Financial Incentives for Investors

Factors to consider when designing a legal framework to regulate venture capital investment activities include:

 Regulate the scope of venture capital (encouraging investment in the fields of technological innovation and high technology).

 The minimum amount of capital that the fund must mobilize within a period of time.

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 Minimum/maximum capital contribution limit that the fund holds in partners

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 Regulations on the holding period/withdrawal of capital of members in venture capital funds and in sponsored partners.

 Issues related to controlling the behavior and responsibilities of venture capital fund managers such as: regulations on the supervisory functions of the State Securities Commission, banks, auditing organizations, investors... for fund operations, the responsibility of disclosing fund information to individuals and related organizations...

 In addition, some countries also stipulate the type of assets that the fund must hold in its investment portfolio, in which the state encourages the holding of high-risk assets, such as India, which stipulates that assets in the form of shares must account for 80% of the fund's investment portfolio. In addition, many countries only encourage venture funds to invest equity capital in unlisted companies and start-ups in high-tech fields.

b. Improve capital market institutions to support venture capital activities

Institutions in the capital market have a mutual impact on venture capital investment activities. In which, the stock market plays an important role in the development of the venture capital market. Active activities in the stock market will create high liquidity for investors when the transaction is completed. In turn, the activities of issuing shares to the public by venture capitalists have a negative effect on the development of the stock market.

through the development and diversification of goods for the primary and secondary markets. The current lowering of listing standards and conditions for IPO implementation is necessary for the development of the Vietnamese stock market. The State needs to continue implementing strong policies to bring confidence to the public and institutional investors in the market such as closely monitoring the activities of listed companies, controlling fraudulent behavior in the securities trading process... The development of this market will create a playground to better attract equity capital from individual investors or institutional investors who are risk-averse and have an adventurous spirit in new technology fields.

Regarding the issue of venture capital supply, the top priority is still capital from foreign investors. Because the nature of venture capital activities is risky, the initial investment capital is quite large. Therefore, a policy to encourage foreign investors to contribute capital to investment funds in Vietnam will not only increase the supply of venture capital but also bring many useful experiences in the activities of investment funds. Therefore, the state needs to gradually increase the ceiling on the percentage of shares that foreigners are allowed to own in partners in Vietnam. The removal of this ceiling limit is related to the financial liberalization roadmap, but the state needs to prioritize the removal of this limit specifically for venture capital investment activities in the fields of technological innovation. Because this is a long-term investment activity and its development will contribute to promoting investment in new technology fields that have a strong impact on the quality of Vietnam's economic growth.

Another source of venture capital is from financial institutions such as insurance companies, banks, financial companies, and even other investment funds. In which, mobilizing capital from insurance organizations is more feasible because in fact, part of the investment activities of venture companies is similar to venture capital activities: capital trading. Some foreign insurance companies based in Vietnam also use their capital to contribute to investment funds abroad such as. Therefore, the state needs to encourage these financial institutions to invest in venture funds operating in new technology fields in Vietnam through preferential tax policies.

For commercial banks, the state should first encourage these organizations to finance enterprises to conduct LBO transactions, helping sponsored enterprises regain control and resolve conflicts arising between venture capitalists and enterprises when the transaction ends. Because when an enterprise issues shares to the public, the value of the enterprise's assets is determined by the market. Meanwhile, LBO transactions mainly depend on the initial agreement between venture capitalists and enterprises. If there is a certain intervention of the state (in the valuation of the enterprise's assets) and the objective participation of banking organizations in this process, it will contribute to resolving conflicts arising in determining the value of the enterprise's assets.

In addition, in the long term, the state also encourages credit institutions to lend to venture capital funds within a safe limit for the operation of the banking system. A problem that arises is that privately owned banking institutions in some countries often prefer to lend or contribute capital to venture capital funds rather than state-owned banks. Therefore, encouraging Vietnamese commercial banks to participate in venture investment activities must go hand in hand with improving the quality of operations of the banking system, gradually diversifying the forms of ownership of commercial banks, and strengthening the supervision of safety ratios in credit activities, etc.

Finally, to increase the supply of venture capital, the state needs to encourage large economic groups and large enterprises to establish venture capital funds to diversify capital contribution channels for the fund's operations as well as promote technological innovation in each specific industry and field. For example, encouraging the establishment of venture funds in the fields of post and telecommunications, aviation, electronics, IT, biotechnology, energy, etc. Capital contribution to these specialized funds can come from many different sources, not just depending on the self-capital of economic groups. Therefore, to promote capital increase for the operations of these funds, economic groups in the future need to innovate all operations according to the trend of knowledge economy, closely linked with innovation networks, promoting motivation.

opportunities and the need for technological innovation in the entire production and business activities to create many attractive opportunities for venture capital investment.

c. Create a healthy competitive environment and limit monopoly

The State needs to support and encourage a healthy competitive environment and limit monopoly in business. Only with strong motivation from market demand can enterprises truly carry out technological innovation. And when the motivation for technological innovation is promoted, it will lead to the emergence of demand for venture capital investment in the market. Two basic policies that the State needs to pay attention to when encouraging venture capital investment in the process of technological innovation include:

 Building a legal basis and institutions to effectively implement competition and monopoly control policies. To implement this policy, the state must ensure that all economic sectors are equal in accessing investment opportunities that are not restricted by law. If a private economic sector is suppressed and pushed out of the domestic market by the state economic sector operating with monopoly advantages, even if the state invests heavily in the science and technology system, it will still not improve the country's innovation capacity. Therefore, it is necessary to strongly implement policies to limit the monopoly of state-owned enterprises, accelerate the equitization and forms of purchasing, selling, and leasing state-owned enterprises, and create favorable conditions for the domestic private sector and foreign investors to participate in technology innovation investment projects.

