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The Guide of Private Equity Financing for Singapore Companies
The way equity financing works is that you sell a portion of the ownership of your company for cash. Investors take on all the risk, meaning that if the company goes bankrupt, investors are wiped out. But if your Singapore company setup succeeds, investors usually earn larger returns than available from interest rates. In contrast to debt financing, equity financing costs a lot more if your company succeeds, but is much less costly if your company goes under.
Asia’s rise is accelerating the genesis of new startups and proliferating private equity investors in Singapore. Recently, the Singapore government has been stimulating more private investors to pour money into the country’s many start-up ventures by setting up tax incentive schemes. A news report has revealed that Singapore was responsible for nearly 52 percent of private equity investments that took place in Southeast Asia between the years 2005 and 2010. Singapore is also credited as being the fourth most favourable market for private equity and venture capital firms. This is a good omen for ventures that want to acquire capital via equity financing.
This guide provides an introduction to the private equity financing alternatives for Singaporean start-ups.
What is Private Equity Financing?
One of the biggest obstacles that start-ups must contend with in their beginning phases is acquiring capital. Many startups receive funding from capital supplied from founders, family and friends. Unfortunately, this funding is often insufficient. Private equity funding can fill the gap.
Private equity financing is all about private-investors seeking capital gains and dividends in exchange for investment in a startup. Private funding is a great font of start-up financing when businesses lack enough collateral for regular loans. To have a decent shot of obtaining equity capital in Singapore, you must have a sensible business plan, an unambiguous exit strategy, rational financial expectations, a seasoned set of managers, and great potential for growth. Figuring out what stage of business life cycle you are in is important if you want to line up a good investor. Business angels and venture capitalists are the biggest providers of private equity capital. Other sources include investment companies, banks and financial institutions.
- Angel investors are individuals loaded with money who love high-risk investing and putting their cash into startup ventures by buying a portion of the business. Put simply, angels are private investors who expend their capital and business skills in early-stage businesses by putting money into these kind of companies. Angels can act alone or can be hooked up with a network of fellow angels. They usually offer investments to start-ups that have great growth prospects and that operate in familiar business sectors. Some angels assume a leading position in the startup by providing mentoring and advice to early-stage businesses, but others are content to be silent partners. Business angels are the finest source of private equity capital for early-stage start-ups that need seed money.
- Venture capitalists are experienced investors who get actively involved in your business. Like the majority of angel investors, venture capitalists not only provide money, but also opine on how you can make your business more profitable. Venture capitalists need a higher rate of return from the businesses they sink money into, normally 25 percent or more. The bulk of venture capitalists would rather invest in advance-stage start-ups that operate in high growth industries such as nanotechnology, biotechnology or IT.
- Private funds are the Number 3 source of equity funds for startups. Financial institutions, banks and investment companies are the principal providers of private financing. Private funds managers couldn’t care less about actively participating in the running of your business. Their primary goal is to extract a healthy return on their investments. This kind of funding is only appropriate for established businesses that are generating revenue and have a massive potential for growth potential, not for start-ups in the beginning growth phase.
Angel Investment Scene in Singapore
- Angel investment is a substantial source of capital in Singapore.
- Angel investors are usually successful business people with a hunger for high-risk start-up companies.
- Normally, angel investors provide early-stage funding to start-ups.
- Angel investors like to put money into start-ups holding some kind of competitive advantage in the marketplace. This might be exclusive distribution and marketing relationships, breakthrough technology, a famous brand name or the ability to exploit sparse raw materials. If possible, the business plan should guarantee that it will produce huge returns for the investors.
- Start-ups with a big potential for growth attract business angels the most.
- Angel investors not only offer financing but also provide strategic guidance and mentoring to the businesses they fund.
- According to a study performed by the National University of Singapore, angel investors in Singapore are prone to favour the hospitality, retail, and business service industries.
- Normally, individual angels spend between S$25,000-S$100,000, while groups of angels invest a lot more, in the vicinity of S$250,000-S$750,000.
- Angel investors frequently band together into groups or networks so that they can combine their capital and resources. Angel networks are frequently a great wellspring of capital for businesses in need of early-stage or seed financing. The angel networks help align entrepreneurs with the right angels. Some of Singapore’s most noteworthy angel investment networks are listed later in the article.
