Private Capital Markets - Legal Templates & Insights (2022)

Jimmy Hsu, TIF Ventures

Reprint Permission from Aspatore Inc., All Rights Reserved

Bullet Points

  • The government is active in creating a good environment forinvestments and attracting VC setups in Singapore.
  • Singapore is a VC hub, attracting technology companies fromaround Asia.
  • Startups get funding from the government, business angels andboutique funds.
  • Venture capital/private equity funds are not limited to localfirms, but flanked by big funds from US, Europe who set upsatellite investment arms to invest outside of theirhomeland.
  • Later-stage deals tend to involve more internationalinvestors, with a base in Singapore.
  • Exits are primarily made through trade sales with foreigncompanies or IPOs at the local stock exchange.

General Practices

The VC industry in Singapore is still in an early stage. Theprocess is still fairly new to the country, and the number ofbrand name VC firms (as opposed to buyout firms, for example) isrelatively few. Having said that, there are investment firms herethat have been operating since the 1980s, but they do not investin the narrower technology/hi-growth companies that form thebread and butter of VCs' investments. These firms cast their netsinto the wider area of traditional industries including food andlogistics.

The Singapore government has played a key role in developingthe industry since the 1980s. But the establishment of theTechnopreneurship Investment Fund (TIF) in 1999, with the goal ofencouraging VCs from overseas to set up their Asian operations inSingapore and the private sector to set up firms indigenously,has spurred the greatest growth in the VC industry. Thesedevelopment efforts are ongoing, and fund investments related tothese efforts are channeled through the fund-of-funds investmentarm of the Singapore Economic Development Board (EDB), TIFVentures Pte Ltd.

The Singapore government is also an active direct investorthrough other government-related organizations such as Temasek,EDB Ventures, IDA Investments and Singapore Technologies Group,providing seed and early stage funding for startups. Inparticular, EDB introduced a Start-Up Enterprise DevelopmentScheme (SEEDS) in 2001, to help start innovative enterprises.Under SEEDS, EDB co-invests with third party investors in earlyseed stage start-ups on a matching basis up to $300,000. Likemost government related investments, these are primarilycatalytic in nature, with the aim of encouraging entrepreneurshipin Singapore. Other early investors are business angels who areusually successful businessmen and boutique fund managers.Additional active investors include Rothschild, Jafco, Enspire,Fortune and Walden.

With its reputation as a financial center and thepro-enterprise environment developed over the years, Singapore isattracting more and more regional start up companies. Singaporeis seen as the place to find funding for good, growing companies,and they take advantage of the many favourable conditions offeredhere. For one, our traditional strength as a hub for MNCs is oneof the compelling factors. Though our indigenous market size issmall, it is multiplied many fold by the presence of some 6000MNCs primarily from the US, Europe and Japan. In addition,various foreign incubators are setting up here to help theirstart-ups and technology enterprises use Singapore as a launchpad into the global market. These include the China's firstoverseas innovation centre, the India Centre, the Japan BusinessSupport Centre, the German Centre and Korean Venture AccelerationCentre. All of these make Singapore an ideal hub for VCs in theSoutheast Asian region. As such, deal flows for local VCs arevaried, as they encompass all kinds of technologies andgeographies, attracting entrepreneurs from the immediate regionas well as from China, India, Australasia and Korea.

Consequently, deal evaluation and due diligence are somewhatcomplex, as the typical Singaporean VC has to conductcross-border investments with different market economics,legislation and so on. It is not uncommon for initial investmentsto take the form of convertible loans until milestones are met,and these are converted to equity for the company. Deal termsvary but are typically modeled on the U.S. VC prototype. Theinvestment vehicles change considerably depending on the locationof the startup.

Deal syndication is common in Singapore, especially at theearly stage. This is due to the relatively small number of VCs inthe country and the lack of a sizeable VC pool that can takegreat risk. A feature of early-stage venture capital in Singaporeis the disproportionate presence of VC funds, which are privatelyfinanced by wealthy technology entrepreneurs. These funds actmuch like angel investors and are significant players.

The trend for VC investing in Singapore becomes morecosmopolitan in the later stages, with foreign VCs andtraditional PE players getting a slice of the action. Foreign VCfirms are beginning to make their presence felt in localinvestments, and the relationships between local and foreign VCshave been good.

A Unique Market

Singapore does not have a large domestic market, but it iswithin a seven-hour flight of close to a three billion populationin Asia and Oceania. To grow a successful startup, a VC has to be"export-oriented" and possess intellectual property that has aglobal market and is able to cross national boundaries easily. Itshould also have high entry barriers.

Singapore is also in a unique position in that 40 percent ofthe more than 7,000 multinational corporations here have theirAsian headquarters here. In turn, startups are attracted toSingapore, in order to serve these global, multinationalcustomers.

