In the recent Global Startup Ecosystem Report (GSER) 2021, Singapore was ranked 17th globally and 5th within Asia.
In spite of the pandemic, the island state still drew in S$5.5 billion of venture funding back in 2020, exhibiting the resilience of the Singapore Investment landscape. However, what goes behind this S$5.5 billion number?
Within the VC landscape, there were a total of 191 fundraises at the seed stage in 2020, representing almost 50 per cent of all venture deals completed.
One reason why Singapore is seen as an attractive hub for investing is that it is one of the most competitive economies and the second easiest place to do business in the world.
The island state is also primarily an English-speaking country and is uniquely located at the heart of Southeast Asia, making it a more accessible gateway for international players.
Taking a deeper look into Singapore’s startup ecosystem, we explore some of the more popular means to invest in startups and how they have evolved to suit the landscape.
Also Read: SEA tech founders playbook: A to Z of becoming a fundraising legend (Part 2)
Why traditional financing is still prevalent
In exchange for investors funds, the startup issues equity to the investors. The investors wait for the next fundraise or divestment event before cashing out their stake. Investing in the early stages allows investors to receive drastic returns on investment upon success.
However, with high rewards comes high risks. In the event a startup is not able to take off or grow, investors face losing all of their investments. Moreover, the illiquidity of private capital will require investors to hold onto their investment longer as they are required to wait for future fundraise or divestment.
As for the startups themselves, founders do not like giving up too much equity stake as they too wish to ride on the upside of their startup. Investors also prefer not to see too much dilution as they want the founders to be more incentivised and motivated to grow the company.
At some stage, the founders will be pressured by the investors to go for the next round of fundraising, even if they are not prepared to.
Should the startup be unsuccessful in raising money through traditional equity, the next alternative would be to seek a bank loan. Bank loans come with high interest rates since there is a higher chance of a startup defaulting or failing in its early stages.
With the burden of high-interest rates and monthly loan repayments, this could be highly detrimental to a startup’s growth.
Venture Debt: The rising alternative for fundraising
Venture debt is one of the emerging investment products that has increasingly gained traction over recent years. In a typical venture debt structure, the startup issues warrants, in exchange for capital, and arranges to repay the original investment and interest over a two (2) to four (4) year tenure in the form of a loan.
Also Read: SEA tech founders playbook: A to Z of becoming a fundraising legend (Part 1)
The investor has the flexibility to convert the warrants into shares, usually at a discounted price based on the valuation, set at the trigger event.
Venture debt financing allows the investor to receive capital back on a regular basis over the loan tenure. At the same time, the investor also gets to enjoy the upside by converting the warrant issued into an equity stake.
Nevertheless, venture debt does come with its own risks. As it requires fixed repayments to the loan from the onset, it can be a challenge for hypergrowth startups to manage cash flow.
The startup space is ever evolving, and there is no one-size-fits-all solution. Startup founders will have to properly evaluate their needs and circumstances to find out which is the most suitable for them.
Investors have also started turning their attention towards new emerging methods such as crowdfunding and frontier investment products such as revenue-based equity, which is becoming increasingly prominent within Southeast Asia.
The article is co-authored by Charles Phan, Project Lead, and Darrell Su, Senior Analyst, Capital Advisory at Paloe
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