Singapore VC: Silicon dreams

For $250,000, a group of professors and innovation experts at the Massachusetts Institute of Technology (MIT) will teach regions from around the world how to become the next Silicon Valley.

Eight teams are admitted each year to the university's regional entrepreneurship acceleration program. They must include representatives from government, corporations, academia, risk capital and the entrepreneurial community who attend four series of workshops over a 24-month period. Existing ecosystems are analyzed, development frameworks are drawn up, and regions can share experiences and best practice.

Participants must have innovation and entrepreneurial capacity - the ability to develop ideas and transform them into scale businesses - but this is impossible without the appropriate supporting networks, of which venture capital is one.

"The story they like to tell is of a professor from the engineering school going to lunch with a professor from the business school, and they sketch out on a napkin a plan that turns into a billion-dollar business," says Meng Weng Wong, co-founder of local incubator JFDI, who is representing Singapore on the program. "In Singapore, restaurants typically don't provide napkins so they wouldn't have been able to sketch anything. Sometimes it is these tiny cultural nuances that make all the difference."

Singapore has sunk billions of dollars into creating a technology hub by fiat. For many years regarded as a second-class citizen in Asia VC circles, trailing the likes of China and India, the city-state has reinvented itself as a hub for Southeast Asia. Incubation programs and research institutes have been reinvigorated, creating start-ups that not only address the local market but also reach into Malaysia, Indonesia and beyond.

Silicon Island, the recently launched venture capital affiliate of Singapore-headquartered PE firm The Northstar Group, took its name from the local ambition to recreate a portion of northern California's Bay Area.

"Just like Silicon Valley is a tech development location for the globe and the Western world in particular, Singapore is emerging as an important hub for developing solutions for not just the Singapore market but the region and ultimately the globe," says Shane Chesson, a former tech investment banker who leads Silicon Island alongside Hian Goh, an entrepreneur who set up the Asian Food Channel.

While policies fostering start-ups have undergone a marked transformation in recent years, the broader questions for the VC industry is how much more money is the government willing to spend and what happens when it does eventually step back. An entrepreneurial ecosystem requires careful nurturing; and long-term sustainability depends on social and cultural change as much as hardware.

New day, new dawn

This is not the first time Singapore has sought to emulate Silicon Valley. In 1997, Finian Tan, founder and chairman of Vickers Capital Group, was recruited as a deputy secretary in the Ministry of Trade and Industry (MTI), with the remit to turn the city-state into a technology hub. This resulted in the creation of the Technopreneurship Investment Fund (TIF), a $1 billion vehicle used to attract companies and venture capital firms to Asia from the US.

Some of the fruits of TIF's work are plain to see: it helped jump-start GGV Capital and brought the likes of Draper Fisher Jurvetson to Asia. However, the primary focus of their activities was China.

"We said, ‘Come to Singapore and we'll help you do Asia,' and China became the magnet. This wasn't apparent at first," says Tan, who served as chairman of TIF. "They moved to China because Singapore is not the best place to do China from; China is the best place to do China from."

At the time Singapore simply didn't have a sufficient pipeline of start-ups in which these venture capital firms could invest. Peng T. Ong, a serial entrepreneur - best known for founding Match.com - turned angel investor in Singapore, who is now raising a Southeast Asia-focused VC fund, notes that there was a misread as to how start-up ecosystems grow.

"The VC industry is a service industry, it serves the start-ups," he says. "If there is no start-up industry there is no point in funding the VC industry because it can't create the start-up industry, just service it. But TIF had some positive results. The funds went off to China and a lot of the top VCs in that market are Singaporean. Now they are paying attention to Singapore."

There are two key change agents. First, Southeast Asia is seen as a more attractive and addressable market and Singapore is a logical hub for sub-regional operations. Second, steps have been taken to put the appropriate start-up infrastructure in place. The Technology Incubation Scheme (TIS), set up in 2010 under the auspices of the National Research Foundation, has been at the forefront of this effort.

According to AVCJ Research, VC investment in Singapore reached $743.4 million in 2013, roughly equal to the sum total for the previous nine years. Twice as many deals were done in 2013 compared to 2011.

Southeast Asia has been patchier, with last year's $178.2 million trailing the $260 million-plus seen in 2007 and 2008. Deal categorization is a factor here, though, with many of the transactions completed during that two-year period falling outside the technology, media and telecom (TMT) space.

Gaps in the system

While a number of support schemes in Singapore pre-date TIS, industry participants observe that there were few options offering the capital and expertise required by nascent TMT companies. For example, the NRF introduced the Early Stage Venture Fund (ESVF) initiative in 2009 with a promise to match S$5 million ($3.9 million) investments on a 1:1 basis but there was little take-up.

Spring Singapore, an agency under the MTI that promotes the development of small and medium-sized enterprises, operated two programs: the Technology Enterprise Commercialization Scheme (TECS) that provided up to S$250,000 to particular products to enable proof of concept and take them from R&D towards commercialization; and Spring Seeds, which matched private investments of up to S$1.5 million in innovative start-ups with cross-border potential.

