ASEAN venture capitalists’ risk appetite for deep tech startups rising: Alex Crompton, Entrepreneur First

Alex Crompton, Director at Entrepreneur First Singapore. Credit: Entrepreneur First

Alex Crompton, the Director of Entrepreneur First (EF) in Singapore, is bullish on the city-state’s venture ecosystem, and takes a contrarian view that its investors are growing in risk appetite and sophistication, particularly in relation to the deep technology cluster.

Noting that Entrepreneur First operates within a broader historical context, he said: “What we’re seeing is that this era seems to be a time for highly ambitious individuals with a much larger scope for impact than there has ever been… Fundamentally, EF is founded around this thesis that what the most ambitious people do has changed, but the institutions that support them in their ambitions have not.”

He also holds a contrary view on the talent shortage within Singapore’s startup ecosystem: “It’s kind of easy to say that but I just don’t think it’s true. Our experience of having worked with people that come from the best universities, research institutions and companies in Europe, and then our experience of working with people from the same in Singapore and Asia – there’s a certainty that the quality of talent isn’t any different. Singapore brings together people from around the region and it has done so for a very long time.”

Edited excerpts

What’s the size of the corpus that Entrepreneur First can deploy in Singapore at the moment? 

We have a small core fund in Singapore of about S$16 million that can support us until our sixth cohort in 2022; we tend to invest very small amounts at the early stages of a company’s development – even before they’re proper companies really – and it isn’t a traditional seed fund, so it doesn’t need to be very large and if we don’t end up deploying all of it, I would be very surprised.

In terms of the macro view, there’s been significant uncertainty surrounding Brexit – the UK leaving the European Union – and the UK has expressed a desire to join the Trans-Pacific Partnership, despite trading roughly twice as much with Ireland as it does with Japan, the biggest TPP economy. What’s the impact for startup ventures and the venture capital sector? Singapore has experienced a minor movement of startups and smaller funds out of the UK into the city-state.

If there’s one thing that startups are, it’s that they’re counter-cyclical. Many of the greatest companies throughout history have been started in time periods where things have been difficult in other places. When I look at the impact of Brexit, there’s still uncertainty about how things are going to turn out. With the information that’s coming out about the capital that’s being invested, things might not be as bad as people once feared.

The massive advantage that technology companies have in particular is that – if history is anything to go by – they can go against the macro trends in crucial ways. One of the most exciting things happening around the world is that economies and governments are becoming more active in how they build and develop their entrepreneurial ecosystem, as well as collaborating with investors and technologists in figuring out the best way to do things.

I think there are massive opportunities whether it’s the UK or Singapore that are emerging as a result of the competition between ecosystems. In Singapore, we have so many great partners both in the venture community and within the government.

In creating EF, we’re essentially creating an environment which allows people to do more deals and invest in the deep tech companies that we create. And even with the Brexit,  I don’t think that will necessarily change the way that a number of great companies get built in the UK. On the other hand, we see a huge opportunity worldwide to create environments which allow startups to flourish. And that’s definitely happening in Singapore.

A common criticism of the Singapore ecosystem by various stakeholders is talent scarcity. What’s your take on this factor?  

Talking about the talent shortage issue, it’s kind of like saying: “Would you like more money?” Wherever you go in the world, people believe that there’s not enough talent. In Europe its been the narrative for a long time. If you’re going to ask anyone about what it’s like to hire for startups, they’ll tell you there’s not enough talent.

It’s kind of easy to say that but I just don’t think it’s true. Our experience of having worked with people that come from the best universities, research institutions and companies in Europe, and then our experience of working with people from the same in Singapore and Asia – there’s a certainty that the quality of talent isn’t any different. Singapore brings together people from around the region and it has done so for a very long time.

I don’t think there’s a lack of quality talent. The real question is how you get those talented people to participate. The reality is that great people want to do great things. Unless there are companies working on things which are really meaningful, then they’re not going to enter the startup ecosystem.

When you go down to the labs and financial institution and get the opportunity to meet such people – we’ve seen this happen in the UK over the last five years – this is really what people have decided to do. The opportunities available and the companies around them have changed and I think the same shift is happening in Singapore. It will very quickly become realized as well as Singapore.

Singapore has massive advantages. The reason why London has been able to produce so many high-quality AI companies over the last five years is actually that you could launch the same company in Silicon Valley and never have hired that same calibre of talent – there aren’t that many of them and they’re ridiculously expensive.