Venture Capital Industry in Singapore
- Singapore’s venture capital industry is comparatively recent and tiny in contrast to what is available in Europe and the United States.
- The Government of Singapore facilitates foreign venture capital firms by helping them to establish their regional headquarters here. Singapore currently boasts of more than 100 venture-capital firms.
- Singapore’s venture capitalists not only offer funding but also mentor start-up enterprises. A great many entrepreneurs entrust venture capitalists for financing and access to professional management expertise.
- We should point out that the majority of venture capitalists in Singapore like to concentrate on investing in late-stage expanding startups or mature companies, rather than early-stage funding for incipient start-ups. Some venture capitalists would prefer to put money into profitable companies rather than gambling on a start-up in which profits haven’t occurred as of yet. Nonetheless, some financiers do offer funding to early-stage start-ups.
- Singapore has different kinds of venture capital firms, extending from autonomous limited partnership venture capitalists to ones backed by corporations. Because of eye-catching tax incentives and other government giveaways, many money-stuffed government boards, large corporations and tycoons have created venture capital funds in Singapore.
- Singapore’s venture capitalists fixate on industries in the services, manufacturing, and the high-tech sectors. Recently, a substantial slice of venture capital investments went to high-return sectors such as medicine, biotechnology, genetic engineering, cloning, etc.
- On average, venture capitalists are willing to risk money equalling up to five times a company’s net earnings.
- In the main, venture capital investments only endure from two to five years.
- Venture capitalists favour enterprises that are expected to become multi-million dollar companies in the not-too-distant future.
- Venture capitalists demand an annual return on investment of no less than 25 to 30 percent for the life of the investment.
- Venture capitalists scrutinize several factors when seeding start-ups, such as a spectacular business vision that will blow away the competition within the market (such as breakthrough in science or IP), a first-class team, an innovative business model and the market/economic rewards of a killer business plan/idea.
- Venture capitalists favour excellent business teams. That is, venture capitalists will dig deep to uncover a team’s qualifications, what role each team member will play, any technical skills they have, etc.
- Venture capitalists look over the business milestones to figure out how much capital they’ll have to cough up.
- Venture capitalists eye the team’s timely knowledge of markets and competitors.
- Venture capitalists dismiss long-term financial projections, pie-in-the-sky claims about how the company will prosper or how it will magically capture a huge customer-following. They’ll kick to the curb any businesses that are only interested in getting their hands on the money while ignoring any direction from the venture capitalists.
Private Equity Fund Industry in Singapore
- Banks, financial institutions and investment companies set up private equity funds.
- Normally, private equity funds do not touch early-stage or developing start-ups.
- Private equity funds are looking for established, operational start-ups with high growth potential.
- Private equity funds are extremely stingy with technical and management expertise; they are only in it for the money.
- The three major kinds of private funds are:
- Independent funds: Usually setup by cash-laden individuals, well-heeled families or wealthy companies.
- Institutional funds: Setup by financial institutions and banks.
- Corporate funds: Large companies often establish a segregated fund earmarked for smaller company investments.
List of Private Funding Resources in Singapore
Singapore has several networks that pair start-ups with venture capitalists and business angels. Singapore also domiciles investment funds that put money into innovative companies. Here are the best:
- Angel Capital Network: Invests money with companies and entrepreneurs in a number of stages of development across different industries.
- Business Angels Pty Ltd: Refers startups to angel investors.
- Draper Fisher Jurvetson: DFJ puts money into formative technologies, from life sciences and the Internet to nanotechnology and clean energy.
- ENDEAVOR: Invests in all developmental phases but prefers to spend money on joint ventures, late-phase expansions, and distressed ventures.
- K1 Ventures Ltd: Invests across a wide range of industry sectors.
- Sirius Capital Holdings Pte Ltd: A boutique entrepreneurial and venture capital finance firm, concentrating on small and medium-sized enterprises in Singapore and abroad..
- Upstream Ventures: Concentrates on early-stage enterprise creation by offering emerging companies financing, know-how and networking
- Singapore Investment Network: Gives access to one of Singapore’s most comprehensive databases of angel investors who regularly put money into various Singaporean industries.