Although commitments started at a smaller quantum than the full S$3 million, Leslie Loh, who sold his software start-up System Access to SunGard Data Systems in 2006 and turned to VC investing, found there was a dearth of options in between these two layers.

"Singapore has always been supportive of software but the support stopped when you got to the point of commercialization and going to market," he says. "From 2009-2012, I had a fund that only did Series A, S$3 million per investment. We didn't do too many deals, a couple a year, because there wasn't enough in the pipeline that met our criteria."

The challenges faced by tenCube, a mobile security solutions provider that launched in 2005, are indicative of how smaller companies could easily fall through the cracks.

TenCube was initially supported by S$30,000 provided by the three founders but this didn't last long and they spent a frustrating 18 months trying and failing to raise capital. The company took contract work to make ends meet before a professor at the founders' alma mater, the National University of Singapore, provided seed funding, followed by the university itself.

A formal seed round worth S$600,000 came courtesy of EDB Seeds - a precursor to Spring Seeds - and then India-based One 97 Communications provided S$1 million in early 2010. The business was sold to McAfee later the same year.

"We spent a lot of time talking to anybody who seemed to have money," says Darius Cheung, one of tenCube's founders. "We must have talked to about 50 investors over the course of one year but only about five would really invest in that range. Now because of various developments in the ecosystem it is easier to see who the investors are; it's a lot more transparent."

Cheung is now onto his third start-up, a Singapore-based property rental website called 99.co, which launched in late 2013 and has received funding from the likes of Fenox Venture Capital, Golden Gate Ventures, East Ventures and 500 Startups.

Golden Gate and Red Dot Ventures - which Loh started in order to address the early-stage shortfall - are two of the 15 VC firms now part of TIS, although only about 10 are said to be fully active and most of these were in the second batch, launched in 2012. These incubators make the investment decisions and the NRF contributes up to 85% of the capital, subject to a ceiling of S$500,000 per company. Incubators provide mentorship and can buy out the NRF within a three-year term.

A total of 108 Singapore-headquartered start-ups have been supported through TIS, with 27 going on to receive follow-on funding and 13 exits. NRF has committed around S$50 million to the program. Red Dot alone has made one investment per month over the last 20 months and two of these companies have since received Series A funding.

Feeding into this early-stage pipeline, which takes start-ups from proven product to revenue generation, is a growing array of seed specialists.

In addition to government-backed programs - such as Spring TECS and Interactive Digital Media Program Office's iJam offering - angel investors and private sector incubators like JFDI are increasingly active. Based on the Y Combinator model, JFDI has so far awarded S$25,000 apiece to 26 companies, nearly two thirds of which go on to receive S$500,000 in seed funding. The target is another 100 companies over the next two years.

"I have been involved in trying to build up the ecosystem in terms of entrepreneurs and start-ups for the past 10 years and it is a long process," says serial entrepreneur Ong. "When you are on an exponential curve, at the early points it seems like nothing is happening but then you hit the knee of the curve and it's like, ‘Boom, what happened?'"

Series A incoming?

Singapore has yet to hit the knee of its wider VC development curve. While the infrastructure is in place to address the seed problem, there are now insufficient investors at the Series A stage, taking companies from revenue generative to profitable, to serve this new generation of start-ups. Vickers' Tan says that many companies wither on the vine because there is no one willing to provide S$1.5-2 million.

The government has now begun to take action here too. The ESVF initiative has been re-launched and plenty of VC firms have applied for licenses, while Vertex Venture Holdings earlier this year was awarded S$100 million to invest in Singapore-based companies. "In the past we had no such criteria," notes Kee Lock Chua, Vertex's president and CEO.

There is also increased private sector interest as the incubators continue to produce investable enterprises. Andreessen Horowitz and Fenox are among the Silicon Valley firms active in Singapore, and they are joined by counterparts from China and Japan, as well as local outfits looking to take advantage of ESVF.

"There are dozens of accelerators and incubators in Singapore and that is great for us," says Silicon Island's Chesson. "Staying close to the incubators is helpful. We want to be a rare source of Series A and B funding in Southeast Asia."

Interestingly, two start-ups backed by JFDI and Red Dot, respectively, are specifically looking for follow-on funding from overseas investors. TradeGecko, a graduate from JFDI's spring 2012 boot camp, provides supply chain management solutions for independent brands and retailers. It is closing in on a Series A round from a European investor that specializes in software-as-a-service businesses.

Ascenz, which develops fuel monitoring systems for use aboard ships, received S$590,000 from Red Dot in 2012 and secured a fresh round of funding from Green Marine Capital, the VC arm of international carrier BW Group. Yoong Hui Chia, CEO of Ascenz, says Singapore's port makes it an ideal platform from which to reach out to new customers, but a strategic alliance with BW offers something extra.