 Improve the law on intellectual property protection to protect the rights and interests of investors in the process of technological innovation. Intellectual property rights play a key role and have a strong influence on the funding decisions of venture capital investors. A proposed project, even if it has a creative and feasible idea, but is easily copied and lacks state protection for those who own it, will hardly lead to the formation of an attractive investment business. Therefore, the state needs to reform the management mechanism and registration procedures for intellectual property protection in accordance with international treaties. In addition, the state

The country needs to implement appropriate sanctions against acts of intellectual property infringement to create a healthy investment environment that encourages the promotion of research and invention of new technology products on the market.

d. Encourage transparency in business operations

The State needs to implement policies to encourage financial transparency in all economic activities to limit risks for investors such as: perfecting the accounting system in accordance with international accounting standards, building a reasonable tax system to enhance the self-awareness of business people rather than imposing high tax rates and complicated regulations for practical application, encouraging non-cash payments in the economy...

e. Promoting entrepreneurship in society

The State needs to review and remove barriers to stimulating entrepreneurship in society. Entrepreneurship plays an important role in venture capital industries. A strong science and technology sector that lacks individuals with entrepreneurial spirit cannot create many attractive opportunities for venture capitalists. Therefore, the State must continue to encourage the stimulation of entrepreneurship in society through policies:

 Encourage cooperation between science and technology organizations and enterprises. Develop infrastructure with quality and low cost or equivalent to countries in the region.

 Limit direct state intervention in business operations.

 Remove procedural barriers in the process of establishing and operating a business.

 Eliminate procedural barriers when businesses implement preferential policies for investment in technological innovation.

 Facilitate exit when investors “fail” in the market through improving bankruptcy laws and related laws.

2. Financial incentives for investors

a. State investment in venture funds

Investments in venture funds using state capital represented by state agencies are an important way to stimulate venture capital currently being applied by OECD countries. The state's proactive investment in venture funds will contribute to strengthening the confidence of potential domestic and foreign investors, attracting them to invest in the fund. Some funds established by government agencies receive capital contributions from the private sector and are considered joint venture funds. State venture capital investment aims to solve problems related to insufficient capital for projects undergoing the high-tech incubation stage, with very high risks that make ordinary investors hesitant. Using state capital as seed capital for venture funds will have a significant impact on investors because it frees them psychologically in their investment decisions. It is also the basis for monitoring investment orientation in areas and stages of R&D that need priority development.

b. Venture capital credit

Venture capital credit is a source of capital for high-tech venture investment, of which a significant portion must be taken from development support funds and similar state support sources. This form can be applied in the following cases:

 Providing preferential credit loans to entrepreneurs to buy back shares in high-tech enterprises that have been transferred to investors (mainly venture capital funds) after using LBO techniques but still not paying off the debt to investors or to implement a recovery strategy (tunraround) for high-tech enterprises facing financial difficulties. This measure is mainly aimed at creating a final exit for investors in cases where LBO is unsuccessful.

 Lend capital to venture funds for establishment or capital increase, at a certain percentage of the fund's total operating capital.

c. Tax incentives

In general, tax incentives are needed to encourage investment in high-tech ventures. However, the experience of some European countries has raised questions about the effectiveness of such schemes in terms of costs to the state budget, returns to investors and the purpose of the investments. There is also a debate about whether tax incentives should apply only to direct venture investments in equity or to indirect investments in the form of venture funds. Tax incentives can lead to changes in investment concepts and behaviors. Tax-related measures can be disruptive in terms of principles, cost accounting and their structure within the tax framework. Key issues in drafting tax incentives for business innovation and technology development projects include:

 Cases of tax exemption and reduction;

 Exemption and reduction;

 Preferential investment types;

 Preferential purposes;

 Preferential time structure;

d. Subsidies (from state and social sources)

Subsidies from various sources are currently often made for the following two purposes:

 Partial risk compensation : Currently, only a few countries are applying subsidy programs to compensate for risks arising from investing in shares of high-tech enterprises. Subsidy plans for failed businesses are intended to share losses with venture capitalists. The loss rate must be high enough to see that a risk compensation is worthwhile. However, the compensation must only reach a certain level so that venture capitalists take on the responsibility as to ensure that they will soon abandon the investment when they see problems. In our country's conditions, when investing in shares has not yet become a familiar business practice, the state should consider proposing subsidies, which are of particular importance for venture capital in developing high technology.

Funding for high-tech project assessment activities . Some incentives are proposed to be applied to investment in technology development and innovation such as government-sponsored high-tech enterprise appraisal and assessment costs to reduce transaction costs. The State can encourage the development of technology assessment by:

- Partially support the development of support systems to reduce assessment costs, such as developing a database for experts to access innovation projects or computer-based defect detection systems;

- Prepare a subsidy plan for technology assessment activities and marketing plans to cover the costs of financial institutions in using certified experts and consultants;

3. Promoting venture capital in Vietnam

a. Building a general website about venture capital activities in Vietnam

Lack of information will limit the access of venture funds to suitable investment opportunities – potential high-tech projects while project owners looking for external funding feel frustrated because they cannot rely on anyone for their high-risk projects, which banks and other credit institutions do not want to target. The situation suggests that a dialogue channel should be established through a tool such as a venture capital website, maintained by the Vietnam Venture Capital Association (when there are a certain number of venture capital enterprises participating) or in the near future, it can be by the Chamber of Commerce and Industry, the management board of a high-tech park or a non-profit organization with a certain level of funding collected from venture capitalists and state funding sources. The presence of a website can reduce the high costs of finding investment opportunities. Building a venture capital website can include the following activities:

 Identify an organization that will take charge of designing and maintaining the website.

 Provide updates on the status of projects that need funding.