Angels split on expected government pullback in seed funding

ANGEL investors (known also as angels or seed investors, who buy into fledgling companies) are split on an expected government pullback in funding for seed-stage startups. While some deem the likely cutback hasty given a still nascent angel investor market, others welcome it as a sign of a more private-led, sophisticated ecosystem.

The pullback, angels told The Business Times, will probably materialise after the ongoing revamp of two government seed funding schemes: iJAM, and TIS (Technological Incubation Scheme). The schemes - through which the National Research Foundation (NRF) co-invests in seed-stage startups alongside tech incubators - will be revised and possibly renamed.

An NRF spokeswoman told BT: "The government has made plans to streamline all publicly supported startup schemes in RIE2020 (the Research Innovation Enterprise 2020 plan) to make it easier for startups to apply."

Consultation sessions, including work for the Committee on the Future Economy (CFE), are afoot to gather feedback from the community - so that new schemes rolled out as part of RIE2020 will better address the "changing needs" of the Singapore ecosystem and benefit startups in the "next stage" of the ecosystem's development, she added.

Startups in deep tech (medtech, cleantech, and engineering), for instance, will enjoy greater funding support. Those in the ICT (information and communications technology) and IDM (interactive and digital media) sectors - credited with building a vibrant startup ecosystem in the past five years - may see curtailed backing.

Meanwhile, TIS (which NRF said has "served the Singapore ecosystem well") will continue "for the time being". Only iJAM's fate is up in the air.

According to Christopher Quek, director of iJAM incubator AGA (Angel's Gate Advisory), the scheme will officially end on March 31, with no direct substitute scheme likely to come. He said: "The angel investor market is unfortunately still not mature in Singapore. While there are initiatives to build an angel investor network here, it's still too early for the group to take over the big gap that iJAM will leave."

iJAM, which provides a startup up to S$250,000 in seed funding in two tiers, has since 2007 supported 393 Singapore-incorporated IDM startups, including live chat software maker Zopim, which in 2014 was sold for US$30 million to Nasdaq-listed customer support company Zendesk.

It is imperative that such a scheme stays, to promote Singaporean shareholder interests and ensure a healthy participation rate of Singaporean entrepreneurs - who may otherwise be crowded out of funding by global competition, Mr Quek added. That AGA has helped 35 Singaporean startups raise an aggregated S$5.6 million in angel or seed funding was "only achievable" with the support of iJAM.

Angels, Mr Quek stressed, are unlike venture capitalists (VCs). "Angels focus on the aspirations of entrepreneurs rather than the returns, as the chance of failure is 99 per cent. This mindset - willingness to offer funds and give others a chance - is not easily found in Singapore," he said.

VCs, who typically start investing from Series A rounds (the first round of venture capital financing after seed funding), are fund managers that are required to make returns on the fund. "Their mindset is more commercial, and they will likely never invest in seed-stage startups. Hence the need for seed funding," said Mr Quek.

Leslie Loh, managing director of TIS incubator Red Dot Ventures (which has since 2012 raised S$180 million for 20 startups) agreed, saying angel investing is a game for only the "very passionate", people who are usually entrepreneurs themselves.

A major pullback in government funding for TIS (a scheme that has backed 145 startups since 2008) will thus patently hurt the ecosystem, he said. A blanket removal of the scheme will as much as halve the volume of seed-stage deal flow, he estimated.

Currently, under TIS, NRF can co-invest up to 85 per cent of an investment (or S$500,000) in a Singapore-based startup on recommendation from an approved tech incubator - which will be required to co-invest the remaining 15 per cent, and provide mentorship to the startup. As an incentive, the incubator has the option to acquire NRF's stake in the startup within three years.

"The scheme was so attractive that it brought together the ICT and IDM ecosystem in the last five years, and created the vibrancy and momentum in the startup ecosystem today," said Mr Loh. While he does not expect the same level of government leverage (that is, an 85:15 co-investment ratio) in the revised TIS, he said the pullback must not be acute, and recommended a "middle-ground" ratio of 70:30.

The existent 85:15 co-investment ratio can still apply to deep tech startups, proposed Charlie Ill, investment director at Red Dot Ventures. "There aren't enough investors still to commercialise deep technologies, so a generous government leverage may encourage more of them," he said.

For all that, there are angels who cheer the likely cutback in government funding for seed-stage startups. Vinnie Lauria, managing partner at TIS incubator Golden Gate Ventures, sees the move as a long-term positive for the ecosystem as this means the entry of more private investors.

"Private investors tend to bring in a greater level of sophistication to an investment as returns are 100 per cent financially driven by industry experts, while government investments are driven both by financials and the goal of growing an ecosystem over the long term, which has been clearly demonstrated in the past five years," he said.

It's a sign of a maturing ecosystem, he added, that now has sufficient private investors in the market, and more private angel money going into seed-stage startups, such as from 500 Startups, East Ventures and KK Fund. The latter, a Singapore- based fund launched last March, targets very early Internet and mobile companies in South-east Asia, Hong Kong and Taiwan.

Said Koichi Saito, general partner at KK Fund: "When I look at a startup, it is all about the founder. Once I find good founders who can execute well, I do not have to wait until Series A."

NRF has not committed to a timeframe for the revised schemes.

jaccheok@sph.com.sg

This article was first published on March 14, 2016.
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