Singapore, a modern day economic miracle, while known world-wide for its ease of doing business, low-tax policies, and first-world infrastructure, is well on its way to become the regional hub for start-ups. More so in the fields of IT, biotechnology, clean and green technology, media and entertainment; where with the help of a number of incubation schemes initiated by the Singapore Government, the country’s thriving start-up ecosystem has seen a growth of more than 50 percent in the last half-a-decade.
The venture capital funding has increased from S$35 million to S$2.1 billion in the last four years; and as far as M&A goes, the country has contributed to over 40 percent of the total South-east Asian start-ups acquired in the last five years. Singapore Venture Capital and Private Equity Association also noted in its study recently that the country witnessed venture capital deals worth S$578 million compared to S$1.2 billion that took place in the rest of South-east Asia.
Hugh Mason, CEO of JFDI Asia, one of South-east Asia’s most successful seed accelerator companies, too recently showered praise on the Singapore Government adding that it has “gone further than any other in the region to try to clear the way for innovation to happen and to set up structures that enable it”.
Though some analysts have pointed towards Singapore’s tiny local market, costly local work-force, and high rents, as possible hindrances towards incorporating a start-up in the city-state, the advantages are far more. Garena, a five-year-old local start-up, which ensured that Singapore ranked 27th among 29 countries with at least one company over US$1 billion in the World Start-up Report 2014 is a testimony to that.
Also, there has been a proliferation of unconventional working spaces and start-up accelerators firms in Singapore in the last few years such as Joyful Frog Digital Incubator,The Hub Singapore,The Co, and Golden Gate Ventures.
The country also hosts has more than 100 venture capitalists [providing easy availability of funding] with Walden International and Monk’s Hill Ventures being the notable ones.
Other notable advantages include robust Intellectual Property (IP) protection, and geographical proximity to world’s largest emerging markets such as India, China, Vietnam, Thailand, and Indonesia.
Government Schemes for Start-ups
The Singapore government has played its part too in propelling the nation towards a thriving start-up ecosystem. Some measures initiated include the Block 71 program – which incubates local start-ups; whereas money is also being pumped into medtech start-ups, in the Technology Incubation Scheme and in the Early Stage Venture Fund (ESVF).
Other start-up government financing schemes include the Business Angel Scheme (BAS), SPRING Start-up Enterprise Development Scheme (SEEDS), Sector Specific Accelerator (SSA) Programme, and Technology Enterprise Commercialization Scheme (TECS).
While TECS provides funding for R&D efforts for the commercialisation of proprietary technology ideas, SEEDS is aimed at providing start-ups a co-investment financing option from independent investors of up to S$1 million in matching capital. Meanwhile, SSA is for innovative Singapore- based young companies with a co-investment financing option from approved SSA Operators. Finally, BAS provides start-ups in Singapore a co-investment financing option from pre-approved angel groups, of up to S$1.5 million in matching capital.
Aside, there is the ACE, a Singapore entrepreneurial organization, which is assisting local start-ups in expanding overseas. While Garena is one, others such as Reebonz, Redmart, PropertyGuru, Viki, Razer, Hope Techniks and Luxola, have benefited too.
Then there are the IDA Labs, which are physical lab spaces for individuals, companies and government agencies to collaborate, generate new ideas, develop new technologies and test out new concepts.
An important addition few years back was when the government expanded the Productivity and Innovation Credit (PIC) scheme to allow IP in-licensing costs qualify as PIC benefits. These costs to register patents, trademarks, and designs can qualify for 400% tax deduction now. Till 2015, such companies also enjoy a PIC Bonus, which is a dollar-for-dollar matching cash bonus of up to $15,000 given on top of the 400 percent tax deduction.
Start-up Tax Exemption (SUTE)
If a newly-incorporated company in Singapore has no more than 20 individual shareholders; and in case of corporate shareholders, one individual holds at least 10 percent of the issued shares; it is eligible for the SUTE scheme. It must be noted though that property and investment holding companies are not eligible. The exemption is given on normal chargeable income of up to S$300,000 for each of the first three consecutive years of its operation.
- For first S$100,000, after 100% exemption, the exempt amount is S$100,000
- For next S$200,000, after 50% exemption, the exempt amount is S$100,000
- Thus, the total exempt amount for income up to S$300,000 is S$200,000
As noted above, apart from government assistance, the private equity funding and venture capitalist landscape in Singapore is also getting more vibrant these days. Reason being the tax incentives enjoyed (noted above) by private investors when they invest in the country’s start-ups.
Moreover, the founder has the option of financing his or her business by selling equity in the start-up in the form of shares for a cash investment.
What such equity financing means is this: what you pay to your investors in the form of dividends on shares is typically comparably lower than interest rates you would pay to service a bank loan called debt financing.
Thus, depending on the situation, equity financing may sometimes be more expensive for you if your company turns out to be overwhelmingly successful. This so because if your company earns high profits, you will be paying out a total amount of dividends on these investments that are a greater value than the interest amounts you would pay on a fixed bank loan.
Whereas if the company does not make profits then equity financing becomes less of a financial liability upon the company given that you are not obliged to pay your investors if there are no profits.
However, in order to have a good chance of securing equity capital in Singapore, you need to show your potential investors that you have a watertight and comprehensive business plan, clear exit strategies, reasonable and prudent financial projections, an experienced and go-getting management team, as well as strong growth potential. Otherwise, you will have to seek other sources of funding like from venture capitalists, business angel investors, banks, investment companies/funds or financial institutions.
Angel investors are private investors who typically not only invest capital but also contribute their business expertise/skills in early-stage businesses in exchange for a significant share in the company. These are typically high net worth individuals (HNWIs) with an appetite for start-up companies with higher risk but promising enough to yield higher returns.
Past experience have shown that business angels in Singapore tend to invest more in the business services, retail and hospitality sectors.
Moreover, there are several local and regional networks for you to seek an angel investor. For example, the Business Angel Network Southeast Asia (BANSEA), which match 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, which usually involves early-stage ventures with a high growth potential, either in a developing market or in an existing market with international expansion capabilities, and that is sustainable in the long-run.
The venture capital industry in Singapore is relatively new and small compared to the US and Europe. But, as mentioned earlier, there are still more than 100 venture capital firms in Singapore ranging from independent limited partnership venture capital firms to corporate-backed venture capital firms. Additionally, it is also common for Singapore government bodies, large corporations and high net worth individuals to set up venture capital funds in Singapore due to the attractive tax incentives and other beneficial government policies.
However, take note that venture capitalists typically are involved in their investments for between 2 to 5 years and seek a higher rate of return from the companies they invest in, at the rate of above 25 percent ostensibly because they will have to account for a higher level of profits to their clients. Popular start-ups for venture capital funds are those in high growth potential sectors such as IT, biotechnology and nanotechnology with a competitive edge in the market and longevity of profiteering. Start-ups whose business involve scientific breakthroughs, IP creation and other similar large-scale impact businesses are often favoured.
Incorporate your Start-up in Singapore!
In summary, if there ever was a good time to incorporate a start-up in Singapore, it is now. So much so that the start-up scene in the country has seen the average annual growth rate of company incorporation crossing eight percent in the last three years. If you are a foreign company or an entrepreneur looking for a stepping board to Asia, Singapore is the ideal destination.