The Difficulty of Developing Venture Capital in Singapore

Recently, over a supper conversation in Holland Village, a friend made an interesting observation about entrepreneurs in Singapore, "Actually, there is entrepreneurship in Singapore, but the Singaporean entrepreneurs are not here but in overseas. The market here is just too small. If you are successful in business, you should be now in China, Vietnam or Cambodia." What he is saying is that if you want to be a successful entrepreneur, you have to set up shop in other markets. Making a few dollars in Singapore is easy, but a few million is pretty difficult. By now, if you are planning to set up a business in Singapore, you have to accept the fact that you must go global on the very first day. I thought about this for a while and come to another conclusion as to why developing venture capital is extremely difficult in Singapore. In that process, I want to sketch out an alternative model that might mitigate some of the issues involved.

Is venture capital really possible in Singapore? You can take a look at the directory of investors in the Singapore Venture Capital Association and come to the realization that we might have many funds here, but most of them are sourcing their deal flows out there. So, why is developing venture capital in Singapore so difficult? Here are a few reasons why this is so.

• The Wimbledon Effect: Have you watched the Wimbledon tennis tournament which happens in London every year? Usually, you don't see a lot of British players winning the tournament. The lack of British winners made the public lament about the Wimbledon effect, i.e. you can have the biggest tennis tournament here in London with strong organization and culture, but you don't have home-grown players that can win the grand slam. Singapore suffers from the Wimbledon effect, that it is an ideal base for financial services. A lot of them park their funds here, but they move around the region to do their deals. The problem is that there are really very few deal flows that can entice the investors to look around.
• The horizon of Asian vs US venture capital: Notice that I did not include Europe in the equation. In some sense, Asian venture capitalists are similar to the European counterparts. They thrive in deal flows which have a very short time horizon and little risk. In the US, if you heard about the new space tourism industry in New Mexico, you might be wondering why venture capitalists are making such investments to start an emerging industry like commercial spaceflight for people. It's the type of risk appetite that US investors take for their investments. The appetite for risk is directly proportional to the  amount of booms and busts in an economy. In other words, if the risk is higher, you get bigger booms and busts (like the biotech/dotcom boom and bust periods in US). Since Asian investors want to do deals which are very safe, it is not possible to pursue venture capital in Singapore. If you want a good example, take a peak on how the Singapore government pursues the biomedical drive. You will realize that it's incremental and still stuck at a 50-50 situation of success (predicted by the World Bank). The horizon is important, but of course, I am not saying that we should be investing all the money in the emerging industries.
• "Markets, Markets and Markets!": If you ask someone why Starbucks cafe is so successful, you will hear the three words muttered to you, "The secret of success is boiled down to three words: location, location and location." Applying the same reasoning infers that our domestic market is too small to grow anything substantial. Other than the food and beverages business (even the successful ones are moving out of Singapore to open new markets), it is not easy to set up something here and gain a lot of traction.
• Lack of innovators: This is my favourite criticism towards students who are involved in entrepreneurship societies. I am seeing too many engineers wanting to do business models but lack of innovators who want to do real technology and innovation. Somehow, I can't fault anyone on this. It boils down to culture, and it is not seriously not easy to create innovation. It requires people to think out of the box and most importantly, the government expects creative destruction without any anti-establishment views.

So, does that mean that it is impossible to do venture capital deals in Singapore? The answer is yes, and we have to accept that the deal flow is small. In fact, most entrepreneurs in Singapore are more successful in raising capital from friends, family and fools than from business angels and venture capitalists combined. So, I want to sketch out a variation of the venture capital model but add a component that is not really new in fundraising. The best way to help technology start-ups in Singapore is to do it via the micro-financing model. The IDM initiative follows this model (which I am currently involved) but due to its constraints as a government initiative, it is unable to exploit the full advantages of micro-financing given the way how the contract and conditions are structured. I have to be fair and say that it's the best that they can do. Now, I want to push the boundaries a bit further. If you do a fully private micro-financing model and add another component from the model which made Israel successful in both venture capital and entrepreneurship.

Singapore is similar to Israel in terms of market size. How did Israel do it differently from Singapore? Actually, if you examine their model, l closely, most of their technology entrepreneurship came from the military that has shifted into the commercial space. That's the first step and then using the free trade agreement in 1986, Israel shifted the entrepreneurs into US with the advantages of the Israeli enterprises being US companies that open up their markets. So, with these ingredients in place, I might offer an out of the box solution (which I believe that the think-tanks have been talking but none really voice it out). Let me specify my solution in the IDM space (given that I am in this space).

Suppose we are able to open up the technology space from the military for commercial uses (as in not weapons, but technology that can be transitioned from the military space to the commercial space), we adopt a micro-financing model that is fully private and places less conditions than the current MDA one, coupled with the bilateral free trade agreements we have, we might be able to open up a space for venture capital activity.

Comments

[Jason Vu]

Agreed, the market is so small, Singaporean entrepreneurs should think globally or at least regionally and it is harder to follow Israel model

[Gibson Tang aka Moose]

Nice insight on the state of venture capitalism in Singapore. This is quite true since the previous company that I worked in tried to raise some funding from local venture capitalists to continue their operations and the first cheque came from an American based in Singapore who, ironically, had worked in Apple (Silicon Valley) for a number of years.