Steady start to S'pore's startup funding in 2016

Singapore

SINGAPORE'S entrepreneurship ecosystem is having a steady start to 2016 despite startup valuations going south.

Serial entrepreneur Leslie Loh, who runs startup incubator Red Dot Ventures, said that the global economic slowdown, coupled with the pessimistic, cautious investing sentiment from the US, have rubbed off on investors in Singapore and Asia through the early part of the year.

Singapore funding in fact is up: US$275 million in 37 deals in the first quarter versus US$183 million a year ago. Last year's record was US$549 million with 31 deals in Q3, according to Tech in Asia Research. Total investment amount in Asia in Q1 2016 was US$17.29 billion in 850 deals, up from US$14.82 billion in Q1 2015. In Q3 2015, the numbers were US$22.2 billion and 1,063 deals.

Sebastien Lamy, who leads Bain's private equity practice in South-east Asia, said that investors in South-east Asia spent much of 2015 hoping it would be the region's "breakout year".

Notable activity this year include Alibaba's US$1 billion investment into Singapore-based e-commerce site Lazada for a controlling stake (announced on April 12), as well as Internet company Garena's US$170 million Series D funding (March 31).

Chua Joo Hock, chief investment officer of Temasek-owned Vertex Ventures, said: "Investors will continue to be more cautious. There is definitely more discipline on valuation expectation - which is long overdue. Fundraising is taking longer, and startups are more careful about spending and trying to make the cash last longer."

Funding activity is likely to lag further with the expiry of the Technological Incubation Scheme (TIS) in June, said Mr Loh. This will cause a fall in the number of investments into seed-stage infocomm startups, a decrease of as much as 30 per cent in the next 1-2 years, he cautioned.

TIS is a scheme through which the National Research Foundation co-invests in seed-stage infocomm startups alongside tech incubators. Since 2008, it has backed over 145 startups. Mr Loh said: "Seed-stage investment is critical to the early-stage startup ecosystem as it provides bridge funding to develop sufficient deal flow for venture capital investment."

Venture capitalists typically start investing from Series A rounds, the first round of financing after seed funding.

But Mr Loh noted that startups in deep science or tech, a sector that has advanced but not yet achieved a critical mass as did the infocomm sector, will benefit from the S$19 billion Research Innovation Enterprise 2020 Plan announced in January.

"The government has already done a good job in providing initial seeding and support for the startup ecosystem," said Vertex's Mr Chua. Even with revisions to the government funding regime, there will continue to be many available schemes to help entrepreneurs, he noted.

Fintech and SaaS (software-as-a-service) startups can expect more investor interest, while direct consumer-facing businesses with high burn rates will find it a challenge to raise funding, he said.

More broadly, South-east Asia is starting to see greater "downround" activity, with startup valuations generally lower by about 20 per cent from last year, said Malaysian Private Equity & Venture Capital Association chairman Amin Shafie.

"Investors are no longer satisfied with new unit economics used by startups to justify nosebleed valuations, preferring instead to look back to basics of revenues and paths to profitability," Mr Shafie was quoted as saying at the recent 2016 South-east Asia Venture Capital & Private Equity Conference held in Kuala Lumpur.

It's good news for venture capitalists that valuations are more realistic, Mr Chua said. "As long as valuation is reasonable, good companies will always be able to attract investors."

Facebook co-founder Eduardo Saverin said last week that his Singapore-based venture capital firm B Capital has closed an initial US$143.6 million for a new fund. This will target startups seeking Series B or C funding in South-east Asia and India.

Meanwhile, a homegrown financial technology startup is looking at an IPO (initial public offering) on the Singapore Exchange that could happen by the end of this year. A venture capitalist told The Business Times: "It's very early, but it's something in the pipeline right now. Nasdaq has also approached us for deals."

Reebonz, a seven-year-old luxury e-commerce startup reportedly valued at some US$200 million (following its latest S$40 million Series C round led by Mediacorp in May 2013), is believed to be considering an IPO on Nasdaq, the world's second-largest stock exchange known for its large selection of tech stocks including Google and Facebook.

The luxury-for-less retailer and its early investor Vertex Ventures declined comment. But BT understands that IPO plans are on hold for now.

Said Red Dot's Mr Loh: "If a homegrown startup can achieve a high valuation on a credible exchange like Nasdaq, it will reflect well on our startup ecosystem. It demonstrates we can produce global champions."