Why this Vietnam-based PE firm doesn’t bet on startups

Mekong Capital founder and partner Chris Freund (left) and partner Chad Ovel (right) / Photo credit: Mekong Capital

Founded in 2001, Mekong Capital is one of the oldest investment funds in Vietnam. The private equity (PE) firm has built a solid reputation for betting on popular consumer-facing businesses such as Mobile World, Pizza4P, Pharmacity, F88, Nhat Tin Logistics, and Maison Marou.

Out of the 41 PE investments that Mekong Capital’s funds have completed, it has fully exited from 28 firms. Its biggest exit to date is Mobile World, which went public in 2014 and generated a 57x return for Mekong Capital’s second fund in 2018.

The PE firm has maintained its stance of not putting money into risky startups with unproven business models, even when other VCs deemed Vietnam as the region’s next growth market after Indonesia.

Chad Ovel, a partner at Mekong Capital, spoke to Tech in Asia about why he’s seeing a shift from VC funding to PE money for some tech businesses in Vietnam amid this downturn and why biotech is a hot investment segment in the country.

In a recent interview, you mentioned that Vietnam’s startup valuations could plummet 50% due to a decline in VC funding. Could you elaborate on this observation? What is the impact of this scenario on Mekong Capital as a PE firm?

Ovel: To clarify, I was specifically referring to tech companies, not startups. Mekong Capital focuses on investing in businesses that have reached a more mature stage. However, I do think we’re experiencing an overhang in valuation expectations among many predominantly tech businesses in Vietnam.

We recently expanded our investment scope and went beyond traditional consumer sectors like retail, restaurants, and healthcare.

We’re actively meeting with mature tech companies that are transitioning from VC funding to PE money. Unfortunately, many of these tech companies still hold onto valuation expectations based on fundraising rounds that took place 18 to 24 months ago. As a result, they are struggling to raise capital as easily as they did before.

One question that I have frequently been asked is whether these high valuations are driven by founders’ expectations or by the VC funds that have backed these companies. If it is the latter, I think founders should have the flexibility to raise the capital at reasonable valuations the market is willing to pay.

For us, we are willing to invest in companies that have solid unit economics and a clear and exciting future vision.

In March, Mekong Capital announced it had invested US$20 million in financial services firm F88 via Mekong Enterprise Fund IV. / Photo credit: F88

Are companies shifting from VC funding to PE money because they’re maturing? Or is this happening because there’s a lack of venture capital at the moment?