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Major Points About Venture Capital in Singapore

Jimmy Hsu, TIF Ventures


Reprint Permission from Aspatore Inc., All Rights Reserved

Bullet Points

  • The government is active in creating a good environment for investments and attracting VC setups in Singapore.
  • Singapore is a VC hub, attracting technology companies from around Asia.
  • Startups get funding from the government, business angels and boutique funds.
  • Venture capital/private equity funds are not limited to local firms, but flanked by big funds from US, Europe who set up satellite investment arms to invest outside of their homeland.
  • Later-stage deals tend to involve more international investors, with a base in Singapore.
  • Exits are primarily made through trade sales with foreign companies or IPOs at the local stock exchange.

General Practices

The VC industry in Singapore is still in an early stage. The process is still fairly new to the country, and the number of brand name VC firms (as opposed to buyout firms, for example) is relatively few. Having said that, there are investment firms here that have been operating since the 1980s, but they do not invest in the narrower technology/hi-growth companies that form the bread and butter of VCs' investments. These firms cast their nets into the wider area of traditional industries including food and logistics.

The Singapore government has played a key role in developing the industry since the 1980s. But the establishment of the Technopreneurship Investment Fund (TIF) in 1999, with the goal of encouraging VCs from overseas to set up their Asian operations in Singapore and the private sector to set up firms indigenously, has spurred the greatest growth in the VC industry. These development efforts are ongoing, and fund investments related to these efforts are channeled through the fund-of-funds investment arm of the Singapore Economic Development Board (EDB), TIF Ventures Pte Ltd.

The Singapore government is also an active direct investor through other government-related organizations such as Temasek, EDB Ventures, IDA Investments and Singapore Technologies Group, providing seed and early stage funding for startups. In particular, EDB introduced a Start-Up Enterprise Development Scheme (SEEDS) in 2001, to help start innovative enterprises. Under SEEDS, EDB co-invests with third party investors in early seed stage start-ups on a matching basis up to $300,000. Like most government related investments, these are primarily catalytic in nature, with the aim of encouraging entrepreneurship in Singapore. Other early investors are business angels who are usually successful businessmen and boutique fund managers. Additional active investors include Rothschild, Jafco, Enspire, Fortune and Walden.

With its reputation as a financial center and the pro-enterprise environment developed over the years, Singapore is attracting more and more regional start up companies. Singapore is seen as the place to find funding for good, growing companies, and they take advantage of the many favourable conditions offered here. For one, our traditional strength as a hub for MNCs is one of the compelling factors. Though our indigenous market size is small, it is multiplied many fold by the presence of some 6000 MNCs primarily from the US, Europe and Japan. In addition, various foreign incubators are setting up here to help their start-ups and technology enterprises use Singapore as a launch pad into the global market. These include the China's first overseas innovation centre, the India Centre, the Japan Business Support Centre, the German Centre and Korean Venture Acceleration Centre. All of these make Singapore an ideal hub for VCs in the Southeast Asian region. As such, deal flows for local VCs are varied, as they encompass all kinds of technologies and geographies, attracting entrepreneurs from the immediate region as well as from China, India, Australasia and Korea.

Consequently, deal evaluation and due diligence are somewhat complex, as the typical Singaporean VC has to conduct cross-border investments with different market economics, legislation and so on. It is not uncommon for initial investments to take the form of convertible loans until milestones are met, and these are converted to equity for the company. Deal terms vary but are typically modeled on the U.S. VC prototype. The investment vehicles change considerably depending on the location of the startup.

Deal syndication is common in Singapore, especially at the early stage. This is due to the relatively small number of VCs in the country and the lack of a sizeable VC pool that can take great risk. A feature of early-stage venture capital in Singapore is the disproportionate presence of VC funds, which are privately financed by wealthy technology entrepreneurs. These funds act much like angel investors and are significant players.

The trend for VC investing in Singapore becomes more cosmopolitan in the later stages, with foreign VCs and traditional PE players getting a slice of the action. Foreign VC firms are beginning to make their presence felt in local investments, and the relationships between local and foreign VCs have been good.

A Unique Market

Singapore does not have a large domestic market, but it is within a seven-hour flight of close to a three billion population in Asia and Oceania. To grow a successful startup, a VC has to be "export-oriented" and possess intellectual property that has a global market and is able to cross national boundaries easily. It should also have high entry barriers.

Singapore is also in a unique position in that 40 percent of the more than 7,000 multinational corporations here have their Asian headquarters here. In turn, startups are attracted to Singapore, in order to serve these global, multinational customers.

