Is the sweet deal for start-ups over?

Is the sweet deal for start-ups over?

Two generously funded government schemes for start-ups, which drew world attention for their success, are wrapping up after five years. But while the Government's National Research Foundation (NRF) has signalled that a scheme will continue in some form after the end-date of June, start-up investors are worried.

They wonder whether the new version will see them chipping in more funding themselves - and weathering more of the risk. And will it be mostly for high-tech ventures as in the past, or will other areas like advanced health technology see more of the bounty?

The two schemes were such a bright idea that they actually kick-started the start-up scene here. They are the Technology Incubation Scheme (TIS) and the Disruptive Innovation (DI) Incubator, which were introduced by the NRF in 2009 and 2008, respectively. TIS will end on June 30, while DI ended on March 30.

Of the 145 start-ups in which the NRF invested, a creditable 34 of them went on to be sold or publicly listed. Online video firm SyQic, for example, listed on AIM, a secondary stock exchange in London.

The two schemes involve the NRF co-investing with 16 approved tech "incubators", which are companies that help newbie start-ups develop by providing services such as seed funding, business mentoring and office space. The premise was that the Government would inject the bulk of the funding, with the investors running the incubators providing the rest, as well as mentorship to ensure that the start-ups had a good shot at success.

It was a sweet deal for the investors because the NRF provided 85 per cent of funding, with the incubator paying the remainder.

Each TIS grant is capped at $500,000. This means the incubator pays only $75,000. All the upside belongs to the incubator: Any time the start-up is acquired for a higher sum, the NRF just takes back its principal, including a 5 per cent interest for each year - and the investor pockets the rest.

The NRF has indicated that a new scheme will be announced after June. It provided no further details, except to say that the two schemes will be folded into a "new rationalised government equity co-financing scheme" which will make it easier for start-ups to apply for government grants.

But serial entrepreneur Leslie Loh, who runs incubator Red Dot Ventures, warned: "If the sweet deal does not continue, investors will be more prudent - which means fewer start-ups will be funded."

WHY THE SCHEMES WERE A SUCCESS

Since 2009, the NRF has invested about $70 million in the 145 start-ups , the majority of which are in the infocomm and communi- cations technology (ICT) sector.

Compared with the 5,000 start-ups set up in Singapore over the last few years , 145 may seem too small a number to create an impact. However, it is the TIS/DI schemes which created the impact here and globally. The world sat up and noticed that the Government was serious in supporting start-ups because it was willing to carry a higher risk of 85 per cent of each funding deal.

Mr Dennis Goh, partner at Wavemaker Partners, an approved NRF tech incubator, echoed other investors when he said that sinking money into tech start-ups based on innovative ideas with no commercial product and no revenue is very high-risk.

Hence, without TIS support, Wavemaker would likely have funded fewer start-ups, he added.

Mr Jeffrey Paine, partner of venture capital (VC) firm Golden Gate Ventures, said: "The commitment, capital and ongoing support from the Government have spread the risk for investors investing at early stages of the start-ups' lives."

The TIS became well known across the world and attracted venture capital firms and investors to Singapore like no other programmes have done in South-east Asia, he noted.

"It sparked the start of the South-east Asian start-up ecosystem, investor community and the ultimate density of founders in our region."

Mr Paine's firm was formed in 2012 by two American Internet entrepreneurs, Mr Vinnie Laurie and Mr Paul Bragiel. Mr Laurie had passed through Singapore while on a holiday and heard about the TIS. He liked it and convinced his friend Mr Bragiel to co-invest in a seed fund here.

In designing the two funding schemes, the NRF placed a lot of effort on selecting the right incubators. It believed that the serial entrepreneurs and corporate executives who set up the incubators could provide better guidance to the start-ups.

It was right.

A yardstick of TIS' success is additional funding, which was a sign that the business ideas could be commercialised.

Of the 145 start-ups that the NRF invested in, 61 raised follow-on funding totalling more than $210 million. The funds were used for business expansion and technical development.

Another way to measure success is exits - start-up jargon for acquisitions and public listings. Thirty-four were sold or publicly listed. Start-ups that were acquired include online fashion accessories firm Luxola, indoor wireless start-up YFind and online home- sharing service TravelMob.

It was these successes that provided encouragement to other entrepreneurs and amplified the opportunities in the start-up sector.

WHAT COULD A FUTURE SCHEME LOOK LIKE?

Definitely, the NRF will continue to finance start-ups. But what is the shape and form of the new scheme? At which stage of the ecosystem does it think the investor community will need incentives to help start-ups grow bigger and globalise?

This is what investors are most concerned about.

Mr Eddie Chau, partner in TNF Ventures, an NRF-approved tech incubator, said TIS was the engine which revved up the start-up ecosystem, but "the train hasn't arrived at the station yet".

More needs to be done to ensure that start-ups evolve to become successful small and medium-sized enterprises and, hopefully, into billion-dollar companies.

Investors point to the bigger funding needed, now that many out of the thousands here are maturing and need funding to expand.

The current investor community generally is still focused on the seed-funding stage. Such growth start-ups may have revenue, but are not profitable. They seek new markets overseas and need funding for further product development. If they do not get funding, they will fizzle out.

The size of each funding deal for such growth start-ups is above $5 million, and can go up to as high as $100 million and more. Currently, Temasek-related company Vertex Ventures is among a handful of VCs that can provide such funding deals.

What might investors see in the new TIS scheme? From my observations, indications from start-up community insiders and signals from the Government, a new scheme will take this form:

- The co-investing model will continue. The NRF seems to like experienced mentors giving the start-ups a helping hand.

- But there will be no more 85-15 sweet deals. The Government may consider 50-50 or, at best, 60-40.

- Increased funding may be given to start-ups in "deep" science, like advanced manufacturing and health, and biomedical sciences. These sectors require increased funding for equipment and several rounds of tests. Incubators skewed to these sectors will be encouraged, too.

- Funding for ICT will continue, but another cab-app firm like Uber, or e-commerce start-up, will not cut it. Only unique and highly innovative ICT ideas will be funded. The majority of the 16 NRF incubators which invest in ICT start-ups will continue to do so, albeit in fewer ICT start-ups.

So, investors need not worry. The start-up momentum is on a roll. The Government will continue funding growth start-ups to enable them to reach the next level of profitable and successful businesses - those worth above US$500 million (S$670 million).


This article was first published on April 30, 2016.
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