"We are looking at expanding the business beyond Singapore and beyond Asia. We have a director based in Oslo who will help us penetrate the European market. BW can also give us more knowledge on the problems they face as a ship owner," he explains.

This appetite for overseas expansion is vital in terms of fashioning a profitable exit.

Last year, Japanese e-commerce giant Rakuten paid $200 million for Singapore-headquartered Viki, a video streaming site characterized by community-generated subtitling that was funded by a string of VCs, including Greylock Partners and Andreessen Horowitz. It is by some distance the largest TMT exit in the region, for a business that offered both strategic appeal and cross-border opportunities to the buyer.

Southeast Asia usually sees a handful of sub-$100 million trade sale exits in the TMT space each year, in part because the lack of Series A and B funding prevents companies from achieving greater scale and value. However, Ong claims there are at least four Singapore-headquartered start-ups that are four years old and have run rates of $100 million - well in excess of Viki.

"Money is smart and figures out the opportunities and goes after them," he says. "Viki is just the beginning of a lot of interesting things. It is not just Singapore; there are 600 million people in Southeast Asia."

A healthy exit environment is necessary if the start-up ecosystem being nurtured by the government is to become self-sustaining. Not only will venture capital firms become more interested but the founders of successful start-ups will offer capital and expertise to the next generation of entrepreneurs, creating the virtuous circle that has served Silicon Valley so well.

Ong, Cheung of 99.co, Red Dot's Loh and Silicon Island's Goh have all done this to a greater or less extent, but they number among the few.

The key stakeholder

The MIT entrepreneurship program is predicated on government, corporations, academia, risk capital and entrepreneurs acting in concert, but in almost every successful case study governments have played an active, if not a leading, role.

In the case of Singapore, the ecosystem has essentially been built on foundations comprising subsidies and incentives.

For the geography-agnostic VC investor, Silicon Valley may represent a better chance of generating significant returns on each dollar of capital committed than anywhere else in the world. China probably still ranks higher than Singapore, so the government seeks to equalize that risk, sharing the downside and leaving the upside for the private sector. That is the TIS in action.

The model is working, but it cannot continue in this vein forever. The government and all industry participants appreciate the ecosystem must ultimately become free-standing, but no one really knows how much time and money is required to build a Silicon Valley for Southeast Asia.

"What I sense on the ground today is this thing being a living breathing entity that benefits from government support but does not depend on government support," says Silicon Island's Goh.

Eddy Lee, a principal at Fenox, has a slightly different take, noting that Asian entrepreneurship is often characterized by a government-directed, top-down approach: the infrastructure, skills training and start-up funding all come provided. It stands in stark contrast to the US system, which is bottom-up or within the individual.

"The government can create infrastructure - and they are already doing that by putting together funding programs - but training the mindset of entrepreneurs takes time," he says. "You have to create the right motivation by recognizing the contribution of entrepreneurs to the economy."

This can come in the form of practical government incentives. In addition to the current programs, suggestions include tax breaks for corporations that form partnerships with start-ups rather than conduct R&D activities in house; and relaxed working visa requirements that allow start-ups to compensate engineers with options rather than meet a minimum salary threshold.

However, education and society are equally significant. Lee appreciates the emphasis on science and mathematics in Singapore's schools, as a beneficiary of the local educational system himself, but he stresses the importance of entrepreneurs developing a well-rounded skill set in order to communicate and sell an idea. He is also waiting for entrepreneurship to be recognized for its contribution to the society.

Another potential pitfall is fear of failure. Entrepreneurship involves risk and it doesn't always pay off, but Cheung of 99.co is unsure whether the Singapore public is ready to accept that, particularly given taxpayer money is at stake.

It is in these areas that hard assets must be complemented by less tangible qualities that can take years to bed down. Block 71, a start-up cluster located in the Ayer Rajar industrial estate, not far from the NUS, is the best example of the two elements working in tandem.

The government initiative was treated with skepticism to begin with, but it is now home to around 250 start-ups that receive discounts on rent, free Wi-Fi access and shared work and recreational amenities. Earlier this month infrastructure developer JTC Corporation said it would collaborate with several other government agencies on expanding the cluster to accommodate 500 start-ups.

JFDI's office sits at the heart of Block 71 and its café represents a social hub for the local community, a place where founders can congregate and share ideas. Wong argues that if the capital infrastructure has got Singapore 90% of the way, the remaining 10% involves fashioning an entrepreneurial culture on top of it.

"Silicon Valley is very good at getting people to connect," he says. "There is something distinctly American that helps people sit down and talk about their start-ups. Other cultures don't do that. We have a tiny part of Silicon Valley culture in Block 71 that encourages people to not be afraid to take risks."

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• Topics
• Southeast Asia
• Early-stage
• Venture
• Technology
• Singapore
• TMT
• Venture
• Southeast Asia
• Northstar Group
• Fenox Venture Capital
• JFDI.Asia
• Red Dot Ventures