Several factors set Singapore apart from the rest of Asia. First, Singapore has a stable financial and political environment that supports growing businesses. In addition, the legal infrastructure in Singapore protects intellectual property, which is a motivation for startups to develop their proprietary products here. Finally, as one of the few financial centers in Asia, Singapore provides many innovative instruments of funding, from seed money to private placements and from VCs and buyout funds to public offerings.

It is also worth noting that the laws in Singapore are continually revised to create a pro-business environment. For example, recent changes make it easy to set up companies in Singapore: Foreign entrepreneurs can apply for visas that allow an extended stay in the country to facilitate setting up businesses. The corporate tax rate was also recently lowered.

Major Players

Although the government's influence is important in Singapore, it declines as a startup matures. There is a strong core of angels in Singapore, who are savvy investors whose companies have obtained a halo effect as a result of their efforts. Corporate VC programs were once strong but have declined since the dot-com crash. Foreign and local VCs are beginning to increase their activities, with large amounts invested in foreign and local startups.

In Singapore, deals tend to be referred from other investors in the industry, ranging from business angels to VC players. The preferred method is personal introduction. Serial entrepreneurs or deals backed by experienced investors are the ones that most often receive funding.

In terms of investors into VC funds, the government, corporations, wealthy individuals and banks predominate. Some insurance companies are starting to look at investing in VC funds.

Looking at Opportunities

When evaluating an investment, we look at the following:

  1. Market opportunity, technology innovation and capability, the people behind the company (founders, management and investors).
  2. Opportunities from corporate spin-offs, entrepreneurs, referrals from other investors, research institutes and universities.
  3. Business plan and strategy.
  4. Product competitiveness and intellectual property value.
  5. Addressable market: size, trends and needs.
  6. Management: skills, experience and completeness of the team.
  7. Financial status of company: debt, AR, P/L, cash flow and so forth.
  8. Use of funding: cap-ex, op-ex, marketing and sales.
  9. Existing shareholders and makeup of investors.

When we actually value a company, we consider whether it is at the pre-revenue or post-revenue stage, profitable or breakeven. We also look at revenue or earnings multiples, depending on the stage of company growth, and the valuation of comparable deals done.

Details of a Deal

In general, term sheets are similar tothose of developed venture industries in US. Singapore VCs are well-versed in cross-border deals; most local deals contain terms similar to those used in overseas deals. However, there may be differences in conversion clauses, and registration rights may differ due to the rules and regulations governing business operations in different countries and IPOs in different exchanges. As for instruments used, the classes of stocks may be different in different countries, but the principles are similar, the use of shares with preferential rights, and ESOPSto protect investors' rights and motivate founders/entrepreneurs.

Stock options are increasingly used to motivate management teams to meet financial and operational goals. In this context, we typically look at milestones (in revenue, product development, sales and business growth), contributions made and funding obtained.

The board of directors has fiduciaries duties toward the governance of the company. Boards typically play an advisory role in guiding management in strategy, major business decisions and funding matters. Strategic direction of the company and business plans are discussed and approved by the board. In particular, the chairman of the board is usually very important in moving the company in the right direction for growth and marketing.

Timeline/Exit

For early-stage investments, our timeline for exit is about three to five years. External factors that affect this timeline are the timing of exit opportunities, the experience of the entrepreneur, the support of co-investors and the business environment in general.

In Singapore, financing rounds usually start at the seed stage. Early-stage investing comes when an entrepreneur has done proof of concept and is ready for development. The typical sequence of financing rounds is as follows: early, then A, B and C. Actual exit occurs through trade sales, M&A and IPO on the local or overseas stock exchange.

Looking Ahead

We invest primarily in early-stage, Singapore-based companies. Exceptions are made when overseas companies have recognized the potential of establishing operations or developing linkages in Singapore in the near- to mid-term. When companies are based overseas, we rely heavily on ourwidespread network of VCs whom we have invested with to conduct the due diligence and provide the intelligence for those markets. Depending on the stage of the company and how we can add value, we sometimes request for representation or observer status on a company's BOD.

Over the last few years, we have increasingly seen companies targeting new markets such as China and India, although the United States does remain the ultimate primary market for most startups. We've also seen an increasing role for top-tier fund managers to help their portfolio expand into these new markets. In the next few years, VCs will want to invest in companies based abroad that have synergistic and value-adding characteristics or have first-mover advantage. VCs will start to have a broader geographic view and invest more globally.

