Venture Funding Options for Singapore Companies
In equity financing, you sell partial ownership of your company in exchange for cash. The investors assume all the risk i.e. if the company fails, they lose their money. But if it succeeds, they typically make much greater return on their investment than interest rates. Compared to debt financing, equity financing is far more expensive if your company is successful, but far less expensive if it isn’t.
The rise of Asia is rapidly spurring the birth of new startups and private equity players in Singapore. In recent times, the Singapore government has been actively encouraging more private investors to invest in the country’s numerous start-ups by introducing timely tax incentive schemes.
This guide provides an overview of the private equity financing options for start-ups in Singapore.
What is Private Equity Financing?
One of the major challenges that start-ups face in their early stage is access to capital. Many new business ventures are funded with informal capital often sourced from the founders, or their family and friends. However, often to fund their growth or to build out their infrastructure, informal sources of funding no longer suffice. This is where private equity financing can play a role in addressing the gap.
Private equity financing refers to capital from private investors who are looking at capital gains and possibly dividend returns in return for their investment in a firm. Private funding is an attractive source of start-up funding especially for businesses that do not have sufficient collateral for traditional loans. In order to have a good chance of securing equity capital in Singapore, you need to have a comprehensive business plan, a clear exit strategy, reasonable financial projections, an experienced management team, and strong growth potential. Determining the stage of your business life cycle is key to finding the right investor. Venture capitalists and business angels are the two major sources of private equity capital. Other sources of private equity capital include banks, investment companies and financial institutions.
- Angel investors are wealthy individuals who generally invest in high risk, early stage business ventures in exchange for a share of the business. In other words, business angels are private investors who invest their business skills and capital in start-ups and early-stage businesses in exchange for equity in the investee company. Business angels can operate independently or can be part of an angel network. They are usually interested in investing in start-ups that have high growth potential and that belong to business sectors that they are familiar with. Some business angels play an active role in the business in offering guidance, and mentor-ship to start-ups while some act as sleeping partners. The best source of private equity capital for start-ups in the seed or early-stage are business angels.
- Venture capitalists are professional investors who play a very active role in your business. Like most business angels, venture capitalists not only offer funding, but also advise you on how you can enhance the profitability of your business. Venture capitalists look for a higher rate of return from the company they invest in, usually 25% and above. Most venture capitalists prefer to invest in start-ups that are at advanced stage and are in high growth sectors such as biotechnology, nanotechnology, or IT.
- Private funds are the third source of equity financing for startups. Banks, financial institutions, and investment companies are the main sources of private funds. Managers of private funds are not interested in playing an active role in managing the business. Their main purpose is to receive an attractive return on their investment. Such funds are only suitable for those businesses that are already established, are generating revenue, and have a high growth potential and not start-ups in the early-stage of growth.
Angel Investment Scene in Singapore
- Angel investment is a significant source of raising capital in Singapore.
- Angel investors are typically successful businessmen with an appetite for start-up companies with higher risk.
- Usually, business angels offer early-stage investment to start-ups.
- Angel investors tend to invest in start-ups that have a certain competitive advantage in the market. This could include innovative technology, exclusive marketing and distribution relationships or a strong brand or access to scarce raw material, etc. The business idea should demonstrate that it will generate returns for the investors.
- Start-ups that have a high growth potential win the favor of most business angels.
- Angel investors not only provide funding but also offer mentorship and strategic guidance to the companies they invest in.
- According to research conducted by the National University of Singapore, business angels in Singapore tend to invest in the retail, hospitality and business services sectors.
- Typically, individual business angels invest anywhere between S$25,000-S$100,000, while angel groups invest much larger sums in the range of S$250,000-S$750,000.
- Angel investors often form angel networks or groups in order to pool their resources and capital. Angel networks are often a good source of capital for those seeking early-stage or seed funding. The networks help match entrepreneurs with appropriate business angels. Some of the popular angel investment networks in Singapore are listed below in the article.
Venture Capital Industry in Singapore
- The venture capital industry in Singapore is relatively new and small as compared to the US and Europe.
- The Singapore government plays an active role in attracting foreign venture capital firms to set up their regional base in the country. Today, there are more than 100 venture capital firms in Singapore.
- Venture capitalists in Singapore not only provide financing but also offer mentoring to start-up companies. Most entrepreneurs turn to venture capitalists for both financing as well as to gain access to professional management skills and expertise.
- It must be noted that most venture capital firms in Singapore tend to focus on “late-stage expansion financing” and investment in late-stage startups or mature companies, rather than early-stage financing in new start-ups. Certain venture capitalists prefer to invest in companies that are already making profits rather than investing in a potentially profitable start-up. However, some firms do offer financing for start-ups in their early stages.
- There are different types of venture capital firms in Singapore ranging from independent limited partnership venture capital firms to corporate backed venture capital firms. Due to attractive tax incentives and other beneficial government policies a number or cash-rich large corporations, government boards and high net worth individuals have setup venture capital funds in Singapore.
- Venture capitalists in Singapore pay a great deal of attention to the services industry, manufacturing industry, and the high-tech industry. In recent years a significant portion of venture capital investments were directed towards high-return sectors such as biotechnology, medicine, genetic engineering, etc.
- On an average, venture capitalists invest up to four to five times the net earnings of a company.
- Generally, venture capital investments last between 2-5 years.
- Businesses that are likely to turn into multi-million dollar companies in due course are most favored by venture capitalists.
