money from technology," Quat said. "It's different from the traditional way to be an employee for a big company. So I would like to support them."

"Everyone's an entrepreneur"

It's that last thought that sticks with me as I finally make my way to Vietnam. "Everyone in Vietnam is an entrepreneur," more than one person told me during my stay there. Even Ted Osius, the US ambassador to Vietnam, has pointed out the country's entrepreneurial spirit and its "dynamism." I don't have to look farther than the street food stands crowding every block in Hanoi or the dozens of tailor shops in Hoi An in central Vietnam to understand.

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Thach Le Anh, head of Vietnam Silicon Valley, at the Vietnam Consulate in San Francisco, gives an overview of the group's efforts to boost startups in Vietnam. Shara Tibken/CNET

Over the past couple of years, a new wave of startups and entrepreneurs have emerged in Vietnam. Call it the "Flappy Bird Effect," named for the mobile game that went viral last year before its Hanoi-based creator, Nguyen Ha Dong, pulled it from Apple's App Store for being "too addictive." At the game's peak, Dong was making about $50,000 a day in advertising -- the amount a typical Vietnamese worker earns over nearly three decades.

"No moment in Vietnam's startup history for the last 10 years could be so monumental and magical" as the Flappy Bird success, wrote Anh-Minh Do, an editor of the Tech In Asia blog, a news site and one of the few English-language sites tracking Vietnamese startups.

Entrepreneurs I met in Vietnam either admired Dong's success or derided his app for being mediocre and "something anyone can do," as one would-be app developer put it. But they couldn't avoid talking about it. Flappy Bird stands as the shining example of a Vietnamese product that went global and did so very quickly.

An overnight success like Flappy Bird is the exception to the rule. Even if other Vietnamese companies make it to US shores, it likely won't happen soon.

"Vietnam takes time," said Pham Hop Pho, vice president of IDG Ventures Vietnam, the first venture capital firm in Vietnam. "It's a get-rich-slowly country."

The funding gap

The startup world in the US is a complex web of venture capital firms, angel investors, crowdfunding and entrepreneurs working together (or against each other) to ensure up-and-coming businesses get the proper funding. Vietnam's funding realm can't compare.

When IDG Ventures Vietnam opened its shop with a $100 million fund in 2004, it found a populace that was unaware of the concept of a venture fund. "We translated the words 'venture capital' into Vietnamese," University of Southern California-educated Pho said. "There was no word for 'VC.' A lot of people thought we were selling insurance because the word sounds similar."

The VC firms in Vietnam today largely focus on funding startups early. But that presents a challenge for companies when they get bigger and need to raise more money. They don't have a lot of options like in developed nations.

Part of the problem with securing funding in Vietnam is it's hard to have a successful "exit." Until going public or being acquired becomes common in Vietnam, investors don't know when, or even if, they'll get a return on their investment.

"How do we get our money out?" Pho said. "That part needs to be a lot clearer than it is now."

Tapping into the US investor scene isn't easy for companies without connections there. "If I were to invest in a Vietnam company today, I would not know where to start," Etienne Deffarges, president of the Harvard Business School Alumni Angels Association, said during the VSV event in San Francisco. "I've been to the country, but I don't know anything about startups in Vietnam."

Raising Vietnam's profile

Making US investors aware of Vietnam was a big reason for VSV's visit. It certifies companies that have been through its accelerator in hopes investors will be more comfortable with giving them money -- giving them a sort of Vietnam seal of approval.

"It's really difficult to find an investor and to convince them to believe in our vision and to put some investment in our project," said Sarrie Bui, who will be taking part in VSV's upcoming accelerator program, both for the funding but also for the mentorship offered by VSV. When she applied for the VSV accelerator early this year, all she had was an idea for an Etsy-like e-commerce site that would connect makers and artists in Southeast Asia with buyers all over the globe. But VSV will help her launch her site, TheHandmark.com.

