In this cover story, The Edge Singapore speaks to founders, venture capitalists and private equity partners to identify the challenges in building Southeast Asian unicorns, Singapore’s role as an entrepreneurial hub and the outlook for dealmakers as macro obstacles remain.
STAGE 1: FOUNDING
Singapore is a leading destination for entrepreneurs, offering attractive tax benefits, strategic access to the Asia Pacific region and a business-friendly regulatory environment with inclusive immigration policies.
In the early 2010s, government-led initiatives were also in place to make the city-state a fully-fledged start-up hub. This led Enterprise Singapore to establish Startup SG, a platform for entrepreneurs with innovative ideas to discover and access available avenues of support.
These initiatives have borne fruit. According to the Global Start-up Ecosystem 2023 report by insights firm Startup Genome, Singapore has made its maiden entry in the global top 10 list of best start-up ecosystems, having climbed to 8th place from 18th in the previous year. It currently trails behind Tel Aviv, Boston and Beijing, ranked fifth, sixth and seventh respectively.
While the city-state continues to be an enticing base to validate business models and commercialise breakthroughs, there are still challenges faced by aspiring founders in Singapore. Growing pains include difficulties in securing talent, customer acquisition and intensified competition, homegrown tech founders tell The Edge Singapore.
Amid the funding downturn triggered by the tightening of monetary policies, surging inflation and a decline in success stories, the founders affirm that the entrepreneurial spirit in Singapore persists given the abundant capital opportunities.
“The pandemic-driven pessimism did hamper this momentum and perhaps even kill these ambitions,” says Aaron Tan, co-founder and CEO of car marketplace unicorn Carro. “I think there is a need to jump-start the scene but it is not dead.”
Tan believes many young, passionate and aspiring entrepreneurs are attending the various start-up events and talks held recently. “We can see a good momentum of new faces entering the space,” he says.
See also: Prudential launches global AI Lab in Singapore to accelerate innovation
Grants, ventures and angels
Even amid the sluggish funding landscape seen worldwide, the young and passionate are building their dreams in the face of unfavourable trends. Bain & Co says the global average early-stage deal size declined 13% q-o-q in 1Q2023. This came from continued geopolitical tension, stubborn inflation rates, macroeconomic instability and the banking sector turmoil, which led to a sustained slowdown in investment activity.
In Southeast Asia, early-stage venture capital funding dipped 65% y-o-y to US$4 billion ($5.4 billion) as at May 31, the lowest level since late 2019, based on data by Preqin. In Singapore, early-stage investments saw an 8.2% y-o-y drop in volume in 2022 — reflecting investors’ shift of focus from growth to sustainability, according to Enterprise Singapore and DealStreetAsia research.
Despite reports of slowing early-stage deals, Tan of Carro says there are a lot of funding opportunities to be found in Singapore. “I think there’s too much money in Singapore. We should be grateful to have so many grants and resources available,” says Tan.
As someone familiar with markets such as the US and Japan, he highlights that few governments are as committed to supporting the local start-up and SME ecosystem as Singapore’s. Beyond grants, there are also significant government monies channelled into venture funds to spur the ecosystem further by ensuring no funding gap between each growth stage, Tan adds.
“Singapore is flush with liquidity, which may be a good and bad thing. I feel it is better to have less liquidity so that the money goes to the best, deserving company. Too much capital would mean that even low-quality companies would get backing, which may not be ideal in the long run,” he says.
One entrepreneur that has benefited from the grants available in Singapore is founder of maritime technology start-up Greywing, which raised US$2.5 million in seed funding from investors including Y Combinator, Entrepreneur First and Flexport. Co-founder Hrishi Olickel says he received funding from his university for a previous project through the National University of Singapore (NUS) Practicum Grant of $10,000 for innovation.
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Olickel says: “When we wanted to start Greywing, we were also given EntrePasses for foreign entrepreneurs to start and operate a business in Singapore that is either venture-backed or possesses innovative technologies. This made it easy for us to start a company because it takes a lot of uncertainty out of building a company with zero revenue while staying in Singapore.”
But grants and funding from venture firms are only some ways to get funding to start a business. For instance, industrial artificial intelligence (AI) start-up Groundup.ai mainly received funding from angel investors and the government’s Open Innovation Challenges, which provide winners with either cash prizes or funding opportunities.
Founder and CEO Leon Lim shares that he started his entrepreneurial journey in 2017 by co-founding the Mining Rig Club, providing cryptocurrency mining rigs to the masses on the back of the crypto boom. Although the company had a successful run generating over US$3 million in revenue in less than four months, it became a struggling venture as the crypto market crashed the following year.
While Leon was deciding whether he should throw in the towel, he was encouraged by an angel investor to continue working on a separate software he had built to support the operations of the mining rig business. This pivot proved a good decision as Leon and his team were further validated after winning several Open Innovation Challenges hosted by the Infocomm Media Development Authority. Groundup.ai’s predictive maintenance solution is now deployed in various industries, including oil and gas, manufacturing, construction and logistics.
“We are quite fortunate to have people who believed in us despite the challenges at the time. I would like to attribute it to trust and communication. We were transparent, updating them with the good and the bad, even when the going got tough,” says Leon.
To encourage individuals to invest in start-ups, Singapore angel investors were provided with the Angel Investors Tax Deduction Scheme from March 2010. Under the scheme, an approved angel investor who invests a minimum of $100,000 in a qualifying start-up would be eligible for tax deductions. This scheme, however, lapsed in March 2020.