- Venture capitalists expect an ROI of at least 25%-30% for each year of investment.
- Venture capitalists look for the following factors while investing in seed stage start-ups: A brilliant business idea that will have a competitive edge in the market such as a scientific breakthrough or IP; a top-notch team; business model innovations; and the economic and market benefits of the business plan/idea.
- The business team plays a key role in securing the favor of venture capitalists. More specifically, venture capitalists will look at how qualified the team is, what is the role of each team member, what are the technical skills they possess, etc.
- Venture capitalists assess the milestones that have been set for the business and how much capital will be required to achieve them.
- Venture capitalists assess the team’s understanding of the current market and competition.
- Venture capitalists are not interested in knowing long-term financial projections, unrealistic claims about how the company will grow and acquire a large customer-base in the short or long term, businesses that are solely seeking for funds without any guidance from venture capitalists.
Private Equity Fund Industry in Singapore
- Private equity funds are setup by financial institutions, banks, or investment companies.
- Usually, private equity funds do not invest in early-stage or developing start-ups.
- Established start-ups that are already in operation and demonstrate high growth potential are preferred by private equity funds.
- Private equity funds do not offer management and technical expertise; they only provide funding.
- There are different types of private funds such as:
- Independent funds: Such funds are typically setup by wealthy individuals, cash-rich companies or families.
- Institutional funds: Such funds are setup by banks and financial institutions.
- Corporate funds: Large companies setup a separate fund in order to invest in smaller companies.
List of Private Funding Resources in Singapore
There are several networks in Singapore that help match start-ups with business angels and venture capitalists. The country also boasts of investment funds that invest in innovative companies. Some of these networks and firms include:
- Business Angel Network Southeast Asia (BANSEA): Matches start-ups in the seed stage of enterprise formation with business angels. BANSEA invests in companies that offer exceptional opportunities for high returns on investment. This usually implies early stage ventures with the potential to achieve high growth, strong market position and sustainable advantages. BANSEA invests in companies that have the potential to grow to more than S$50 million in annual revenue within five years. This should be either in a developing market or in an existing market with international scope.
- Angel Capital Network: Invests in entrepreneurs and companies in a variety of industries and stages of development
- Business Angels Pty Ltd: Refers businesses to angel investors.
- Draper Fisher Jurvetson: DFJ invests in emerging technologies, from the Internet and life sciences to clean energy and nanotechnology.
- K1 Ventures Ltd: Invests across diverse industry sectors.
- Sirius Capital Holdings Pte Ltd: Is a boutique venture capital and entrepreneurial finance firm, focused on small and medium-sized companies in Singapore and overseas.
- Upstream Ventures: Focuses on early-stage venture creation by providing funding, expertise and networks to emerging companies
- Singapore Investment Network: Provides access to one of Singapore’s largest databases of angel investors who are regular investors in various industries across Singapore.
- Angels Den: A UK based angel network that has recently set up shop in Singapore. Business Angels primarily look for a profitable return on their investment within three to five years.
- 3V Source One Capital: Focuses on growth to late-stage companies with an Asian link or growth strategy.
- Extream Ventures: Is an early-stage venture fund focused on Asia-based technology driven companies in the areas of Internet (enterprise, consumer, retail), IDM (interactive digital media), mobile & wireless (applications & services), security & biometrics, and semiconductors (fabless design) It typically targets Singapore-based early stage companies with significant regional market opportunities. Extream Ventures assumes the role of lead investor in early stage companies, typically investing up to a maximum of S$3M per company 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: An international venture capital firm that provides seed and startup funds for emerging growth companies, as well as capital for expansion financing and acquisitions.
- 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: Focuses on Asia-based (preferably Singapore), early stage technology startups within 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 across 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 US$5-20 million in companies seeking venture capital or growth equity to accelerate their businesses
- Fortune Venture: Focuses in high-tech investments, specifically in software, information technology, and the Internet, areas which Singapore companies have strong domain knowledge and core competency
- GIZA Venture Capital: Invests in seed and early-stage technology companies across industries such as ICT, cleantech, and life sciences.
- Grove International Partners: Invests in companies whose underlying assets and businesses are 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: Invests in entrepreneur-driven companies that exhibit strong growth potential through scalability and the ownership of proprietary rights. Focuses on industry sectors such as education, green technology, oil & gas, resources 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: SingTel Innov8 (Innov8), a wholly-owned subsidiary of the SingTel Group, is a corporate venture capital fund that invests in companies in all stages of development, from seed to early growth. SingTel Innov8 invests in ideas, technologies, products and services that are related to the Group’s business including those in adjacent spaces such as internet applications and new digital media.
Some of the private financial institutions in Singapore include:
- Standard Chartered Bank
- Hong Kong and Shanghai Banking Corporation
- Development Bank of Singapore
- Oversea Chinese Banking Corporation
- United Overseas Bank
- GE Commercial Financing Singapore
- IFS Capital Limited
- Hong Leong Finance Limited
- Sing Investments and Finance Limited
- Singapura Finance Limited
On a final note
Private investors are increasingly turning their attention towards the Asia-Pacific and are relocating their offices, investing capital, and executing transactions in the region. With Singapore’s ascendancy as Asia’s entrepreneurial hub, more and more private equity investors are heading to the country in search of growth rates and opportunities that are currently hard to come by in more developed economies. Singapore government hopes to bring in angel investments to the tune of S$600 million by 2015. This is undoubtedly an advantage to start-ups that choose Singapore as their operational base.