The Business Times

Start-ups risk 'going astray' in two scenarios

'Grantepreneurship' and 'predatory incubation' should be avoided: observers

Published Sun, Sep 14, 2014 · 10:00 PM
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[SINGAPORE] Paying it forward - a culture in which veteran entrepreneurs who were once beneficiaries of support and mentorship themselves readily lend support and mentorship to their younger peers - is still in its infancy in the start-up ecosystem here.

And this lack of guidance by experienced mentors, say observers, could lead to two scenarios where young, inexperienced start-ups "go astray".

The first scenario, "grantepreneurship", refers to start-ups wanting to start their businesses only after they manage to snag government grants, or exploiting such grants due to their sheer availability.

The second phenomenon, "predatory incubation", is where investors or mentors demand "sweat equity" (equity in exchange for time and energy invested in a start-up) even before helping them - and entrepreneurs struggle to have to give up a large portion of their business even before starting.

"Grantepreneurship" is not unique to Singapore, and is in fact a function of any government intervention, said Hugh Mason, CEO of start-up accelerator JFDI.Asia. "It's a result of the government wanting to elevate the start-up ecosystem - a complex environment - in a very short time.

"So we have various government agencies wanting to help as many start-ups as possible; and start-ups, on the other hand, sparingly applying for grants - with some even seeing it as helping public servants spend government money and fulfil KPIs (key project indicators)."

James Chan, founder- CEO of tech incubator Silicon Straits, said that it is not possible to effectively promote an entrepreneurial culture by throwing money at the problem just before entrepreneurs start a venture.

"Passion, character and integrity can be inculcated only from a young age - first by the parents and then possibly by the education system," he said.

Vinnie Lauria, founding partner of Golden Gate Ventures, nonetheless believes the various government initiatives and grants have created a vibrant start-up ecosystem and will be beneficial in the long term.

"Maybe these (initiatives and grants) have propped up a few more entrepreneurs for longer than the private market would have, but I think it's a necessary drawback for the greater positive happening in the market," he said.

Government initiatives also have checks and balances in place to prevent the abuse of grants, Mr Lauria added. Start-ups applying for iJam's Tier 2 funding of up to S$100,000, for instance, must have secured a matching amount of funds from private investors first.

iJam - short for IDM (Interactive Digital Media) Jump-start and Mentor - is a programme under Singapore's Media Development Authority (MDA) that provides financial and incubation support to start-ups with breakthrough ideas.

"Predatory incubation" is also not an ideal outcome.

"For instance, an investor values a start-up for S$200,000. He invests S$10,000 and helps the start-up get S$50,000 in government grants. Normally, he would get only 5 per cent of the company but a deal is struck such that the investor gets S$60,000 worth of equity or 30 per cent. The investor is basically leveraging the government grants to get additional equity out of the start-up," explained Ko Tze-Shen, co-founder of Angels Gate Advisory (AGA).

In response, Alex Lin, head of Infocomm Investments (the investment arm of the Infocomm Development Authority of Singapore), said: "There is a knowledge gap that exists between entrepreneurs and investors. In reality, the success rate of start-ups is relatively low at about 5 per cent, based on JFDI's data. So investors have a very low chance of exercising their equity options. To mitigate this risk, they ask for a higher equity option to compensate them for their investment, time and energy spent on coaching the start-ups."

Silicon Straits' Mr Chan agrees it is common, and reasonable for mentors to ask for "sweat equity" as long as both parties are agreeable.

"I don't think there's a need to be excessively concerned about 'poor entrepreneurs' being conned of their equity. If they feel cheated, it's usually in hindsight, and there's no better teacher than real-world experience to motivate them to do better," Mr Chan said.

A pay-it-forward culture will help young start-ups avoid such pitfalls, said observers. And hoping to cultivate this and foster a Silicon Valley-like ecosystem of support is AGA, the two-year-old homegrown incubator. Said Mr Ko: "Our hope is to promote a culture where entrepreneurs become entrepreneurs because of their passion and love for their business - not because they are able to subsidise the risks with a grant."

AGA provides free advisory services and free incubation space (of up to three tables) to start-ups, and does not ask for equity in exchange for government grants even though it is an iJam-appointed incubator with access to such grants.

"If we contribute and invest time and energy freely in start-ups, when they grow and become profitable, they too will contribute and invest time and energy (freely) in the next generation of start-ups," said Christopher Quek, AGA director and resident mentor.

The incubator - backed by investment firm Khattar Holdings - has mentored over 50 start-ups, among them educational gaming platform, mobile search engine Loco, and food data analytics firm Taste Genome.

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