With the growth of the securities crowdfunding industry in Singapore, local private investment platform Fundnel has been making moves to grow and deepen its business operations in the market.
Via a range of partnerships with various investment organisations and communities, coupled with the recent amendments made to crowdfinance regulations in Singapore by the Monetary Authority of Singapore (MAS), which terms the sector as the securities crowdfunding (SCF) inudstry, the company is preparing itself for further growth.
The crowdfunding/crowdfinance sector, which is predicted to surpass the venture capital sector in 2016 and managed to raise US$34.4 billion in 2015. A Forbes analysis notes that venture capital averages to roughly US$30 billion per annum, with 2014 seeing that account for an estimated US$45 billion in investments, whereas angel capital averages an estimated US$20 billion per annum.
In light of its strategy of pursuing growth through the use of strategic alliances, Fundnel’s CEO and co-founder Kelvin Lee discusses the company’s origins, growth trajectory and the future, in an interaction.
What led to Fundnel being incepted and the creation of the brand? What is the background of the founding team?
The Fundnel Family is a mixed bag of finance sleuths, data analysts and creative folk working towards a common goal of making private investments more efficient, open and simpler. During my time at JP Morgan, I spearheaded a number of IPOs.
One of the more memorable IPOs that I did was for a standout Hong Kong-based technology company based out of China that was on the road with us for an NYSE IPO. I remember it was a Sunday afternoon and I was helping out the management teams with roadshow rehearsals.
I could vividly recall the frustrations the CEO had whilst I was helping him brush up on his responses to investors and the press. In a candid moment later in the day, he told me that the way investment banks like ours were going about raising funds for companies was outdated and we would eventually be replaced by technology-powered funding platforms such as Indiegogo and Kickstarter. I agreed.
Who are the primary financial backers? To date, how much funding have you raised on the platform and how much have investors infused into Fundnel, in terms of equity financing?
With regards to our own fundraising, we have a couple of early investors but in general are currently mostly self-financed or bootstrapped. We are in the process of finalising our next round of funding and will announce this at a later date.
Since our inception, Fundnel has helped investors to source and invest in 12 deals worth over US$8 million, as of April 2016. Our journey to complete those 12 deals a long process. Firstly, we had to harness technology to screen over 400 deal opportunities.
Following which, we had to not only rely on human analysis from our investments team, but also leverage on our network of over 2,000 individual investors that we effectively targeted using our data analytics software. Despite the long process, we are confident that this will improve as we continue to learn.
What is the differentiator and competitive edge that you have compared to other crowdfunding platforms? What is the theme and thesis that you take when vetting a startup venture?
There are three key elements in our approach; a regional approach towards dealsourcing and investing, a differentiated approach towards deal screening, due-diligence, investor demand testing and bookbuilding; and our deal size and company-type focus.
In general, we focus on both SMEs and growth-stage companies from both “technology” (40%) and “non-tech” (60%) sectors. Currently, we are also moving up the deal size spectrum to target larger deals (US$5 million and above) and we have three deals that we are working on right now that are above US$10 million each. Because of our larger deal sizes and approach towards due-diligence, investors demand “bookbuilding”.
As a result, we do not see ourselves as purely a crowdfunding platform, but instead a hybridised private investment platform with a growing scope. Crowdfunding as a new medium of fundraising does indeed have good potential in the longer run; however because it is new, the market may not be mature enough to support larger fundraising campaigns at this time.
Therefore, to give businesses that we work with the best chance to succeed, we augment the process with a hybrid approach that leverages on our team’s background with best practices in capital markets (i.e. the typical IPO process that Singaporean investors are accustomed to).
In investment banking, we often theorised about how to make the process of capital raising and investing more efficient with analysis, interaction and effective deal syndication. With Fundnel, we finally have the ability using data, technology and design to simplify the way we invest.
Bringing together a diverse team of individuals with backgrounds in private equity, marketing, entrepreneurship and design, we have branched out into five key markets with offices in Singapore, Malaysia, Indonesia, Hong Kong and a partner office in India. We are creating a new online finance eco-system with the aim of modernising the fundraising/investment process for the new open access economy we live in today.
This combination of access to quality investors, tools, and fundraising generates results. Since our inception, Fundnel has helped investors to source and invest in 12 deals worth over US$8 million, as of April 2016.
Our journey to complete these 12 deals has been a long process. Firstly, we had to harness technology to screen over 400 deal opportunities. Following which, we had to not only rely on human analysis from our investments team, but also leverage on our network of over 2,000 individual investors that we effectively targeted using our data analytics software. Despite the long process, we are confident that this will improve as we continue to learn.
What are the revenue channels for Fundnel and how do you see them expanding? As the fintech space matures, what are the other opportunities you see emerging?
We currently receive a percentage-based fee, on a success basis, for deals done. The percentage varies from deal to deal. In terms of opportunities, we’re looking at applying our technology and platform beyond primary investments into secondary trading and even facilitating trade sales (M&A).
We’re also continuing to build partnerships and/or investments into other eco-system “fintech” tools (e.g. investor reporting, trust/transparency tools, distributed ledgers for settlement etc) would be critical for development of the alternative investment space. We are also LPs in a couple of partner funds that we co-invest with on deals (Anthill, Impact Guru, etc.).
How do you see Fundnel exiting within the next few years – M&A, management buyout or an IPO on a bourse?
Well one can always dream, how about food for thought that we do an “IPO” on our own platform instead and trade in the after-market on our secondary board, Fundnel-X, the platform for the people, owned by everyone?
We have witnessed crowdfunding demonstrating a great deal of growth potential in Asia and it has the ability to provide a wider range of companies more opportunity to gain the access to capital that they need to grow.