"E-commerce is now one of the things the government pays attention to," she said. VSV will help "in terms of knowledge, how to make it really happen."

Whether US investors are comforted or concerned by the Vietnam government's involvement is a whole other question. Most foreign investments in startups in Vietnam today are coming from other Asian countries, like Japan.

When it comes to government involvement in startups, there are two primary models to consider -- the US version where the government is mostly hands-off, or the Chinese model where the government directly supports startups. Earlier this year, China set up a $6.5 billion government venture capital fund to "support fledging startups in emerging industries." Other countries that have given government support to tech companies include Israel, Japan and South Korea -- all places where tech is booming.

Vietnam reportedly may set up a VC fund of its own by the end of the year, and VSV gives out seed funding of at least $10,000 to each of its accelerator participants. The government also sponsors university incubators, workshops and startup competitions. But right now the overall government is following a sort of hybrid model -- not fully supportive like China but not fully hands-off like the US, either.

Government involvement is something some local entrepreneurs see as essential. Before participating in the VSV accelerator, Nguyen Ngoc Tuan tried to find other investors for his site that helps companies recruit new hires "but failed because they required a business plan, financial plan, valuing the company, and it was difficult for us to evaluate our company at that time," he said.

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Sarrie Bui, head of TheHandmark.com (left), and Nguyen Ngoc Tuan, creator of the Jobwise.com employee recruitment site, talk about how the Vietnam government-backed Vietnam Silicon Valley has helped get their companies off the ground. Shara Tibken/CNET

Tuan ended up participating in the four-month-long accelerator bootcamp in Hanoi last summer, learning how to make a business plan and market his product, originally called Astro Telligent but rebranded Jobwise.com in time for its launch this month. VSV invested $13,000 for a 10 percent stake in his company (though Tuan had to pay $3,000 back to the group to cover the bootcamp cost), and it connected him with his first big customer -- Vietnam International Bank. It also helped Tuan raise $80,000 after the bootcamp at an $800,000 valuation.

"Vietnam Silicon Valley is very good for startups," he said.

For Vietnam to reach its goal of having 5,000 functioning tech companies by 2020, it has some work to do. Tech in Asia estimates the current number of startups is between 1,000 and 2,000, though it's difficult to gauge. "Assuming that Vietnam pumps millions more dollars into this sector, then the 5,000 number is achievable," said Do, an editor at the site. "If not, it's just a pipe dream."

Starting a sizable state-sponsored VC fund would be one way to get the market going. And making sure the Vietnamese government earmarks millions for startups was part of VSV's goal with its US tour. It hopes to raise $3 million to co-invest in its accelerator over the next five years, and it's pushing the government to support even more incubators and efforts to help startups.

TechElite, a three-year-old startup whose CEO graduated from Stanford in 2012, is one of the rare Vietnamese companies to have funding from two angel investors in Silicon Valley. But the Hanoi company, which initially created an Eventbrite-like event ticketing and management system, turned to VSV when it came time to raise more cash to develop its new idea -- WorkDone, software that helps companies manage their employees. The founders joined last year's accelerator program and raised about $350,000 at a $1.8 million valuation.

"With VSV, we do not have to care too much about meeting with investors, because they can help us a lot with...potential people who can invest," said Pham Kim Hung, the CEO who spent five years in Silicon Valley before co-founding TechElite back in Vietnam. "The government has to join and support startups in some way. It's critical for startups in Vietnam."

Tune back to CNET's Road Trip on Monday for the second part of a tour of startups in Vietnam, in which CNET visits a few companies that are trying to make it without government assistance, and chronicles some of the challenges they face.

Corrections, 11:10 a.m. and 11:35 p.m. PT: Corrected the amount that TechElite has raised, and later fixed the name of the Tech In Asia editor.

Road Trip 2015

CNET News' reporters embark on a global hunt for innovation. Join us to see where they land, the people they met, the innovations they uncover -- all from the comfort of your armchair.

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