Several factors set Singapore apart from the rest of Asia.First, Singapore has a stable financial and political environmentthat supports growing businesses. In addition, the legalinfrastructure in Singapore protects intellectual property, whichis a motivation for startups to develop their proprietaryproducts here. Finally, as one of the few financial centers inAsia, Singapore provides many innovative instruments of funding,from seed money to private placements and from VCs and buyoutfunds to public offerings.

It is also worth noting that the laws in Singapore arecontinually revised to create a pro-business environment. Forexample, recent changes make it easy to set up companies inSingapore: Foreign entrepreneurs can apply for visas that allowan extended stay in the country to facilitate setting upbusinesses. The corporate tax rate was also recently lowered.

Major Players

Although the government's influence is important in Singapore,it declines as a startup matures. There is a strong core ofangels in Singapore, who are savvy investors whose companies haveobtained a halo effect as a result of their efforts. Corporate VCprograms were once strong but have declined since the dot-comcrash. Foreign and local VCs are beginning to increase theiractivities, with large amounts invested in foreign and localstartups.

In Singapore, deals tend to be referred from other investorsin the industry, ranging from business angels to VC players. Thepreferred method is personal introduction. Serial entrepreneursor deals backed by experienced investors are the ones that mostoften receive funding.

In terms of investors into VC funds, the government,corporations, wealthy individuals and banks predominate. Someinsurance companies are starting to look at investing in VCfunds.

Looking at Opportunities

When evaluating an investment, we look at the following:

  1. Market opportunity, technology innovation and capability, thepeople behind the company (founders, management andinvestors).
  2. Opportunities from corporate spin-offs, entrepreneurs,referrals from other investors, research institutes anduniversities.
  3. Business plan and strategy.
  4. Product competitiveness and intellectual property value.
  5. Addressable market: size, trends and needs.
  6. Management: skills, experience and completeness of theteam.
  7. Financial status of company: debt, AR, P/L, cash flow and soforth.
  8. Use of funding: cap-ex, op-ex, marketing and sales.
  9. Existing shareholders and makeup of investors.

When we actually value a company, we consider whether it is atthe pre-revenue or post-revenue stage, profitable or breakeven.We also look at revenue or earnings multiples, depending on thestage of company growth, and the valuation of comparable dealsdone.

Details of a Deal

In general, term sheets are similar tothose of developedventure industries in US. Singapore VCs are well-versed incross-border deals; most local deals contain terms similar tothose used in overseas deals. However, there may be differencesin conversion clauses, and registration rights may differ due tothe rules and regulations governing business operations indifferent countries and IPOs in different exchanges. As forinstruments used, the classes of stocks may be different indifferent countries, but the principles are similar, the use ofshares with preferential rights, and ESOPSto protect investors'rights and motivate founders/entrepreneurs.

Stock options are increasingly used to motivate managementteams to meet financial and operational goals. In this context,we typically look at milestones (in revenue, product development,sales and business growth), contributions made and fundingobtained.

The board of directors has fiduciaries duties toward thegovernance of the company. Boards typically play an advisory rolein guiding management in strategy, major business decisions andfunding matters. Strategic direction of the company and businessplans are discussed and approved by the board. In particular, thechairman of the board is usually very important in moving thecompany in the right direction for growth and marketing.

Timeline/Exit

For early-stage investments, our timeline for exit is aboutthree to five years. External factors that affect this timelineare the timing of exit opportunities, the experience of theentrepreneur, the support of co-investors and the businessenvironment in general.

In Singapore, financing rounds usually start at the seedstage. Early-stage investing comes when an entrepreneur has doneproof of concept and is ready for development. The typicalsequence of financing rounds is as follows: early, then A, B andC. Actual exit occurs through trade sales, M&A and IPO on thelocal or overseas stock exchange.

Looking Ahead

We invest primarily in early-stage, Singapore-based companies.Exceptions are made when overseas companies have recognized thepotential of establishing operations or developing linkages inSingapore in the near- to mid-term. When companies are basedoverseas, we rely heavily on ourwidespread network of VCs whom wehave invested with to conduct the due diligence and provide theintelligence for those markets. Depending on the stage of thecompany and how we can add value, we sometimes request forrepresentation or observer status on a company's BOD.

Over the last few years, we have increasingly seen companiestargeting new markets such as China and India, although theUnited States does remain the ultimate primary market for moststartups. We've also seen an increasing role for top-tier fundmanagers to help their portfolio expand into these new markets.In the next few years, VCs will want to invest in companies basedabroad that have synergistic and value-adding characteristics orhave first-mover advantage. VCs will start to have a broadergeographic view and invest more globally.

