S$285m support for startups: Will vetting be stringent enough?

Singapore

THE government's additional S$285 million startup support measure announced on Tuesday has its merits, but extra care must be taken to make sure that only the most deserving startups get funded.

A poorly executed scheme could lead to weak companies having their lives prolonged. This defeats the benefit of a correction in Singapore's startup ecosystem kickstarted by the Covid-19 crisis.

Under the latest support measure, S$285 million more will be set aside to match private investments into startups. The scheme was introduced because some startups are facing challenges in raising capital, even with the financing support rolled out in past Budgets, Deputy Prime Minister and Finance Minister Heng Swee Keat said.

Many observers are viewing the economic downturn brought on by Covid-19 as a chance for an overly exuberant startup ecosystem to undergo a correction. Macroeconomic pressures are expected to separate the wheat from the chaff, weeding out companies that use venture capital as a band-aid for a fundamentally unsound business.

So why the need for government intervention? For one, examples from around the world show that the successful development of a sustainable startup ecosystem seems to hinge on consistent support over multiple economic cycles, said Hugh Mason, an entrepreneur and investor.

When the economy is doing well, interest in startups mount. But when the economy is down, this attention is diverted, "and the crop of fragile startups withers and dies. Because those ups and downs happen every five to ten years and startups take eight to ten years to get to maturity, a lot of startups get wiped out not because they were weak, but because they happened to be out of sync with the cycle," he said.

The government's risk-sharing financing scheme comes as venture capital (VC) firms begin conserving cash for their own portfolio companies.

With investors allocating less money to new investments and some struggling with capital calls, even good startups might not be able to secure enough funding. A government co-investment scheme could help fill the gap, said Jeffrey Seah, a partner at Quest Ventures.

The issue is that it is not yet clear whether VC firms and government entities are sophisticated enough to judge whether a startup is deserving of such special attention. Many Singapore-based VC firms only sprung up in the last decade and have yet to invest through downturns.

VC exits in South-east Asia have also been lacklustre, given the young ecosystem. In the past five years to 2019, the region saw 132 exits worth US$8 billion, according to data provider Preqin. In contrast, China had 902 exits worth US$106.5 billion and the US had 3703 exits totalling US$323.1 billion.

"The reality is that it's difficult to execute such a scheme well. Startup success and failure depend on so many things," said Li Jianggan, chief executive of venture builder Momentum Works.

"Fundamentally, do we believe in market forces or do we believe in government intervention? It is a balancing act and something that tests the wisdom and long-term vision of the decision makers."

The details of the co-investment scheme have yet to be announced, though Mr Heng said that the funds will be used for "promising startups" as a means to preserve the innovation ecosystem that has taken Singapore many painstaking years to build.

Enterprise Singapore told The Business Times that government-owned investors EDBI and SEEDS Capital will be assessing startups on a case-by-case basis. The startups "must possess strategic capabilities such as technology and innovation competencies and/or sustainable competitive advantages," said the agency.

It is crucial that the standards for assessing such startups be extra-stringent. Those millions of dollars could have been directed towards more worthy causes during a downturn, instead of an ecosystem that in recent years has favoured blitz-scaling and cash-burning companies.

"While a culture of innovation should be encouraged and nurtured, (the blitz-scaling, cash-burning strategy) is really a product of excess capital and a desire, by opportunistic fund managers, to replicate the Silicon Valley winner-takes-all playbook in South-east Asia - a market that has experienced a prolonged period of sustained growth and relative stability," said Joel Shen, a tech lawyer at DWF.

"If the startup can't raise money or finance its operations using its own cash flow, then it fails - just like any other business. What makes the startup more deserving of government support than other businesses?"