3rd Creek Foundation (3CF) and Thriive Impact Investment Fund (TiiF) are pleased to announce our first impact co-investment in Hanoi, Vietnam! Pham Hong Van, owner of Smiling Mushroom has been approved for a debt investment of $35,000. Van is strongly committed to helping other women and disadvantaged people obtain jobs, while improving the treatment of and benefits for her employees, and improving the environmental practices of her business.
Van is incredibly passionate about producing healthy and conveniently ready-to-eat mushroom floss and mushroom sausage for Vietnamese families. In 2012, her early-stage small business received a $9,047 pay-it-forward loan from Thriive, enabling her to grow her business substantially when no one else would consider providing her with financing. Van is now ready to expand her impact through continuing the growth of her business supported by financing from TiiF and 3CF.
Making an impact investment in Vietnam
In this blog, we would like to share our experience with debt investments in Vietnam. To make a debt impact investment in Vietnam, there are two major processes: (i) find the business, and (ii) make the investment.
In finding a candidate for our investment, it is important that we have well thought out selection criteria and a sound due diligence process. Our goal is to find the businesses with capital needs of up to $50,000 who demonstrate potential to grow and create our target social and environmental impact. After soliciting applications from businesses we are familiar with from our core Thriive program, we shortlisted two businesses for which we conducted full due diligence. The process takes time and persistence to ensure all the necessary information is collected from the business and both the projected impacts and business growth are in line with the goals set out by both 3CF and Thriive.
In making the investment, the most challenging process is to register the loan with the state bank of Vietnam. This legal process will only allow the investee to wire repayment out of the country within one year without full registration of the loan. In order to increase the terms to 3 years, we must go through the registration process, which can be costly and time consuming. After much research into the cost of hiring a lawyer and the process itself, we decided to conduct the registration process ourselves. We worked hard to prepare and submit all the necessary documents including the loan registration form, loan contracts, the company’s legal registration documents, and a thorough business plan. We are currently waiting for the final approval.
There are key challenges we faced during the process and lessons we have learned for our future investments.
- Investment readiness: Most applicants to our investments are in the first 5 years of their business and are often working to redesign their business model and create new revenue streams, making them a riskier investment.
- Lack of audited financial data: It is common in Vietnam that businesses keep two sets of books. One is used for reporting to the tax office, and another is used for internal decision making. As the official reported financial data are normally shortened/reduced, we must rely on self-reported internal financial information. Furthermore, many of the financial transactions are in cash and not shown on any bank statements. The business finances might also be mixed between personal and business accounts. Each of these issues makes it increasingly difficult to verify the business’ financials.
- Legal process and regulations: We are still in the process of submitting the loan registration documents to the Vietnamese state bank and, as is common in Vietnam, it is difficult to know how long the registration process will take. Although it is stated in the law that the approval should be made 15 days after receiving the full set of documents, requirements on revising the documents may take additional days.
Why impact investments in Vietnam are important
Impact investing in Vietnam is a worthwhile endeavor for several reasons:
(i) Small and medium enterprises (SMEs) account for 97% of total registered companies in the country and encounter many barriers with access to finance.
(ii) Vietnam's businesses experience strong potential for growth as the economy is developing in a stable economic and political environment.
(iii) There is high potential to create much needed social and environmental impact, including but not limited to job creation for low income and disadvantaged populations.
With our first investment in Smiling Mushroom, we expect Van to create 14 new jobs with commitment to hire 80% women and 80% from low income and disadvantaged backgrounds; increase the number of small holder farmer mushroom suppliers; increase salaries by at least 20%; increase employee benefits such as health insurance and paid time off; and improve environmental practices that will enable her to use 40% less energy and 70% less water.
Huyen Huong is International Program Officer at Thriive.
Laurel Williams is Chief Operating Officer of Thriive.