We have already started to see an upturn in the VC industry,both in terms of fund managers raising funds and the dollaramounts into investments made. This has followed the improvementin the local public markets, which in turn have trailed the U.S.public markets. Thus, there is a lag effect but clear signs ofimprovement. We think convergence technologies, digital TV, mediaand the biotechnology/healthcare sectors will be ripe forinvestment over the next few years.

To raise capital in the near future, entrepreneurs will needto balance their presentations and business plans towardfinancial investors instead of merely focusing on the innovationand technology. Meanwhile, local VCs will need to form meaningfulsyndicates with overseas firms that can help them move beyond thelocal markets.

Key Pieces of Advice

We think the best piece of advice for VCs doing business inour country is to focus on management, management and management.An important piece of advice for entrepreneurs is to be realisticabout valuations. For management teams, they need to keep abreastof their industry and be ready to react to changes. Watch theircash flow and burn rate, know their competitors and be sure towork with partners and sell, sell sell. Startups need tounderstand that the world is not going to come to their doorstepfor their product but to bring their companies to the top, theyneed to be out there selling their company and products.

In all, there are three keys to successful venture capitaldeals in Singapore: good management with operational experience,board members and shareholders that work well together and theright timing.

Jimmy Hsu, CEO

Jimmy Hsu joined TIF Ventures in January 2003 as CEO.Before this, he was the senior vice president from GIC SpecialInvestments Pte Ltd, responsible for co-managing the TIF fundwith NSTB. He joined GIC in 1986, first in the equities and bondsdepartments for 10 months before being posted to San Francisco aspart of a team to manage U.S. private investments. He establisheda strong network with the U.S. venture capital and leveragebuyout community and was responsible for investing several ofGIC's private equity funds. In 1990, he was posted to London tostart the department's European operations. He returned toSingapore in 1994 to head up N.E. Asian operations in privateequity funds and co-investments before being tasked to co-managethe TIF Fund with NSTB.

Prior to joining GIC, he was with the Singapore EconomicDevelopment Board from 1977-1981 and was responsible forinvestment promotion and project appraisal. From 1982-1986 he waswith British Petroleum in Singapore, Australia and London andworked in corporate and strategic planning. Jimmy has a B.Eng.with first class honors from University of Alberta, Canada. Healso obtained an MBA from the National University of Singapore.He is a qualified Chartered Financial Analyst with the Instituteof Chartered Financial Analysts, U.S.A.

About TIF Ventures Pte Ltd

TIF Ventures Pte Ltd (TIFV) is a government-ownedfund-of-funds management company. It was incorporated in April2001 as a wholly owned subsidiary of the Economic DevelopmentBoard of Singapore.

TIFV was formed as part of the Technopreneurship 21initiative, which is a government program to promote a viable andthriving sector of high growth technology-oriented companies inSingapore. Its role in this initiative is to develop the VentureCapital (VC) Cluster, achieved through the Company's three mainactivities: fund-of-funds investment (investment into VC funds),direct investment and venture services. Its main investmentvehicle is the Technopreneurship Investment Fund (TIF), whichcurrently has a fund size of US$1.3 billion. Through itsstrategic linkages with reputable VC firms globally, TIFV alsocatalyzes private sector institutional and corporate investmentsinto the VC industry.

Annex

Private Capital Markets - Legal Templates & Insights (1)

The relationship between the three parties shown --entrepreneurs, venture capitalists and fund managers -- forms avirtuous self-reinforcing cycle. As a virtuous cycle, the piekeeps getting enlarged with each cycle (hence the outward facingarrows).

Institutional fund managers invest in venture capital funds tofund entrepreneurs with innovations that have global marketpotential. Flourishing businesses are either sold or go public,and the capital and profits are returned to investors, whoreinvest the funds. At the same time, successful entrepreneursbecome high-net worth individuals who set up foundation andendowment funds, thereby creating a flow of money intoinstitutional funds. And the cycle repeats. With each cycle, theexperiences of the U.S. and European industry show greaterstrengthening of this inter-connectivity.

The funds from the institutional investors ensure a continuousflow of capital into the VC industry, which continues to fundentrepreneurs with new innovations. In the United States, capitalcommitments are accounted for largely by endowments andfoundations and pension funds, with the rest made up by financialand insurance funds. But individuals and families (and in thelast ten years, we can safely conclude that this group comprisestechnopreneurs who have benefited through this cycle of funds)make up 22 percent of the total funds invested in venturecapital. In Europe, the venture capital industry is not asdeveloped, having emerged only in the early '80s. Pension fundsand insurance companies make up 36 percent of total funds raised,with the rest of the funds channeled from banks, corporateinvestors and fund of funds.

In Singapore, venture capital is a little known asset class.TIF was created to kickstart this virtual cycle of fund.

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