Marcus Chow of Bird & Bird gives an overview of the various sources of financing and initiatives available for fintech startups in the city-state to support their growth strategies
Depending on the relative stage of their development, various sources of financing are available to fintech companies in Singapore. These include angel/seed funding, venture capital, corporate venture capital and government incentives/funding. Besides cash funding, accelerators and incubators also give fintech companies a leg up in the development of their revenue and business models, and offer different business expertise and resources. As banks, insurers and other financial institutions grapple with the fintech threat, many have started co-opting fintech into their processes in the digitisation push.
Singapore was ranked the world's third, and Asia's leading financial centre in the Global Financial Centres Index 2016. The city boasts a high concentration of high net worth individuals (HNWIs), with assets under management of approximately S$2.6 trillion ($1.86 trillion) in 2015. Consistently featured among the world's leading wealth management centres, Singapore was placed sixth in the world, according to the Deloitte Wealth Management Centre Ranking 2015.
These HNWIs form the nucleus of the angel and seed investments in early stage startups (including fintech companies), either individually or through dedicated angel investment vehicles such as Singapore Angel Network.
Venture capital funds typically focus on the middle portion of the classic industry S curve where startups have demonstrated compelling value proposition in a high growth market. These funds typically invest in the series investments, and seek exits through trade sales or initial public offerings.
The transparency and ease of doing business and the rule of law have made Singapore an attractive destination for venture capital (VC) funds globally. Singapore is often used as the launch pad for investments by VC funds into the southeast Asian region. Notable global VC firms that have established a presence in Singapore include Sequoia Capital, Gobi Partners, Golden Gate Ventures and Global Brain Corporation. Last October, Silicon Valley seed funding giant 500 Startups announced 500 Durians II, its second southeast Asia fund worth $50 million. The local VC scene is also rapidly proliferating with local and regional monies going into newly set up VC funds. The proposed amendments to the regulatory policy framework for VC fund managers put forth by the Monetary Authority of Singapore (MAS), making it easier for VC funds to set up in Singapore, are expected to fuel this trend. The proposed rules, which include a simplified authorisation and licensing process, and reduced ongoing business conduct requirements, are slated to be implemented later this year.
The fundraising landscape for fintech in Singapore has been made more vibrant by the participation of corporate venture funds. An increasing number of corporations are setting up VC arms to invest in fintech companies, especially to cash in on the innovation in 'trending' technology such as blockchain and cybersecurity. The value proposition of corporate VC is often in its deep knowledge of markets and technologies, strong balance sheets, dominant market position and ability to be patient investors. Cisco Systems, Intel, and SoftBank are some examples of large multinational corporations whose VC arms have been active in Singapore.
Similar interest has been roused among large local corporates such as technology company DeClout whose investment fund focuses on fintech, smart logistics, cybersecurity and big data analytics startups. Singapore Press Holdings' Media Fund, established to focus on investments in consumer technology and media startups, has begun investing in fintech startups as well.
Government schemes and initiatives
The Singapore government has implemented various funding support schemes for startups in general as well as fintech-specific initiatives.
The government has a number of equity-based co-financing schemes for startups, such as the Early Stage Venture Fund which is currently in its third iteration. The National Research Foundation (NRF) will match investments in technology startups by four qualifying local large enterprises, DeClout, YCH, Capitaland and Wilmar International, up to a maximum of S$10 million per fund.
There is also a range of cash grants available to startups (including fintech companies), for instance the ACE Startup Grant. Each startup's business proposal is assessed based on four key criteria: differentiation from competition, feasibility of revenue model, potential market opportunity, and skills and commitment of the management team. Successful startups will receive S$7 for every S$3 raised by the startup, up to a maximum of S$50,000.
The government also plays an active role in supporting accelerator and incubator programmes. One scheme it has implemented is the Technology Incubation Scheme, under which the NRF co-invests up to 85% of the investment into a Singapore-based startup, up to a maximum of S$500,000, while the partner technology incubator would invest the remaining 15%.
Startups in Singapore can also take advantage of the array of tax incentives available to them. For the first three years, companies enjoy an automatic full exemption on the first S$100,000 of normal chargeable income and a further 50% exemption on the next S$200,000. In addition, angel investors who invest in startups can apply for tax deductions under the Angel Investors Tax Deduction Scheme.
Fintech companies developing nascent technologies may be interested, in particular, in the financial sector technology and innovation proof of concept scheme administered by the MAS. Up to S$200,000 is provided as funding support for investigative projects or technical equivalence trials undertaken by a financial institution or a technology/solution provider sponsored by a financial institution.
To show its commitment to the fintech sphere in Singapore, the MAS and NRF have set up a fintech office as a one-stop virtual entity to review and enhance the available fintech-related funding initiatives, and offer advice to fintech start-ups seeking to avail themselves of such schemes.
In addition to these initiatives, the MAS has teamed up with R3 and a consortium of financial institutions to conduct inter-bank payments using blockchain technology. This is aimed at overcoming time differences, effectively maintaining an audit trail and deterring money laundering. The Info-communications Media Development Authority has also announced its partnership with HSBC and Bank of America Merrill Lynch to design a new blockchain prototype to execute import-export transactions automatically.
Accelerators and incubators
In recent times, there has been an influx of new accelerators and incubators for fintech startups in Singapore, including Life.SREDA Inspirasia and Startupbootcamp Fintech Singapore.
Accelerators provide proof of concept funding, typically in exchange for between five to 10% equity in the startup. However, the key value proposition of such programmes lies in the crucial access they offer to learning and mentorship opportunities as well as to their global network of corporate partners, industry experts, venture capitalists, angel investors, and alumni – many of whom may go on to become partners, customers or investors of the startup.
Banks and financial institutions
Financial institutions are fostering partnerships with fintech companies in various other ways. OCBC Bank recently partnered with Moneysmart to offer a lower rate mortgage package on Moneysmart's portal. DBS Bank, too, entered into cross-referral agreements with local peer-to-peer lending startups, Moolahsense and Funding Societies, last year.
A number of banks have also set up venture funds to invest in digital initiatives. Citibank's Citi Ventures is one of the funds actively investing in local companies. It co-led the S$11.7 million Series B round of funding for multi-currency cross-border securities trading startup M-DAQ.
Local banks have also developed venture debt schemes for startups. Local banks UOB, OCBC and DBS have each recently launched venture debt financing programmes. The Standards, Productivity and Innovation Board of Singapore (SPRING Singapore) shares 50% of the default risk with the banks.
The MAS has announced its proposal for measures to enhance startup access to securities-based crowdfunding (SCF). SCF platform operators will be subject to less stringent requirements, and the pre-qualifications for investors will be simplified. As a result, it will be easier for startups to obtain capital from SCF platforms without the prohibitively onerous conditions currently imposed, such as the requirement to prepare a prospectus for the offer of securities.
Special thanks to Anisha Jalla, corporate practice trainee, for her assistance on this article
|About the author|
Partner, Bird & Bird
Marcus Chow is a partner at Bird & Bird. His practice focuses on M&A, private equity, equity capital markets and regulatory compliance work. He also advises on corporate governance and Singapore stock exchange related matters. He is involved in regional cross-border transactions in PRC (including Hong Kong), Malaysia, Thailand, Vietnam, Indonesia and India.
He previously practiced in New York and Hong Kong, and has experience in a range of industries including manufacturing, retail, construction, real estate, food and beverage, banking and finance, airlines, mining and agriculture. He was also with Singapore Exchange Securities Trading where he was in the issuers' regulation department in charge of vetting listing and IPO applicants, and enforcing continuing listing obligations on listed companies.
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