In Singapore, you have access to international talent from the academic and professional world. But you also don’t have the insane overinflation that you find in Silicon Valley. So if you have had thoughts of building something, it’s probably easier to do that here than in Silicon Valley. One of the biggest competitive advantages for our companies in London and Singapore is that they’re not in Silicon Valley and can build their teams more sustainably.

Another criticism of Singapore’s venture ecosystem is the conservative nature of its venture capital (VC) firms – many have limited partners (LPs) who restrict their mandates – in terms of deploying capital to invest in early-stage ventures. How do you see this situation evolving as the ecosystem matures and competes with emerging hubs like Jakarta and its impact on deep tech investments? 

It’s a really interesting perspective. While maybe this was true a few years ago, we’re seeing more VCs coming out with specific mandates and the more established institutional VCs backing investments in deep tech.

It was certainly something we were concerned about when we first came over. However, sometimes startup ecosystems can develop a narrative that when looked at empirically, doesn’t turn out to be true.

We’ve had a number of well-known VCs invest into our company and are very enthusiastic about it. Perhaps on the fringes of the ecosystem, it feels more old school. But at this point, it just not something that we’re very worried about anymore.

How would you describe the contours of your partnership with SGInnovate, as well as the impact of its recent shift in strategy to focus on a ‘deep tech nexus’?

We’ve worked with them for some time and they helped us get going at the rate that we’ve been able to. This is particularly true given we were entering a new ecosystem when we first started in 2016 and were still very focused on what we were doing in the UK. We couldn’t have done a lot without them.

Whether it’s from the people that they introduced us to to the various ways in which they’ve helped us access various parts of the ecosystem, they’ve massively accelerated our ability to establish and grow our presence here. And in the long run, its the kind of push that also helps to build connections, with the investment community, in particular, is a key part of that.

With the strategy shift by SGInnovate, it sends a really strong and positive signal to the investment community. The ability to do deals quickly is something which is a massive strategic advantage for an ecosystem, and I think what they’re doing will give people the confidence to and provide a significant boost to the ecosystem.

Their talent building initiatives can only be a good thing. Again, I don’t think that there is a talent shortage per se, but there is no way in which it can be bad to have more people entering the ecosystem.

How has the investment thesis of Entrepreneur First evolved since its inception in London and expansion to Singapore, where it launched in 2016, and how has it impacted its operations?

Entrepreneur First has changed a lot over its history, but their mission and focus have remained the same since inception; it’s about connecting with ambitious and intelligent people. The question is: “What should the most ambitious people that live be doing?”

if you look throughout history, there’s always been different ways people express their ambitions. If you look back at history, you’ll find specific categories of people that would orientate themselves with certain communities and places where they could spread their influence and ideas. The military figure Napoleon is the classic example; here was someone from Corsica who had an extraordinary impact doing it

If you look at government or business, they have experienced different eras in history where they were incredibly important; Singapore itself is essentially a manifestation of political ambition in the last century. What we’re seeing is that this era seems to be a time for highly ambitious individuals with a much larger scope for impact than there has ever been.

The fact that someone like Mark Zuckerberg exists is not a trivial fact; he probably has more influence than any other human in the world has ever had through his daily reach to millions of people. No government, military, or religious leader has been able to reach people at quite the scale he’s been able to.

It’s not just the case of some cool tech startup founder who is someone that has changed the course of history. Here was an individual [Zuckerberg] who started a project that has achieved massive scope, without necessarily having massive resources to start off. And this is the first time in history that it’s been true.

So when you ask the question of what the most ambitious people should do with their lives, the answer has changed. 20 years ago? It was probably working at Goldman Sachs then going to Harvard University to secure an MBA and aiming to join a private equity firm. The answer now is to seek out and try to build something enormous.

Fundamentally, EF is founded around this thesis that what the most ambitious people do has changed but the institutions that support them in their ambitions have not. If you look at any of those organisations and institutions, re available to support them haven’t. So whether you go back to any of those areas – whether its the government, public sector or private sector – there hasn’t been any emergent institution for individuals like this.

In the technology space, there are many great accelerators, incubators and investment funds, but they only operate to support companies, We have a specific model that turns people into companies. For the foreseeable future, technology companies are likely to be the most important driving force for our culture and society. How do you enable individual people to access that? How do we enable individuals people to make the most of their potential?

