The Singapore government’s usual co-investment playbook may not be wide-reaching and quick enough to ensure that a new S$285 million ($201 million) support package reaches struggling startups during the COVID-19 pandemic, industry players told DealStreetAsia.
Administrators of the new co-investment capital should consider key tweaks, including speeding up the deployment process, expanding the investment mandate, and focusing on more vulnerable segments, those players said.
Heng Swee Keat, Deputy Prime Minister and Minister for Finance, announced on Tuesday that the government would allocate the co-investment funds as part of its latest round of pandemic-support fiscal measures, following feedback that some startups were facing trouble raising capital. The new funds will be deployed by EDBI, the investment arm of Singapore’s Economic Development Board, and SEEDS Capital, the investment arm of industry development agency Enterprise Singapore.
In February, the minister had announced a S$300 million ($212 million) top-up to existing deep tech co-investment scheme Startup SG Equity. SEEDS Capital also manages capital under that scheme with Singapore government-owned deep-tech development agency SGInnovate.
Asked for specifics about the new support measures, an EDBI spokesperson provided a statement that echoed principles currently employed by the Startup SG Equity scheme.
“EDBI and SEEDS Capital will assess startups on a case-by-case basis. The startups should be incorporated as a private limited company with key value-added activities in Singapore and possess strategic capabilities such as technology and innovation competencies and/or sustainable competitive advantages.”
Notably missing from the statement was specifics about investment structures and deployment processes, details that have been the focus of startups and investors. DealStreetAsia understands that the Singapore government is still ironing out the details and that it has been actively reaching out to the community to gather feedback on the best ways to fully utilise its resources.
Industry players generally welcomed the additional support, but most also felt that the current co-investment programmes must be tweaked to ensure that the capital is able to reach startups in need during the COVID-19 pandemic. Time to deployment emerged as a prime concern.
Sujay Malve, chief executive of renewable energy microgrid startup Canopy Power, said a pure equity deployment typically takes at least half a year to complete, including going through due diligence, negotiations and legal paperwork.
“Not many companies have six to eight months on hand right now,” he said.
For Canopy Power, which specialises in providing its solutions to island-based businesses like resorts, the co-investment requirement seems to penalise startups in less popular sectors.
“We are in clean tech and hardly any Singapore-based venture capital firm is active in clean tech,” Malve said. “So companies out of the typical realm, like information and communications technology, may miss out if EDBI and SEEDS take the typical route.”
Cocoon Capital managing partner Michael Blakey concurred. If the intention of the support is to help startups struggling during the pandemic, the administrators may need to deploy capital much faster than the amount of time usually required for new investments, the venture capital investor explained.
The co-investment requirement that applying startups must be able to obtain independent funding from other investors can also create a Catch-22 situation for companies who need government support precisely because they cannot get it from private markets.
“For new equity rounds, the entire fundraising process typically takes more than six months, which is too long for a company that is running out of cash,” Blakey said. “A majority of venture capital firms are also reluctant to invest in hard-hit sectors as well until they have some clarity on the future of the economy or industry… Ideally, both the VC industry and government should work together to support these companies through the pandemic.”
Both Blakey and Malve suggested that Singapore deploy the support capital as convertible notes or grants instead of equity and widen the pool of investing partners who get fast-track consideration.
“To maximise its reach to the startup ecosystem, the government should open up to co-investing alongside any regulated, Singapore-based fund,” Blakey said.
Said Malve: “Venture capital investors are reducing valutions by using COVID as an excuse. I could understand some discount but I have seen some investors are kind of taking advantage of the situation. Again, the convertible notes could stop this. They can be converted into equity after 12 months or so, or allow startups to pay back the notes, with interest, if they could.”
Kelvin Lee, chief executive of private investment platform Fundnel, said Singapore may need to provide better clarity on the philosophy of this policy allocation. One of the fundamental uncertainties lies in whether disbursement will follow principles that are more investment-like or more grant-like. Under investment principles, deployment agencies have significant discretion over who receives the funds, with the goal of maximising returns.
Under grant principles, deployment agencies are generally obliged to disburse capital as long as an applicant meets certain predetermined criteria, as long as funds are still available.
Singapore’s co-investment programmes are more investment-like in the sense that the administering agencies make their own assessment on whether to invest in applicants even after preconditions are met. In Malaysia, however, an existing co-investment fund for equity crowdfunding and peer-to-peer financing is more grant-like and will generally co-fund any eligible, successful fundraising campaign through a licensed platform with terms determined by the market.
These differences are meaningful in these times, Lee said.
“Through our conversations with homegrown businesses on the Fundnel platform, we’ve identified a shared concern: While the S$285 million initiative is embraced by the community, there lies some uncertainty about how the money will be deployed,” he said. “A co-investment fund differs vastly from a grant; it is conditional as there is tranching based on milestones. Also, the former requires the fundraiser to secure an investor before the business is qualified to apply — a common challenge exacerbated by the pandemic. The impact of the initiative will hinge greatly on how those details are worked out in the coming days and how quickly the funds will be disbursed in the weeks ahead.”
Disbursement on investment principles also puts the administering agencies in the position of picking winners and losers, Lee explained. A co-investment means that EDBI or SEEDS Capital may become entwined long-term with one particular company in the market, which raises questions about consequences for that company’s competitors, including their ability to receive co-investment support. Applicants will also need clarity on how cases are assessed and prioritised, while companies that do not fall within the mandates of EDBI or SEEDS Capital may be left out in the cold.
It also remains to be seen how deployment of the new capital will be prioritised.
For Canopy Power’s Malve, early-stage startups or companies that have been in business for a while, have customers and working technology that is already commercialised should be moved to the front of the line. Cocoon’s Blakey saw an opportunity to help promising startups that are most affected by the pandemic stay in business to help with the eventual recovery.
“The focus should be on the verticals hardest hit by Covid-19 and thus find it hardest to raise funding, such as travel, events, food and beverage and hospitality,” Blakey said. “The biggest bang for the buck would be to support as many businesses as possible during this difficult time, especially companies that are going to make a positive impact on their industry. By accelerating the digital revolution for the tourism, events, and hospitality industries now, for example, a long term outcome would be greater efficiency and thus a quicker recovery post-pandemic.”