- Angels Den: A UK-centered angel network newly arrived in Singapore. Angels Den mainly seeks a lucrative payback on their money in three to five years.
- 3V Source One Capital: Concentrates on growing or late-stage companies with an Asian connection/game plan.
- Extream Ventures: An early-stage venture fund concentrating on Asia-centered hi-tech companies in the specialties of IDM (interactive digital media), Internet (enterprise, retail, consumer), wireless & mobile (services and applications), semiconductors (fabless design) and biometrics & security. It normally focuses on Singaporean early-stage ventures with substantial regional market possibilities. Extream Ventures takes the lead investor role in early stage companies, usually forking over up to S$3M per venture as part of a Series A or Startup funding rounds.
- Bio Veda: Funds health-care startups in the stages of development or expansion.
- Walden International: A worldwide venture capital firm that offers seed and startup financing to emerging growth ventures, and also provides funding for acquisitions and expansion.
- Nanostart Asia: Allocates funds to new, emerging companies in Singapore that want to monetize a highly auspicious nanotechnology-based process or product that is ready to launch.
- Raffles Venture Partners: Funds pioneering start-up ventures.
- OWW Capital Partners: Places money with providers in the logistics, infocomm technology, healthcare, education/training, consumer services and financial services sectors.
- Azione Capital: An early stage venture capital financing company and new-business hothouse that concentrates on mobile communications (including the full range of wireless technologies), digital media, maritime- and energy-industry startups with primarily Asian operations.
- Enspire Capital: Invests in all phases of an enterprise’s development, normally making an initial commitment of US$1 million to US$3 million in a wide range of high tech industries, including Internet and telecommunications, media & technology (TMT).
- Springboard Harper: Invests in high-tech businesses in various developmental phases.
- The Carlyle Group: Funds up to US$25 million in early stage ventures.
- Adam Street Partners: Invests US$5-20 million in enterprises looking for growth equity or venture capital to speed up their business development.
- Fortune Venture: Concentrates on high-tech financing, specifically in information technology, software, and the Internet, zones in which Singapore companies maintain core competencies and deep subject knowledge.
- GIZA Venture Capital: Sinks money into seed- and early-phase high-tech ventures in various industries such as clean tech, ICT, and life sciences.
- Grove International Partners: Places cash with companies that feature real estate or related assets and businesses.
- McLean Watson: Invests in a large scope of high-tech enterprises that specialize in big, expanding or changing innovative markets.
- Tembusu Partners: Invests in entrepreneur-driven venture that show high growth potential through scalability and proprietary rights ownership. Concentrates on industry sectors such as green technology, education, resources such as oil and gas, and healthcare.
- Vertex Venture Holdings: Funds ventures at various phases of development, including seed and mezzanine investments, doing deals in the range of US$1 million to US$30 million.
- Singtel Innov8: SingTel Innov8 (Innov8), SingTel Group’s wholly-owned subsidiary is a venture capital fund for corporations that invests in enterprises at all phases of early development, from seed to emerging growth. SingTel Innov8 invests in technologies, ideas, services and products that relate to the Group’s businesses, including those in adjacent spaces such as new digital media and Internet applications.
Some of the private financial institutions in Singapore include:
- Development Bank of Singapore
- GE Commercial Financing Singapore
- Hong Kong and Shanghai Banking Corporation
- Hong Leong Finance Limited
- IFS Capital Limited
- Oversea Chinese Banking Corporation
- Sing Investments and Finance Limited
- Singapura Finance Limited
- Standard Chartered Bank
- United Overseas Bank
ON A FINAL NOTE
Private investors are progressively narrowing their focus to the Asia-Pacific and are investing capital, relocating their offices, and executing transactions in the region. With Singapore vying to becoming Asia’s entrepreneurial hub, an increasing number of private equity investors are coming to Singapore to grab growth rates and opportunities that are currently elusive in economies that are more highly developed. Singapore’s Government plans to boost angel investments in the realm of S$600 million by 2015. This is unquestionably a huge benefit to start-ups that select Singapore for their operating hubs.