According to a report by Goldman Sachs on “The Future of Finance” in March 2015, the analysts predict that crowdfunding could capture significant dollar share from traditional Venture Capital, Angel Investors and popular sources of funding for small businesses such as equity loans, bankcard loans and consumer financing loans. This addressable opportunity is estimated to be about US$1.2 trillion.
Despite the given statistics, we think that private equity will continue to be an important part of this funding ecosystem. Crowdfunding will become part of the “continuum of private capital funding” alongside Angel investing and Venture Capital. Ultimately, we see a hybridization of funding sources over time. Specifically from our own experience, we have screened over 400 investment opportunities since our soft launch in late October 2015, of which, more than half came within the latest quarter in 2016.
The growing volume of deals have prompted us to begin development of our proprietary semi-automated deal screening “black box” tool – Fundnel Factor – in collaboration with one local partners. This tool allows us to offer only deals with the highest probability of success to our investors, making our process more efficient and scalable and it will get better as we feed it more data collected over time.
We believe that this upward trend will continue as crowdfunding slowly becomes a more widely adopted avenue for raising capital. In addition, we are optimistic that more supportive regulation will be introduced in Singapore in the near future which will open up crowdfunding to a larger pool of investors.
Recently, the Singapore bourse has been encountering considerably challenges (e.g. continuing exits by firms) as it seeks to maintain its market position. From a fintech entrepreneurs perspective, what is needed to build an IPO pipeline and compel startup ventures to list here? Do you see Fundnel listing here were it a mature venture?
This is a topic close to heart, I am patriotic and would be biased having had good experience working on SGX IPOs previously with J.P. Morgan; fundamentally, I think corporate governance, economic stability, legal frameworks, trust and transparency in the Singapore capital markets that our forefathers took a lifetime to build, will be Singapore’s (and SGX’s) competitive advantage against regional players.
In today’s global market, becoming the venue of choice for IPOs depends on several factors: 1) whether the venue provides a trusted environment for all market participants, 2) whether there are peer listings, regional/local relevance to aid investor’s understanding of the businesses (for valuations) and 3) whether there is access to and after-market liquidity amongst the type of investors a business hopes to have (good exits and after-market trading/follow-on fundraising ability).
I personally feel that so far, the only market that has really established itself for Fintech listings is the U.S. predominantly due to investors’ understanding of “Fintech” as an investment theme and also the availability of comparable companies in to be used as valuation benchmarks; there is currently no clear leader in Asia for now but that’s exactly why there is an opportunity for SGX and ASX to create one for Asian Fintech companies.
I do admit that there are big challenges that need to be addressed in order for Singapore (and SGX) to stay relevant in this new age of tech innovation. However we will always face challenges as a small nation so our response consequently would need to be – continuous innovation.
A lot of effort has been put into the development of Singapore’s environment to become conducive for digital startups and also increase investor education on understanding digital companies and hence we are beginning to see an increasing number of people interested in investing in Fintech even within the local regional markets.
Why do so many Singapore-based startups choose to list in Australia’s bourses rather than the SGX?
I personally think that it might be a misconception to position the above as a natural “choice” for startups as the listing requirements for the two markets are different, we might need to probably also consider some of the more tangible factors that a startup typically faces when it comes to deciding on exits.
In terms of qualifying requirements, for Mainboard IPOs on SGX a company that is profitable needs to have a minimum market cap of S$150 millio, and the requirement is S$300 million if the company is not profitable. On ASX, the market cap requirement is simply $10 million. There is hence little wonder many startups might choose ASX just because they are more able to meet the criteria there
In terms of associated costs, I observe that on average, smaller mainboard listings are cheaper on the ASX compared to a Catalist listing on SGX, but larger mainboard listings would be cheaper on the SGX. Based on projections, beyond a fundraising size of S$230 million, the cost of listing on SGX becomes cheaper than that of ASX; the higher fees for Catalist listing is due to sponsor fees.
You also have to consider after-market liquidity. Most times, the decision for startups to do an IPO at an early stage of their journey is rarely about after-market trading liquidity. However, it is an important factor to consider if the company is serious about growth and building their business and investor following in the market.
In the longer term, it would only be natural to list on an exchange where most of the investor community understands your business. If your company does not do business in Australia and is not known to the local trading/investment/broker community, why would they be incentivised to hold your stock or spend the time and effort doing fundamental analysis of your business?
There’s also timeline pressure to exit event for early investors in the company. This will vary between companies and could be influenced by the experience and requirements of their investors
What are the key elements needed to solidify Singapore’s status as a fintech hub, when compared to cities like London and Hong Kong?
Incumbents to be open to collaboration and investment, as elaborated in this Accenture report – Digitally Disrupted vs. Digitally Reimagined.
Regulators need to be more pro-active in engaging and working with players in new “fintech” industry – contrary to popular belief, these founders have risked a lot more, including their own reputation to start their venture and are often found to be laser focused on investor protection and the formation of durable and transparent markets.
Finally, there has to be a willingness between “competitor” platforms to collaborate to assure success of the nascent fintech industry at large.
What do you make of the latest moves by the MAS to overhaul regulations on securities crowdfunding?
We welcome MAS’ latest guidelines which provided clarity on the framework for securities CF and with this clarity, will be applying for the appropriate type of License.
Operationally, there is little impact to our process as we already maintain our own compliance and company due-diligence checklist and audit records pre-launch even prior to this revised framework. Our focus on the due-diligence process means that only the top 10% of investment opportunities that come to us, ever make it to an investor’s mailbox for their review and a select top 2% is eventually invested in.
So apart from additional aesthetic changes to our online platform where investors need to sign in to our platform before being allowed to view deals, there is no change to our daily operations.