Options For Venture Funding For Singapore Companies
Equity financing involves the exchange of partial ownership of your company to investors in exchange for cash, allowing you to pay upkeep costs and expand. The investors assume the risk in this transaction, losing their money should your company go bankrupt. However, the potential returns are much greater than any interest that may accrue should your company be successful. The choice between debt financing and equity financing will depend on the long-term profitability of your company – should your company be successful, equity financing is a highly expensive option, as profits that would be going to you and other directors instead go to investors, but if your company is not, equity financing is far cheaper than debt financing.
The increasing maturity of Asia’s various economies has led to a rapid acceleration in the birth of new start-ups in Singapore and a simultaneous expansion in the local private equity market. The Singapore government has taken steps in recent years to encourage the growth of the private investor community in the country, and to attract both domestic and foreign investors to invest in the company’s start-ups through the introduction of tax incentive schemes.
Ottavia has prepared this guide to provide an overview of the private equity financing options available to entrepreneurs considering launching a start-up in Singapore.
What is private equity financing?
Capital is essential to the continued existence and growth of any business, but access to capital is one of the primary challenges that start-ups face. A surprising number of start-ups are supported through informal capital either provided from the personal wealth of the founders, or from their family and friends. When the time comes to grow the business, or to expand their infrastructure, informal sources of funding can be insufficient. Here is where many business-owners consider private equity financing to bridge the gap between their capital requirements and their available capital.
Private equity financing refers to capital provided to businesses sourced from private investors. These private investors will be seeking capital gains, and potentially dividend returns, in exchange for the capital they provide to the company. Where a business is starting with very few resources and lacks the collateral for a traditional business loan, private funding becomes an attractive option. Businesses with a comprehensive business plan, a clear exit strategy, reasonable and responsible financial projections, a management team with a reliable track record and past experience, and strong potential for short and long-term growth will have the best chance of securing equity capital from Singaporean private investors. Key to finding the most suitable investor for your company is determining what stage of the business life cycle your organisation is at. The two primary sources of private equity capital in Singapore are business angels and venture capitalists, but alternative sources exist. These can include investment companies, financial institutions, banks and others.
- Angel investors are wealthy private individuals who invest in high risk, early stage business ventures in return for a share or shares in the business. Operating as either an independent agent or as part of an angel network, they offer their business skills and capital to early-stage businesses and start-ups in exchange for equity in the company. Start-ups with high growth potential, belonging to business sectors the investor is familiar with are most likely to find success with angel investors. Depending on the preferences of the investor and the business’ management, as well as the circumstances and experience of the stakeholders, investors can choose to function as both sleeping partners, or may take an active role in the business providing mentorship and guidance. Business angels should be the first and primary source of private equity capital for start-ups in the seed or early stage seeking investment.
- Venture capitalists differ from angel investors in two key ways – the first is that they always play an active role in the running of the business, and they seek a higher rate of return from an investee company, usually exceeding 25 per cent. Like many business angels, they not only offer funding but guidance and mentorship to management, helping them shape the company from its earliest stages. The majority of venture capitalists prefer to invest in start-ups that have reached an advanced stage in sectors with a high growth potential, such as information technology, biotechnology or nanotechnology.
- Private funds are the third source of equity financing for start-ups. The primary source of private funds are financial institutions, investment companies and banks, and are usually only sought out by a business with a high-growth potential that has already established itself and has begun generating revenue. Private fund managers do not take an active role in the running of the business, and their primary focus is on receiving a substantial return on their investment. They are not a suitable source of private equity capital for businesses in the seed or early-stage of growth.
The Singapore angel investment community – capabilities and trends
- Angel investment is a significant source of private equity capital for start-ups in Singapore.
- The majority of angel investors are previously successful businesspeople with a desire to help start-up companies with higher risk potential grow.
- Generally, angel investors offer investment to start-ups in the seed or early stage.
- Start-ups with a competitive edge of some description will tend to have an easier time attractive angel investment. This edge could be something like possessing an innovative technology, exclusive relationships with marketers or distributors, a strong brand or extensive industry experience or access to a rare or scarce raw material, et cetera. The key factor is that the business idea should demonstrate that it will generate returns for the angel investor.
- Angel investors are looking for start-ups with high growth potential – if you’re in a rapidly expanding industry, you’re more likely to be able to win the favour of business angels.
- Angel investors provide their investee companies with more than capital, but also offer strategic guidance to the business and mentorship to the management team.
- Industries such as retail, hospitality and business service sectors are the prime targets for angel investment, according to research conducted by the National University of Singapore.