We have already started to see an upturn in the VC industry, both in terms of fund managers raising funds and the dollar amounts into investments made. This has followed the improvement in the local public markets, which in turn have trailed the U.S. public markets. Thus, there is a lag effect but clear signs of improvement. We think convergence technologies, digital TV, media and the biotechnology/healthcare sectors will be ripe for investment over the next few years.

To raise capital in the near future, entrepreneurs will need to balance their presentations and business plans toward financial investors instead of merely focusing on the innovation and technology. Meanwhile, local VCs will need to form meaningful syndicates with overseas firms that can help them move beyond the local markets.

Key Pieces of Advice

We think the best piece of advice for VCs doing business in our country is to focus on management, management and management. An important piece of advice for entrepreneurs is to be realistic about valuations. For management teams, they need to keep abreast of their industry and be ready to react to changes. Watch their cash flow and burn rate, know their competitors and be sure to work with partners and sell, sell sell. Startups need to understand that the world is not going to come to their doorstep for their product but to bring their companies to the top, they need to be out there selling their company and products.

In all, there are three keys to successful venture capital deals in Singapore: good management with operational experience, board members and shareholders that work well together and the right timing.


Jimmy Hsu, CEO

Jimmy Hsu joined TIF Ventures in January 2003 as CEO. Before this, he was the senior vice president from GIC Special Investments Pte Ltd, responsible for co-managing the TIF fund with NSTB. He joined GIC in 1986, first in the equities and bonds departments for 10 months before being posted to San Francisco as part of a team to manage U.S. private investments. He established a strong network with the U.S. venture capital and leverage buyout community and was responsible for investing several of GIC's private equity funds. In 1990, he was posted to London to start the department's European operations. He returned to Singapore in 1994 to head up N.E. Asian operations in private equity funds and co-investments before being tasked to co-manage the TIF Fund with NSTB.

Prior to joining GIC, he was with the Singapore Economic Development Board from 1977-1981 and was responsible for investment promotion and project appraisal. From 1982-1986 he was with British Petroleum in Singapore, Australia and London and worked in corporate and strategic planning. Jimmy has a B.Eng. with first class honors from University of Alberta, Canada. He also obtained an MBA from the National University of Singapore. He is a qualified Chartered Financial Analyst with the Institute of Chartered Financial Analysts, U.S.A.

About TIF Ventures Pte Ltd

TIF Ventures Pte Ltd (TIFV) is a government-owned fund-of-funds management company. It was incorporated in April 2001 as a wholly owned subsidiary of the Economic Development Board of Singapore.

TIFV was formed as part of the Technopreneurship 21 initiative, which is a government program to promote a viable and thriving sector of high growth technology-oriented companies in Singapore. Its role in this initiative is to develop the Venture Capital (VC) Cluster, achieved through the Company's three main activities: fund-of-funds investment (investment into VC funds), direct investment and venture services. Its main investment vehicle is the Technopreneurship Investment Fund (TIF), which currently has a fund size of US$1.3 billion. Through its strategic linkages with reputable VC firms globally, TIFV also catalyzes private sector institutional and corporate investments into the VC industry.

Annex

Graphic6

The relationship between the three parties shown -- entrepreneurs, venture capitalists and fund managers -- forms a virtuous self-reinforcing cycle. As a virtuous cycle, the pie keeps getting enlarged with each cycle (hence the outward facing arrows).

Institutional fund managers invest in venture capital funds to fund entrepreneurs with innovations that have global market potential. Flourishing businesses are either sold or go public, and the capital and profits are returned to investors, who reinvest the funds. At the same time, successful entrepreneurs become high-net worth individuals who set up foundation and endowment funds, thereby creating a flow of money into institutional funds. And the cycle repeats. With each cycle, the experiences of the U.S. and European industry show greater strengthening of this inter-connectivity.

The funds from the institutional investors ensure a continuous flow of capital into the VC industry, which continues to fund entrepreneurs with new innovations. In the United States, capital commitments are accounted for largely by endowments and foundations and pension funds, with the rest made up by financial and insurance funds. But individuals and families (and in the last ten years, we can safely conclude that this group comprises technopreneurs who have benefited through this cycle of funds) make up 22 percent of the total funds invested in venture capital. In Europe, the venture capital industry is not as developed, having emerged only in the early '80s. Pension funds and insurance companies make up 36 percent of total funds raised, with the rest of the funds channeled from banks, corporate investors and fund of funds.

In Singapore, venture capital is a little known asset class. TIF was created to kickstart this virtual cycle of fund.