Young businesses generating over 20% yearly growth in sales and employment deserve more of the lion city’s abundant capital.
As the startup ecosystem increasingly bears the weight of play-it-safe startups taking advantage of the lion city’s prime business conditions, Singapore needs to weed out underperforming businesses and direct its more-than-abundant capital to risk-taking startups that shake things up in previously uncharted verticals.
These startups, aptly called gazelles, are young enterprises that are able to achieve galloping levels of growth greater than 20% within a short three year period and has more than 10 employees in its workforce, according to a definition from the Organisation for Economic Cooperation and Development.
“Singapore can adopt a very targeted approach in offering financial assistance to startups in certain fintech verticals such as process automation which involves deeper technology and longer implementation time, as opposed to offering financial assistance as a blanket approach for all fintech startups,” suggested PwC Singapore Venture Hub Leader Patrick Yeo.
Gazelles primarily operate in riskier tech ventures as more than half (58.1%) choose to disrupt the ICT sub-sector where barriers to entry are relatively low. This is followed by an equal percentage (11.6%) of gazelles who opt to specialise in precision engineering and other scientific and technical services, according to a longitudinal study on the local startup ecosystem conducted by NUS Entrepreneurship Centre.
Such startup types also stimulate economic activity as they generate higher levels of employment with an average organisation size of 32.2 as opposed to a measly 4.4 and 4.1 for bootstrapped and early development startups.
And such risk-taking endeavours taken by gazelles for the slight chance of achieving technological breakthroughs are reaping monetary rewards as they achieve significantly higher average sales revenue at $4.1m which is over twenty times the revenue generated by startups in the early development stage at $0.2m.
On the other hand, growth-seeking startups post $3.3m in average sales revenue whilst bootstrapped ventures are at $0.8m.
This is because innovation and higher R&D spending have been consistently linked to better growth trajectories and sales performance than startups that do not invest their energies on developing new products and services, patents, trademarks and copyrights. "Technology readiness at founding is also a possible influencing factor - average sales growth is higher among startups that spend 3 to 5 years in product/ service development and have at least an alpha prototype of their main product upon founding," NUS noted.
Despite their economic contribution and stellar growth trajectories, gazelles are actually hard to come by in Singapore’s tech ecosystem, just like their galloping counterparts in the animal kingdom, as they only account for a measly 8.1% of tech enterprises out of 48,071 operating startups in Singapore as of end-2015.
The market is instead bogged down by a growing number of underperforming businesses operating within conservative industries such as online services and taking funding opportunities away from startups that dare to venture into riskier but severely lacking areas like deep tech.
In fact, more than half (52.7%) of startups in Singapore are able to survive harsh business conditions for more than five years, higher than the US and UK average at 49% and 42% respectively, the NUS report noted, which may be linked to the lack of risk-taking amongst such ventures.
“In conclusion, Singapore’s tech startup ecosystem has become more dynamic. However, it is not producing sufficient number of gazelles, especially in deep-tech areas, compared to dynamic innovation hubs like the Silicon Valley and Israel,” the report added. "Prioritising deep technology as an area of investment would enable the ecosystem to achieve technological breakthroughs that are disruptive, confer strong competitive advantages and allow startups to scale faster."
It comes as no surprise that venture capital firms believe that whilst there is no shortage of financing in Singapore due to the availability of early-stage capital from accelerators, incubators, governments and private investors, there may be a shortage in investment-ready startups.
"Compared to 10 years ago structures are in place to support startups like fintech businesses that don't require huge capital to get set up. The funds and the startups just need to knuckle down, get their act together and accept that not everybody deserves a cheque," said Hugh Mason of JFDI Asia, an accelerator providing seed funding to mobile and digital startup businesses.
This comes amidst a survey whose findings pointed out that one in five fintech firms believe that there is not enough capital to go around in the lion city giving businesses the opportunity to scale - a claim refuted by VC firms themselves who have expressed willingness to shell out capital for deserving startups.
“If anything, I believe the top-of-the funnel, e.g. pre-seed to Series A, are well serviced by reputable, respected institutional funds. Any statement to the contrary is demonstrably false, and I would be remiss not to point out that simply because a company doesn't raise financing doesn't necessarily mean that there is a lack of it; it could simply mean that the company wasn't investable,” VC firm Golden Gate Ventures principal Justin Hall told Singapore Business Review.
Willson Cuaca of VC firm East Ventures similarly commends various public sector initiatives supporting innovative startups in the city-state. These include an additional $4m in funding earmarked by the government for deep tech enterprises as well as the launch of an enhanced intellectual property framework to streamline product commercialisation.
He also echoed the industry sentiment in his belief that startups in Singapore should be more open to taking risks to make the necessary breakthroughs as only then will the funding come freely on its own. “If the majority of the startups still couldn't find enough funding, don't you think it is simple because they don't have enough business case?"
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