One of the major challenges that start-ups face in the early stages is access to finance. Majority of new business ventures are funded with informal capital often sourced from business owners themselves, or their family and friends. However, with the accelerated growth of start-ups traditional informal sources of funding no longer suffice. This is where private equity plays a major role in addressing the funding gap.
This article provides a brief overview of private equity financing options for Singapore start-ups.
Singapore's Equity Financing Landscape
Equity financing refers to share capital from investors who are looking at capital gains and possibly dividend returns. 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. The best source of private equity capital for start-ups in the seed stage are business angels.
• Venture capitalists are professional investors who play a very active role in your business. 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 returns 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 is the third source of private equity. 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 the business. Their main purpose is to receive returns on their investment. Such funds are only suitable for those businesses that are already established, are generating revenue, and have a high growth potential.
Angel Investment 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 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 favour of most business angels.
• 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.
Venture Capital (VC) 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 mature companies, rather than early-stage financing in 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 VC firms to finance-associated VC firms to corporate-affiliated VC 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 VC 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 VC investments were directed towards high-return sectors such as biotechnology, medicine, genetic engineering, etc.
• On an average, VCs invest four to five times the net earnings of a company.
• Generally, VC investments last between 2-5 years.
• Businesses that are likely to turn into multi-million dollar companies in due course are most favoured by venture capitalists.
• Venture capitalists expect an ROI of at least 25%-30% for each year of investment.
Private Funds in Singapore
• Private funds are setup by financial institutions, banks, or investment companies.
• Usually, private funds do not invest in early-stage or developing start-ups.
• Established start-ups that already in operation and demonstrate high growth potential are preferred by private funds.
• Private funds do not offer management and technical expertise; they only provide funding.
• There are different types of private funds such as:
o Independent funds: Such funds are typically setup by wealthy individuals, cash-rich companies or families.
o Institutional funds: Such funds are setup by banks and financial institutions.
o Corporate funds: Large companies setup a separate fund in order to invest in smaller companies.
Business Angels, Venture Capitalists, Private Equity Networks in Singapore
There are several networks in Singapore that help match start-ups with business angels and venture capitalists. Some of these networks 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.
• Singapore Venture Capital Association (SVCA): The Singapore Venture Capital and Private Equity Association (SVCA) was formed in 1992 under the patronage of the Economic Development Board (EDB) to promote and foster growth in this sector.
• Singapore Investment Network: Provides access to one of Singapore's largest databases of angel investors who are regular investors in various industries across Singapore.
Private Financial Institutions in Singapore
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
Government Equity Funding in Singapore
The Singapore government helps start-ups raise private equity by setting up government venture capital funds and co-investing in start-ups. Some of the government funding schemes include the following:
• Business Angel Funds: Business Angels Funds (BAF) is an equity co-financing assistance scheme offered by SPRING Singapore to innovative, seed or early-stage Singapore-based start-up companies that are less than five years old, that are developing innovative products or processes for the global market, and that have a minimum paid-up capital of S$50,000. SPRING will provide dollar-for-dollar matching for investments made by pre-approved business angel groups up to a maximum of S$1.5 million. The minimum investment per start-up by the pre-approved business angel group must be at least S$75,000. SPRING and the business angel group will take equity stakes in the company in proportion to their investments.
• Start-up Enterprise Development Scheme: The Start-up Enterprise Development Scheme (SEEDS), offered by SPRING Singapore, is an equity-based co-financing option for Singapore-based start-ups creating innovative products and/or processes, possessing intellectual content and demonstrating strong growth potential across international markets. The start-up must be a Singapore-based company that is less than five years old with a minimum paid-up capital of S$50,000 and a maximum of S$1 million and must be carrying out its core activities in Singapore. SPRING will provide dollar-for-dollar matching for investments made by private investors up to a maximum of S$1 million. The minimum investment per start-up by the private investor must be at least S$75,000. SPRINGS and the private investor will take equity stakes in the company in proportion to their investments.
• EDB Investments: EDB Investments (EDBI) is a Singapore-based investment firm and an arm of the Economic Development Board of Singapore that invests in start-ups in the following sectors: Biomedical sciences, clean technologies, digital media, as well as other key industries in Singapore.
• Infocomm Investments Pte Ltd: Infocomm Investments Pte Ltd (IIPL) is a wholly owned subsidiary of the Infocomm Development Authority of Singapore (IDA) that invests in growth-stage Infocomm enterprises.
• i.MATCH: i.MATCH is a government initiative that helps raise equity for Interactive Digital Media (IDM) start-ups. On top of the private investments, the companies also qualify for R&D grants or co-investment by SPRING Singapore.
• TIF Ventures Pte Ltd: TIF Ventures Pte Ltd (TIFV) is a government-owned fund-of-funds management company and a wholly owned subsidiary of the Economic Development Board of Singapore. TIFV invests primarily in venture capital funds across geographic regions, high-tech and high-growth industries.
On a Final Note
In order to have a good chance of securing private 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.
URL : http://www.guidemesingapore.com/company-setup/c937-raising-private-equity-capital-singapore-startups.htm