- Angel investors with a shared vision or investing style often form angel networks or groups, allowing them to pool their resources and capital and benefit from a larger contact network. These groups are frequently a good source of capital for entrepreneurs seeking funding in the seed or early stage of their business. The networks function as feeders, matching entrepreneurs with the most suitable angel investor for their needs. Some of Singapore’s most prolific and popular angel investment networks are listed below.
- An individual angel investor will typically provide anywhere between S$25,000 and S$100,000 in capital, while angel investor groups provide larger sums in the range of S$250,000 to S$750,000.
The Singapore venture capital industry – capabilities and trends
- Compared to more established communities in the United States and Europe, the Singaporean venture capital industry is small and new.
- The Singapore government has sought to make Singapore a more attractive place to foreign venture capital firms and continues to play an active role in encouraging these firms to set up regional bases within the city. Today, more than 100 firms operate in Singapore, investing in local start-ups.
- Venture capitalists take an active role in the running of the investee start-up business, providing the management team with not only capital but mentoring. Entrepreneurs often choose a venture capitalist based not only on the amount of capital they can provide the company, but the professional management skills and expertise they can offer them.
- Most venture capital firms in Singapore provide investment for late-stage start-ups or mature companies, and primarily provide ‘late-stage expansion financing’ rather than initial funding for start-ups in the seed or early stage. Certain venture capitalists prefer to only invest in businesses that have already begun to turn a profit, rather than investing in those businesses that have the potential of becoming profitable in the future. That said, some firms do offer financing for pre-profitable start-ups in in their early stages.
- The Singaporean venture capital industry contains a diverse range of firms ranging from corporate backed organisations to fully independent limited partnerships. Attractive tax incentives form part of a suite of attractive government policies that is increasingly attracting more cash-rich corporations, government boards and high net worth individuals have established venture capital funds in Singapore.
- The Singaporean high-tech industry, manufacturing industry and services industry are all of particular interest to venture capitalists. A substantial portion of all venture capital investments have in recent years been directed towards medicine, biotechnology, genetic engineering and other sectors with a potential for high return.
- Venture capitalists on average invest capital equal to four or five times the net earnings of the investee company.
- Venture capital investments last between two and five years.
- Businesses with the potential to become multi-million dollar companies in the near future are those most likely to attract the attention of venture capital firms.
- A return on investment of between 25 and 30 per cent for each year of investment is commonly expected amongst venture capitalists.
- A company possessing the following qualities will be extremely attractive to venture capitalists:
- A top-notch management and technical team
- A brilliant business idea with a definite competitive edge – such as unique IP or scientific breakthrough – in a market
- Business model innovators
- Definite and significant economic and market benefits of the business idea or plan
- The business team plays a key role in the securing capital from a firm or individual venture capitalist. How qualified they are to see the company through to success, what role the each fulfil and their technical skills (where applicable) will all influence the venture capitalist’s decision.
- The milestones set for the business’ development and the level of capital required to achieve each will be closely assessed by the venture capitalist.
- The team’s knowledge of the current market and their competition, if any, will be scrutinised by the venture capitalist.
- Long-term financial projections, unrealistic claims about the company’s short and long-term growth potential – either in terms of revenue, customer-base or market share – or businesses that are solely seeking funds without guidance are of no interest to venture capitalists.
The Singapore private equity fund industry – capabilities and trends
- Private equity funds are maintained by banks, investment companies and financial institutions.
- In the majority of circumstances, they do not provide capital to seed or early stage start-ups.
- Established and well-developed start-ups that have already demonstrated a capacity for high growth and are already in full operation are the preferred investee companies for private equity funds.
- Private equity funds only provide investee companies with capital, not management guidance or technical expertise.
- Private funds take a variety of different forms, including:
- Independent funds – typically established and led by wealthy private individuals, cash-rich companies or wealthy families.
- Institutional funds – setup by banks and other financial institutions.
- Corporate funds – setup by large companies for the purposes of investing in smaller, developing companies.
Private funding resources in Singapore
Singapore is home to an increasing number of private funding networks that match entrepreneurs and start-ups with business angels and venture capitalists who share their goals and interests, as well as a range of investment funds supporting the development of innovative companies. Some of the most prominent firms and networks include:
- Business Angel Network Southeast Asia (BANSEA): BANSEA focuses on start-ups in the seed stage of the enterprise formation process, matching them with compatible angel investors. BANSEA targets companies with the potential for high returns on investment, usually implying companies in the earliest stages of development with a potential for high growth, sustainable advantages and the ability to quickly maintain a strong market position. As a rule, BANSEA invests in companies with the potential to grow their annual revenue to more than S$50 million within a period of five years in either an existing market with international scope or a developing market.
- Angel Capital Network: Invests in entrepreneurs and ventures across a range of industries and in every stage of development.
