Singapore is an ideal location for starting up a business – The World Bank has reported that Singapore ranks first in the world on the ease of doing business, both in 2015 and 2016. The startup ecosystem in Singapore has also been growing and maturing – In 2015, Singapore was ranked 10th on The Global Startup Ecosystem Ranking, moving up seven ranks compared with the previous year. Startups in Singapore are able to benefit from the ease of doing business in Singapore, as well as the startup ecosystem which provides support not only from the government in the form of incentives and schemes that encourage innovation and entrepreneurship, but also the many accelerators, incubators and venture capital funds looking to nurture and invest in viable startups.
Fundraising is crucial to any startup as it provides the funds required to first, kick-start the operations, and subsequently, to develop and grow the startup. This article focuses on the various financing options for startups in Singapore.
The most straightforward way a startup can obtain funding would be through cash grants. These are outright grants disbursed by the government to the startup if certain prerequisites and conditions are met. Examples of such cash grants are the ACE Startups Grant and the Technology Enterprise Commercialisation Scheme (“TECS”), both administered by SPRING Singapore.
The ACE Startups Grant is provided to first-time entrepreneurs. The shortlisting of successful applicants is done on a competitive basis based on four key criteria: differentiation, business model feasibility, potential market opportunity, and management team. In addition, the company must not have received any funding for the proposed idea from another government agency. If successful, the applicant will receive S$7 from SPRING Singapore for every S$3 raised, up to a maximum of S$50,000. The grant will be disbursed over two to three tranches, conditional upon the satisfaction of certain pre-determined milestones. The successful applicant will also be matched with a mentor, who will support the sustainable growth of the startup in its first year.
TECS focuses on startups that have strong technology intellectual property (“IP”) and a scalable business model, providing early-stage funding to support the commercialisation of proprietary technology solutions. To apply for this scheme, the proposed idea must clearly demonstrate the application of technology, be of a breakthrough level of innovation, lead to or build on proprietary know-how/IP, and be commercially viable. Depending on the stage of development, applicants may either apply for the proof of concept or proof of value grant. For proof of concept projects, TECS will provide a cash grant of up to 100% of the qualifying costs for each project, subject to a maximum of S$250,000. For proof of value projects, TECS will fund up to 85% of the qualifying costs for each project, up to a maximum of S$500,000. Proposals for TECS are assessed for their innovativeness, technical feasibility and commercialisation potential.
Due to the nature of startups, traditional debt financing may be difficult or expensive as the startups may not be able to provide the necessary collateral and/or track record to satisfy the financial institutions as to their creditworthiness.
The Intellectual Property Financing Scheme facilitated by the Intellectual Property Office of Singapore (“IPOS”) allows companies to access loan facilities by using their granted patents as collateral. As part of this scheme, the government partially underwrites the loans granted by the participating financial institutions (DBS Bank Ltd, Oversea-Chinese Banking Corporation (OCBC) Ltd and United Overseas Bank (UOB) Ltd) to encourage these financial institutions to accept IP assets as collateral in support of the loan. Interest rates, repayment structures and collateral requirements are determined by the participating financial institutions. However, granted patents must form part of the collateral, and such patents must be valued by valuers on IPOS’ panel. Under this scheme, the participating financial institutions will be able to issue up to S$100.0 million of loans to successful applicants.
Other alternative sources of debt financing would be through crowdfunding, Peer to peer lending has been increasing in popularity in Singapore. Under lending-based crowdfunding, individuals lend money to a company and receive the company’s legally-binding commitment to repay the loan at pre-determined time intervals at interest rates. These interest rates are typically higher than those of traditional bank borrowings, but allow the startups to access cash without a potentially onerous due diligence process that is typically conducted by financial institutions. In addition to FundedHere, an equity and debt-based crowdfunding platform which was the first to be licensed by the Monetary Authority of Singapore in March 2016 for dealing in securities, there are several other platforms in Singapore currently that facilitate the debt crowdfunding process for startups.
Equity is a common form of fundraising for startups where capital is injected into the company in consideration for an ownership share in the company.
There are several government-supported equity investment schemes where the Singapore government become co-investor in startup companies together with other co-investor(s) from the private sector. Examples of such schemes are the Business Angel Scheme (“BAS”) and the SPRING Startup Enterprise Development Scheme (“SEEDS”), both administered by SPRING SEEDS Capital (“SC”), a subsidiary of SPRING Singapore specialising in investment activities.
Under BAS, when a startup obtains investment from any participating business angel investors, SC may match the investment dollar-for-dollar for up to a maximum of S$2.0 million. Both SC and the business angel investors will take equity stakes in the company in proportion to their investments. The applicant must be able to demonstrate substantial innovative and intellectual content for products, services and/or applications, and demonstrate high growth potential with clear scalability for the global market. Participating business angel investors include BAF Spectrum, Jungle Ventures and Majuven.