There’s a large issue, particularly outside Silicon Valley, where it’s not a cultural norm for people to form companies and experiment with things. For us, the real opportunity is outside Silicon Valley where it’s not a cultural norm. We don’t believe that all the best people in the world who start technology companies exist in Silicon Valley; there’s amazing talent outside of that ecosystem and we’re one method of unlocking that potential.

Looking at venture-backed startups, VCs tend to seek an exit within a three to the four-year horizon, given their fund lifespans. A deep tech startup probably takes a much longer time to mature and reach the market. What’s the experience been in terms of fundraising? 

It’s been very positive. There’s an interesting misconception around what a deep technology startup growing means; there are concerns about its speed of growth and ability to scale, compared to a consumer-oriented company operating in the heterogeneous markets of Southeast Asia.

There’s a perception that deep technology companies have it harder when scaling and for its investors to experience a liquidity event. While deep tech may be harder in some ways, there’s no reason why they can’t grow at the same rate as other ventures. When you look at our portfolio in the UK and Singapore, you see the kind of growth that deep tech ventures can achieve is often comparable to more orthodox startups. And the investors have realised this.

One of the exciting things about the market in this region [Indo-Aia Pacific] is the social, cultural and language diversity. And you need to bear in mind that great technology works anywhere. A lot of customers that our portfolio companies possess are distributed across the world.

This has emerged due to their focus on building something great as opposed to some marketing tricks. For them, achieving scale is due to working on great technology, and achieving scale in this kind of ecosystem is actually often easier.

So we’re seeing a huge amount of investor appetite for this type of company. I’m not concerned that in the end, it will turn out that people should have been building social media companies.

2017 saw the emerging of initial coin offerings (ICOs) – also known as digital token generation events – as a tool of entrepreneurial finance. In the context of deep tech, how do you view this development given there is an overcapitalisation risk and the market is slowly rationalising as of Q1 2018?

One of the things that are striking about venture capital as an asset class is that, historically, it’s been very hard to perform well. There are a few great funds which generate strong returns, and for new entrants, in venture capital, it’s very difficult.

It would be surprising if you could invest at much, much higher valuations than traditional venture capital is willing to and still get good returns. So with huge amounts of capital flowing into an early-stage company is probably something that wouldn’t be born out by traditional VC. In the long run, having some kind of index for digital tokens issued in ICOs would be a very good development.

Structurally, there are various kinds of investors at different stages of an ICO and the liquidity that’s available to them at different points in a company’s lifecycle. This means that investors in ICOS can have a very profitable experience even if the companies themselves don’t turn out to be hospitable. It’s an interesting matter where in the long run entrepreneurs can sustain this chunk of capital from an ICO and at the valuation that people were backing it.

For deep tech exits are initial public offers (IPOs) viable? For sectors like biotechnology, corporate buyouts are a common exit. However, the region has stock exchanges like the Tokyo Stock Exchange (TSE) or Australian Securities Exchange (ASX) which offer very viable and liquid platforms for partial exits and fundraising. What’s your take? 

We haven’t seen any companies which have accomplished that as the deep tech space is still young. For tech exit, one concern is that the company is brought before it can really flourish, and I don’t view that as a bad thing. If you look at the performance of tech companies, many go on to become very large.

There’s always an element of risk mitigation in deep technology. If you build a social media app and people don’t use it, you’re in a very tough spot. Whereas if you create some great technology and it turns out to be challenging in some way, there’s still some really valuable intellectual property (IP) there.

For instance, DeepMind in the UK wanted to build an artificial general intelligence. Instead, they created something that was good at playing guitar games and they did very well out of that and got acquired by Google back in 2014.

In the case of DeepMind, maybe they could have achieved artificial general intelligence if they’d not been acquired. But even getting 10 per cent of the way turned out to be incredibly valuable to Google.

I don’t necessarily look at the acquisition side, in terms of the capitalisation and scope of the company. There are many large companies which build technology products and services and if anything, then a Plan B where you can get acquired if you can’t achieve the scale you’re aiming looks better. That way, I reckon you often retain far more intellectual value as a company if you’re working on something important.

Also Read: 

Global venture builder Entrepreneur First unveils second Singapore cohort

Singapore shouldn’t aim to be Silicon Valley: Anne Marie Droste, Entrepreneur First

SGInnovate-backed Morpheus Labs raises funds at $2m valuation, plans $25m ICO

Fundamentals of Singapore in place to drive startup ecosystem growth: SGInnovate

Deep tech a substantial venture opportunity: Steve Leonard, SGInnovate