By: Kumaran Pillai
News of JFDI shutting down their accelerator unit reverberated at Ayer Rajah this week. The cynics were quick to say the startup environment is not conducive while the rest commented about the lack of entrepreneurial culture in Singapore. The demons in our startup economy reared its dreadful head once again.
The two founders of JFDI, Meng Wong and Hugh Mason, officially announced that their 6-years experiment with the acceleration unit has come to an end. This news, however, didn’t come as a surprise as an operator of a similar accelerator in Singapore.
I founded Apple Seed in November 2013 and have accelerated 28 local companies since then. More than 25% of our portfolio companies are funded. However, two years on, there are no exits in sight for these startups.
I have a line for ‘investment returns’ in my income statement. But the only problem is that I have trouble putting a number down year on year. I couldn’t help feeling a sense of despair that we’ve had similar experiences. Like Mason, I do feel that the accelerator model is not viable in Singapore.
Though I did not announce it publicly, Appleseed somewhat pivoted its model at the end of last year. My reasons for pivoting was not because of high rental costs, lack of entrepreneurial/technical talent in Singapore or because of more stringent employment pass criteria.
Instead, Appleseed turned to ASEAN as a market because it gave us better return on investments compared to Singaporean startups. I can acquire up to 25% in equity in a startup in Indonesia whereas I get a maximum of 8% in equity for a local startup for an S$25k investment.
Besides, a $25k investment in a startup in Jakarta provides sufficient working capital for eighteen months while it can stretch for maybe two months for a Singaporean setup. Given the odds of success, the startup in Bandung or Jakarta will probably achieve their first milestone of MVP (minimum viable product) in the first 18 months. It takes about $500k in initial capital for a local startup to get to its first milestone.
Like Jakarta, the rest of ASEAN enjoys a lower cost structure as opposed to Singapore.
Singapore government has been proactively promoting entrepreneurship in the last 15 years, with little success in the beginning but have been making good inroads in the last five years. The government has been investing hundreds and millions of dollars to develop the startup ecosystem.
Today, Singapore is ranked in the top 10 startup eco-systems in the world. A good proof that the government has been heading in the right direction.
The National Research Foundation, until recently, issued convertible debts to promising startups for as low as 5% per year. It was done to encourage risk taking from the investment community. The well intentioned policy, however, has perverse effects in the markets and often did not reflect the risk that the investors were taking with the startups. It was likened to arbitrary interest rate setting by the government.
On the other hand, our entrepreneurs were equally reluctant to offer anything above “market” rate of 5% when issuing convertible notes privately, making it an underperforming asset class.
Some of the investors, especially the ones from India, said that they’ll make more money in their savings account in India, which stands at 8%, than to invest in a startup here.
The interest rates on convertible notes often did not reflect the risk on capital. This is problematic and often our startups are not attractive enough for any investor class.
Conversely, Singapore has become a hotbed for entrepreneurs from ASEAN, South Asia and China and the entrepreneurs from these countries come to Singapore seeking relatively “cheap” capital.
The business angel community is virtually non-existent and they are nothing more than a bunch of “tyre kickers.” The angels in Singapore are known for their cynical views, often talking down to their younger and inexperienced entrepreneurs. With the exception of a few, the angels are typically accountants with no real startup experience.
Compounding the problem, Angel investments are often miniscule. They range from $25k to $200k which plainly falls short of the capital required to succeed in Singapore. The investment often comes in drips making it harder for founders to plan their activities well in advance.
The grants administered by the government agencies are often saddled with their own challenges. The disbursements are based on achievement of KPIs (key performance indicators) and startups need to spend the monies upfront before they can claim from the government.
The government has stepped up monitoring to deter startup founders from diverting government grants to other projects (or their own pockets) because of a few errant founders. Applying this across the board has made it onerous for even the innocent startup founder, making entrepreneurs jump through numerous administrative hoops before he or she can see the money. Therefore, making any well intentioned grant into a startup project a futile effort.
However, Singapore is still a favourite startup investment destination for the tax benefits it offers. There is no capital gains tax, investment losses are tax deductible and it has a pro-business environment.
Our entrepreneurs and accelerators need to learn how to leverage the lower costs structures of ASEAN to stay competitive and the future of our startups is not in Ayer Rajah or Launchpad. We need to build links into the region. We are going to see more micro-national startups in the next few years.