Despite this, Singapore still has a healthy angel investment network, with 280 angel investors listed on Startup SG’s website. Several active angel investor networks exist, such as AngelCentral and the Business Angel Network of Southeast Asia.
Intense competition
Home to world-class talent, Singapore was ranked first in Asia and 12th in the world for talent competitiveness, according to the International Institute for Management Development’s World Talent Ranking 2022. Aside from Singapore’s ability to attract global talents — which ranked second in Insead’s Global Talent Competitiveness Index 2022 — tertiary institutions in the city-state are also partnering companies to nurture talent in areas such as AI, biotechnology and data analytics.
This does not mean that searching for the right talent is easy. Carro’s Tan says when he started the business in 2015, finding the first set of believers was the biggest hurdle he had to face. “How do you get your friends, family members or those fresh out of college to join you as a C-suite and ensure they can do the job well? It is getting increasingly difficult as more established players enter the Singapore market.”
Singapore is not only a base for MNCs with attractive benefits and salary packages, it is also increasingly becoming home to high-growth technology companies such as Tencent and Alibaba, aside from regional players Gojek and Traveloka. “New players would be completely priced out of the market. Why should job seekers join a newly-built start-up when Meta and Google can pay them three times more?” Tan says.
Leon echoes this sentiment, adding that this has resulted in more start-ups looking at hiring talents outside of the country where the productivity per dollar may also be higher, which is important for bootstrapped companies.
“I was an NUS kid. Very rarely do I hear about anyone wanting to work for a start-up among my peers. They want to work for Morgan Stanley, Google, Apple and Bytedance. The mentality is different from Finland, for example, where many young people are open to sacrificing high salaries to work in sustainability-related companies,” he adds.
Gabriel Lim, director of product management at Softbank-backed tech unicorn 6sense, believes that this may be the consequence of the lack of liquidity events in Singapore as well as the overall Southeast Asian region. He says that as the region lacks such events, people are less likely to take a gamble in being an early employee, knowing that it would be hard for them to realise their stock options.
“To give an example, in Silicon Valley, you can throw a stone and it will hit someone who has sold their company for an attractive amount. This makes joining a start-up an interesting proposition. However, in Singapore, there are not a lot of such exits, so it is less likely for talents and investors to gamble in a startup,” he adds.
Gabriel was previously the co-founder and CEO of Saleswhale, a Singapore-based software company acquired by 6sense early last year for an undisclosed amount. Saleswhale was part of Y Combinator, a Silicon Valley-based accelerator. Before the acquisition, Saleswhale raised a Series A round of US$5.3 million led by Monk’s Hill Ventures.
“For us, it was really a function of whether we wanted to continue running the company amid a competitive landscape or join forces with another company and take some chips off the table. We were very lucky to be acquired by a Silicon Valley company because it was unlikely that we can find mergers and acquisitions opportunities here,” says Gabriel.
On top of the intense competition for talent, local start-ups also face the problem of the small market size. Tan points out that the birthplace of the region’s unicorns is rarely in Singapore — Grab was originally from Malaysia while other well-known players such as Tokopedia, Bukalapak and Kopi Kenangan are from Indonesia, where the population size is many times larger than Singapore’s seven million.
For Singapore-based start-ups such as Carro, Patsnap and Advance Intelligence that have supposedly reached unicorn status, the lion’s share of their revenues are generated outside of Singapore, says Tan. “While we are indeed sizeable in Singapore, up to 80% of our topline is outside Singapore. The truth is that as a venture-backed company, the number one question investors will ask is when we are considering entering Malaysia, Indonesia or Thailand. Most investors do not want to invest in a Singapore-only firm,” he adds.
For platform providers like Groundup.ai and Greywing, expansion beyond Singapore’s shores has been in mind since the start. It is only possible to stay afloat by scaling beyond Singapore, especially given that they face competition in the form of billion-dollar software-as-a-service companies.
“We made a conscious decision to be international from day one. The customers, investors and other stakeholders we work with have always been from all over the world. Of course, this is largely due to our business being related to the maritime industry but as much as we think of ourselves as a Singapore-headquartered company, we have equipped ourselves with international operations capabilities,” says Olickel.
Amid the continually tough operational landscape, Leon says it is easy to doubt whether one could ever build a successful start-up from scratch in Singapore, especially given the grim outlook and narrative of a dull start-up scene. However, he is encouraged by the participation among youths in Singapore in start-up-related events, especially after the pandemic measures were lifted.
“It is not going to be easy; there will be struggles. But there are still many of us that are passionate about chasing our entrepreneurial dreams. There are even people I know who dropped out of school to grow their businesses — but we in Singapore don’t sing that story as often as those in the US do. We don’t like to talk about failures here and how to learn from them,” says Leon.
It is widely known that most start-ups do not succeed and more than two-thirds never deliver a positive return to investors. According to Startup Genome, about 90% of start-ups completely fail.
“I just hope that these younger entrants are not discouraged and find ways to thrive from their support system to ultimately create the next generation of Singapore high-growth tech companies,” Leon adds.
Read more:
STAGE 2: GROWTH
Venture capital seeks growth beyond Singapore’s shores
Corporate venture building: where entrepreneurs go to grow?
STAGE 3: EXIT
Positive outlook for late-stage deals in Southeast Asia in 2024 and beyond