Under SEEDS, SC will match sums invested by third-party investors fulfilling certain criteria (such as a minimum paid up capital of S$500,000, possessing the necessary contacts and expertise to value add to the startup, a minimum investment of S$75,000 and conduct due diligence on the company), dollar-for-dollar, up to a maximum of S$1.0 million. The sum will be invested in tranches based on identified milestones. The typical investment period is about five (5) years. Both SC and the third-party investors will take equity stakes in the company in proportion to their investments.
In addition, SPRING Singapore also administers the Sector Specific Accelerator Programme with a total of S$70.0 million committed to encourage the formation and growth of start-ups in medical technology. Clearbridge BSA, Singapore Medtech Accelerator, Zicom MedTacc and Medtech Alliance have been appointed to identify and co-invest with SC, and to take a hands-on approach to help startups build their management teams, meet regulatory requirements and connect with potential customers. SC will invest dollar-for-dollar with the accelerators.
The Early Stage Venture Fund ("ESVF") is an initiative under the National Research Foundation ("NRF") which provides funds to certain corporations and venture capital funds to invest in early-stage technology startups based in Singapore. Since the ESVF was first launched in 2008, the ESVF has funded, through the private sector (generally comprising venture capital funds in the first two rounds of funding), approximately S$70.0 million in 145 startups. Of these, more than one-third drew follow-on funding – an important benchmark of success indicating a startup’s potential. In May 2016, it was announced that NRF will commit its third round of funding of S$40.0 million to match investments made by Capitaland, Wilmar International, DeClout and YCH Group dollar for dollar. These companies will be required to undertake five (5) years of active investments and another five (5) years of holding their investments.
The NRF has also indicated that a new government-equity co-financing scheme will be announced after June 2016, to make it easier for startups to apply for government grants.
In addition to government-supported equity investments, startups can also obtain equity financing (or a hybrid of debt-equity financing such as in the form of convertible loans) directly from investors. The funding amount for deals in Singapore has increased from US$80.57 million in 2010 to US$1.16 billion in 2015. There are various venture capital funds in Singapore investing in startups, many of which, such as Golden Gate Ventures, Jungle Ventures, and Red Dot Ventures, are also technology incubators, and who have participated in co-investments with the government under various schemes. While most private venture capital funds such as Golden Gate Ventures and Red Dot Ventures focus on early stage investment, corporate and institutional venture capital funds generally focus on Series A and beyond investments. These funds include Singtel Innv8 (the venture capital arm of the Singtel group), EDBI (the corporate investment arm of the Economic Development Board), UOB Venture Management (a subsidiary of UOB Bank), and Infocomm Investments (a subsidiary of the Infocomm Development Authority of Singapore). This is likely due to the difference in fund sizes and investment strategies. As an illustration, Golden Gate Ventures Fund II LP, a fund for Southeast Asian technology startups has a fund size of approximately US$50.0 million, focusing on investments of between US$250,000 to US$5.0 million. In comparison, Singtel Innov8 and Infocomm Investments each have a fund size of US$250.0 million and more than US$200.0 million respectively. UOB Venture Management targets companies at the growth stage, investing up to US$25.0 million per deal.
As compared with cash grants and debt financing, startups raising funds through equity (or a hybrid of debt and equity) and investors should consider the terms of the investments from third parties, such as whether the investors will be granted a board seat, voting rights, exit procedures and valuation, as well as liquidation and dividend priority, if any. In addition, investors may also wish to consider matters such as rights of first refusal on future fundraising by the startup, anti-dilution mechanisms, and reserved matters requiring investors’ affirmative approval.
As part of the startup ecosystem in Singapore, in addition to direct investments in the startups, the government also provides incubator support schemes to provide funds to incubators and accelerators instead, allowing them to be able to provide better support to startups.
One such scheme is the Incubator Development Programme (“IDP”) which provides up to 70% grant support to incubators and venture accelerators to enhance their capabilities and programmes to better assist innovative startups. The IDP may cover costs for operating expenses, as well as activities such as startup nurturing programmes and mentorship of startups. Incubators and accelerators currently participating in this programme include 3M Innovation Incubator, Microsoft Innovation Centre, and Singapore Institute of Technology and Design Enterprise & Innovation Hub.
Tax incentives are also available to startups, such as tax exemptions on a certain amount of taxable income if certain criteria are met, as well as other industry specific tax incentives. Angel investors investing in startups may also apply for tax benefits under the Angel Investors Tax Deduction Scheme. This scheme is available for angel investors who meet certain pre-requisites and conditions, such as a minimum investment amount of S$100,000 and an ability to nurture the investee companies.
Given the wide array of available funding schemes and methods, it is important to assess the options and consider the ones most appropriate and beneficial to the individual startup, based on its specific legal and business considerations. Apart from funding, there are also other legal and commercial considerations that may adversely impact the startup's business if not dealt with properly. Therefore, it is essential that timely support and advice is sought to ensure that all considerations are appropriately managed.
Disclaimer: The information contained in this memorandum does not constitute definitive legal advice and is for general information purposes only. The information contained herein does not purport to be exhaustive. Please consult a lawyer on any specific legal matter.