May 23, 2016
Regarded among investors and industry observers as Southeast Asia’s most developed entrepreneurial ecosystem, Singapore has much to be proud of with regard to the transformation of its entrepreneurial landscape over the last decade. In fact, between 2012 and 2015, Singapore moved up seven places to rank 10th in an international report by Compass, which ranks start-up ecosystems. This is ostensibly a testament of Singapore’s ceaseless aspiration to becoming what might very well be, the Silicon Valley of the East.
Singapore’s achievement as the region’s entrepreneurial hub has, for the most part, been recognisably attributed to the extensive government efforts in supporting start-ups and entrepreneurship. Indeed, there is currently a whole host of government funding and assistance schemes available to enable enterprise development and to contribute to Singapore’s success as a start-up-friendly nation.
In this article, we review a new initiative known as, venture debt, and other similar schemes offered in other jurisdictions.
Singapore’s Venture Debt Programme
The Venture Debt Programme (VDP) is one of the latest government-led initiatives that expands the range of capital raising options available to entrepreneurs in Singapore. First announced in Budget 2015, the VDP is intended to be an approach towards supporting innovation, with the aim of providing local early stage and high growth small and medium-sized enterprises (SMEs) with a new financing option for business growth and expansion.
For such SMEs with high growth potential, traditional bank loans and equity investments may not be feasible as these entities may likely have neither established revenue streams (that often attract venture capital) nor significant assets to use as collaterals (in order to obtain traditional bank loans). As such, venture debt, as an alternative form of financing, presents itself as an in-between option, since it may involve deferred repayment terms to minimise short term impact on cash flow, and also allow applicant SMEs to enjoy enhanced capital efficiency (without requiring any shareholder dilution). To compensate for the higher risk involved in financing such entities, venture debt providers may combine their loans with warrants, or rights to purchase equity.
On 28 April 2016, SPRING Singapore officially launched the VDP with the local banks - DBS, OCBC and UOB. Under the VDP, DBS, OCBC and UOB will seek to catalyse about 100 venture debt loans, totalling close to S$500 million over two years. SPRING Singapore will provide 50% risk sharing to these local financial institutions for such loans. So far, loans to at least three companies have already been approved since the VDP was rolled out by the three local participating banks in January 2016. These companies are Ascenz Solutions Pte Ltd, Conversant Pte Ltd, and MDS Retail Pte Ltd.
Eligibility for VDP
Under the VDP, an SME can apply for venture debt loans of up to S$5 million each for business expansion purposes such as scaling up business production, undertaking new projects, undergoing mergers and acquisitions etc.
To be eligible, startups and SMEs must not only demonstrate clear growth potential, they must also be registered and operating in Singapore, have a minimum of 30% local shareholding (by Singaporean or Singapore permanent resident), and a group annual sales turnover of not more than S$100 million or group employment size of not more than 200 employees. Additional eligibility requirements imposed by the respective local participating banks can be found at their respective websites and enquiry channels. The respective banks will evaluate the application with SPRING Singapore before determining the outcome.
A brief look into the giants of entrepreneurial hubs
The world’s leading entrepreneurial ecosystems like the United States (US) and Israel also have similar initiatives to SPRING Singapore’s VDP.
In the US, the Small Business Investment Company Program (SBIC) is one such similar government venture capital program, administered by the US Small Business Administration (SBA). A multi-billion dollar program created in 1958, SBICs are privately owned and managed investment funds, licensed and regulated by the SBA, that use their own capital plus funds obtained through issuing debentures guaranteed by the SBA (subject to a cap of US$150 million), to make equity and debt investments in qualifying small businesses and thereby assisting in their early stages of growth. From 2011 through 2015, more than US$21 billion in financing was invested in small businesses and more than 6,400 businesses received investments.
Likewise in Israel, the Yozma program has earned worldwide recognition as the creator of the Israeli venture capital industry. Established in 1992-1993, the Yozma program was based on a US$100 million government-owned venture capital fund, of which US$80 million was invested in 10 private Yozma Funds and the additional US$20 million was directly managed by the government-owned Yozma Venture Fund. The 10 private Yozma Funds were each managed by an independent, Israeli venture capital management company, and would have to engage a foreign institution together with a well-established Israeli financial institution. By providing matched funding of typically 40% of the capital for the 10 private Yozma Funds , limited to US$8 million per fund with private partners contributing US$12 million, an additional US$150 million of private sector funds (domestic and foreign) were raised and invested in over 200 startup companies at that time. In addition, each Yozma Fund also had a call option (at cost) on the government’s 40% shares for a period of five years after foundation. Since its inception, the Yozma Group has managed more than US$220 million and made direct investments in approximately 50 portfolio companies.
Concluding remarks – Our thoughts
Venture debt can assist companies during their growth stage with mezzanine financing when early stage entities are in between raising different rounds of funds from investment funds / institutional investors (such as venture capitalists) – perhaps between a Series A investment and Series B investment – in order to finance working capital and accelerate growth. Venture debt can be considered as an alternative to convertible loans and as a complement to obtaining venture capital when companies are attempting to reach key milestones in their business life cycle.
SPRING Singapore’s VDP is therefore another step in boosting the local funding ecosystem and adding to success stories of US and Israel in stimulating the venture capital and corporate financing industry for the benefit of local high growth enterprises. It is, of course, hoped that such government efforts will be met with an ever increasing eagerness on the part of aspiring entrepreneurs to tap on these opportunities, stay the course and keep the momentum going in Singapore’s investment and start-up scene.
The process can get started by either speaking (or being introduced) to a venture capitalist or a relationship manager at the bank, or emailing the bank to commence the process. In our experience, the former approach often gains better traction and a potentially more rapid response from the relevant bank.
The authors acknowledge and thank Wong Chun Han for his contribution in the research and preparation of this article.