Blockchain and AI bringing better value

May 04, 2024 | 22:36
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The combination of AI and blockchain technology is helping global venture capital flows gradually warm up after a long funding winter.

The combination of blockchain and AI is boosting value for businesses, according to Nguyen Ngoc Hung, vice chairman of the Investment Promotion Committee under the Vietnam Blockchain Association, at a conference last week.

Blockchain and AI bringing better value
Blockchain and AI bringing better value

“There are many startups that combine AI and blockchain and raise capital from tens to hundreds of millions of dollars. This is a record capital call at this time, equivalent to $500-600 million in 2021 because investment funds currently do not have much money and are more cautious when making decisions,” he said.

According to Hung, AI needs to be trained via big data. However, the cost of such training is so expensive that even the biggest names in tech, such as Amazon, do not yet provide this service.

“The area that helps blockchain and AI interact with each other is decentralised physical infrastructure networks developed based on blockchain tech and other distributed technologies,” Hung said. “The combination of blockchain and AI in 9-12 months will become popular, as this is a big trend for training AI and creating images for games.”

According to Statista, Vietnam is a promising land for startups in blockchain and AI thanks to its young, dynamic technology workforce, nurtured by an advanced education system and support from the government.

Vietnam currently ranks fifth globally in terms of blockchain technology adoption, with many businesses with investment capital of over $100 million. Statista predicts that the Vietnamese blockchain market will grow strongly, expected to reach $2.5 billion by 2026 with a compound annual growth rate of up to 78 per cent.

Meanwhile, International Business Machines from the US estimates that the scale of the generative AI market in Vietnam will reach more than $100 million this year and will contribute over $583 million to the digital economy by 2030.

Hoa Ha, chief operating officer of Spores Network, said that the capital raising journey of startups in blockchain and AI is almost approaching.

“Raising capital in the blockchain market has been tough for several years and has only shown signs of heating up again since the beginning of this year,” Ha said. “If capital raising for blockchain projects in 2021 was more than $60 billion, by 2023 it was only one-third of the figure. In contrast, AI funding since 2021 has doubled, from about $4.7 billion to $10 billion in 2023.”

Even traditional startups are increasingly applying these two technologies to operations and product development. Nguyen Minh Tuan, CEO of AFA Capital, said that verifying customers’ identities caused the company to face a high risk of fraud. The company was forced to apply blockchain to record the entire customer reward system and now uses AI technology to classify customer requests.

This has incurred more costs, and calling for more capital is a mandatory requirement when the company reaches one million users. “The costs for technology startups are huge. We are raising series A capital to develop products and services to better serve customers,” Tuan added.

AFA Capital is an independent and comprehensive service provider in corporate finance and personal finance management, founded in 2009.

Nguyen Ngoc Huong Thao, representative of AVV Investment Fund, commented that in a young market like Vietnam, almost all industries open up many opportunities for startups to develop and attract capital. However, each fund has its own preferences and priorities to choose.

“Some fields such as fintech and edtech, especially startups using AI, will receive priority from many foreign investment funds in the future due to the size of the markets and the favourable times they bring,” Thao noted.

Around the world, top tech businesses are spending billions of dollars investing in AI. Amazon at the end of March announced it would pour $2.75 billion into AI startup Anthropic, in Amazon’s highest-value venture.

Meta has also spent billions of dollars on Nvidia graphics processors, one of many companies that helped the chipmaker increase its 2023 revenues by more than 250 per cent.

Previously, Microsoft started investing in generative AI with an investment of $1 billion in OpenAI in 2019, and gradually increased the investment scale to about $13 billion.

According to startup site, AI companies raised $11.4 billion, or 17 per cent of total funding globally, in the first quarter of 2024. AI is also a field the world’s second-largest capital attraction in the first quarter of the year, only behind healthcare and biotechnology companies with $15.7 billion.

Cris D. Tran, development director The Sandbox

Investors in the blockchain market are currently more cautious and hesitant when it comes to larger investments, as they are uncertain about effectiveness. When selecting a project to provide funding for, investors typically focus on what makes the project’s product unique, whether it has been tested, and whether it has gained market acceptance.