- Business Angels Pty Ltd: Refers businesses to suitable angel investors.
- Draper Fisher Jurvetson: Targets businesses with a focus on emerging technologies, including clean energy, nanotechnology, life sciences and the Internet.
- K1 Ventures Ltd: Invests across a wide array of industry sectors.
- Sirius Capital Holdings Pte Ltd: A boutique capital and entrepreneurial finance firm, supporting the development of small and medium-sized enterprises based both within Singapore and in other countries.
- Upstream Ventures: Provides funding, business expertise and connection to existing networks to early-stage ventures.
- Singapore Investment Network: Offers companies access to Singapore’s largest databases of angel investors, with a focus on serial investors across a variety of industries.
- Angels Den: A UK-based angel network that has recently established operations in Singapore. Composed of angel investors looking for a profitable return on their investment within a period of three to five years.
- 3V Source One Capital: Focuses on growth to late-stage companies with an Asian link or growth strategy.
- Extream Ventures: A venture fund targeting start-ups in the seed or early stage of development in Singapore, possessing significant market opportunities in a number of innovative and cutting edge sectors. Focused on Asia-based tech companies in areas such as security & biometrics, and semiconductors (fabless design), IDM (interactive digital media), mobile & wireless (applications & services), and the Internet (enterprise, consumer, retail). The fund prefers to assume the role of lead investor in early stage companies, offering investee companies as much as S$3 million in capital as part of a Startup or Series A round of funding.
- Bio Veda: Invests in health-care companies in the developmental or expansion stage.
- Walden International: A multinational venture capital firm providing seed and start-up funds for emerging growth companies, as well as capital for investee companies looking to expand their current operations or acquire other enterprise.
- Raffles Venture Partners: Invests in innovative start-up companies.
- OWW Capital Partners: Invests in service providers in infocomm technology, logistics, education/training, healthcare, financial services and consumer services sectors.
- BAF Spectrum: Focused on early stage technology companies located in Asia – with a preference for Singapore-based organisations – engaged in a range of sectors including digital media, internet and mobile consumer portals as well as R&D-intensive information technology.
- Enspire Capital: Invests at various stages of a company’s development, with a typical initial investment of US$1 million to US$3 million provided to businesses engaged in a wide range of high tech industries, in Technology, Media and Telecommunications (TMT) and Internet.
- The Carlyle Group: Invests up-to US$25 million in early stage companies.
- Adam Street Partners: Invests between US$5 and 20 million in companies seeking venture capital or growth equity to accelerate the development of their businesses.
- Fortune Venture: Focuses on sectors which Singapore companies have a proven track record for strong domain knowledge and core competency in providing investments for firms engaged in high-tech sectors such as software, information technology, and the Internet.
- GIZA Venture Capital: Invests in seed and early-stage technology companies across industries such as ICT, cleantech, and life sciences.
- Grove International Partners: Provides investment for companies whose core business and underlying assets are either real estate or real estate related.
- McLean Watson: Invests in a wide range of technology companies that address large, changing or expanding new markets.
- Tembusu Partners: Provides investment for entrepreneur-driven companies with a strong potential for exceptional growth through scalability and the ownership of proprietary rights, with a focus on sectors such as oil and gas, resources, education, green technology and healthcare.
- Vertex Venture Holdings: Invests in companies at various stages of development, be it seed or mezzanine investments, with deal size ranging from US$1 million to US$30 million.
- Singtel Innov8: A wholly-owned subsidiary of the SingTel Group, SingTel Innov8 provides capital for companies at all stages of development between the seed and early growth stages, putting a priority on companies dealing in technologies, products, services and ideas related to the Group’s businesses, as well as those occupying adjacent positions such as new digital media and Internet applications.
Singapore’s private equity fund industry is sizable and growing. Some of the private financial institutions providing capital investment for start-ups and new companies include:
- Hong Kong and Shanghai Banking Corporation
- Development Bank of Singapore
- IFS Capital Limited
- Hong Leong Finance Limited
- United Overseas Bank
- Oversea Chinese Banking Corporation
- Sing Investments and Finance Limited
- Singapura Finance Limited
- Standard Chartered Bank
- GE Commercial Financing Singapore
The Asia-Pacific region is becoming increasingly attractive to private investors around the world. More and more investors are making the decision to relocate their offices to the region, investing capital and executing transactions in a range of markets. With Singapore becoming the region’s premier entrepreneurial hub, an increasing number of private investors are choosing to engage with our country, recognising that our market offers growth rates and investment opportunities that are increasingly rare in the United States, Europe and other more mature markets. The accelerating pace of investment in our country can only be a good thing for start-ups that elect to make their base in Singapore.