Therefore, it is extremely difficult to raise an investment capital of about $100-150 million in blockchain and AI startup projects at this time. Startups that can attract such funding to build a future-proof product are indeed rare.

The investment funds’ focus in both the blockchain and AI sectors is currently on the virality of the product. For them, a successful tech product must entice users and require minimal reliance on SEO or marketing tools. This demonstrates that the business is operating well, has the ability to generate revenue on its own, and has a proven business model.

Additionally, startups also need to consider capital costs when seeking funding. Before the US Fed’s interest rate hike, there was a significant influx of capital into startups. However, in the current climate, funding is primarily directed towards startups that can demonstrate real cash flow.

The strength of the startup market in the blockchain and AI sectors in Vietnam lies in its fast adoption of tech. However, the Vietnamese market lacks a solid foundation for extensive AI research, and the workforce is not keeping up with the pace of technological advancements. As a result, it can be challenging to gain trust from investors.

As a startup operating in the blockchain and AI space, The Sandbox Vietnam is well aware of these challenges. We are eager to collaborate with partners on the Web 3.0 platform to build suitable spaces and campaigns. We are interested in partnering with education or investment-focused entities to incorporate more blockchain elements into our product.

Do Ngoc Quynh, general secretary Vietnam Bond Market Association

The bond market is not typically considered a suitable fundraising channel for startup companies in general, and particularly for blockchain technology-based startups.

The architecture of the financial market is designed to cater to different risk appetites, with different types of investors at each risk level. This results in the formation of various financial intermediaries, tools, and investment products. In developed countries with strong economies, such as the United States, many projects in the research and development (R&D) phase still engage investment funds despite the presence of various risk factors.

Meanwhile, the Vietnamese financial market, being relatively underdeveloped, is currently lacking in venture capital funds and mechanisms to provide financial resources for startup enterprises, particularly those in the R&D phase, as they are considered to have a higher level of inherent risk. Indeed, if successful, these projects or enterprises have the potential to generate profits multiple times over.

On the other hand, established businesses with tangible products will find it easier to access capital. However, the profit rate may be around 20-30 per cent.

In the current challenging economic context, investment funds will be more cautious when making decisions. They will not want to enter the pre-seed, seed round, or Series A rounds. They will only make decisions when they see clear opportunities.

Even with the current Switch Up Accelerator funding model supported by the Vietnam Blockchain Association, the majority of capital comes from foreign sources. This is because, in the Vietnamese cultural and business environment, there is a lack of investors with such risk appetite and perspectives.

With the development of legal frameworks and the market economy, Vietnam is expected to gradually attract risk-taking investors with global mindset and appetite in the near future. Indeed, at the current stage, early-stage startups still heavily rely on foreign venture capital funds rather than domestic ones.

Furthermore, AI and blockchain are just a part of the global trends such as digital transformation, environmental, social, and governance criteria, and green development. Startups also need to pay attention to the evolving global trends in order to seize opportunities.

Phan Duc Trung, vice chairman Vietnam Blockchain Association

Blockchain and AI are two distinct technologies. AI is currently in need of significant funding, and small-scale global AI startups need about a few hundred million USD to several tens of billion USD. Most startups aim to build AI models that can assist users globally, and these AI products primarily use the English language. Consequently, processing Vietnamese language for Vietnamese users would indeed incur additional costs.

Meanwhile, the capital market for blockchain technology is not a concern. Blockchain does not require any external capital incentives other than a legal corridor because this market already attracts capital by itself. According to statistics from Chainalysis, the amount of money flowing into the Vietnamese blockchain market from July 2022 to July 2023 reached $120 billion.

AI requires capital, while blockchain does not necessarily require capital but relies on legal frameworks. Both environments require legal considerations in the process of raising funds, but at different scales. While AI demands significant capital investment, blockchain requires proof of legitimate sources of funding.

Vietnam is a country that has shown great absorption of foreign direct investment and possesses a relatively stable market in terms of exchange rates and interest rates. This creates improvements for foreign investors to bring in capital, but it also carries risks as they may have excessively high profit expectations. If not met, investors will redirect their investments to neighbouring countries. According to our recent data, Vietnamese startup companies in the blockchain and AI sectors are currently being valued lower than companies in the region by around 35 per cent.

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By Tra My

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