Monday 15 September 2014

Make your start-up dream a reality

To do so, understand your market and determine the funds needed to succeed
By Melissa Tan, The Sunday Times, 14 Sep 2014

Figure out seed funds, cash-flow matters

The dream of starting a business is appealing to more people, enticed by hopes of making it big and being their own boss.

The fact, however, is many intended start-ups do not get off the ground.

Coming up with an idea for a viable business is difficult enough and the plan may not be as profitable as initially thought. The founders may also run out of cash.

Such obstacles may be difficult to surmount, especially for first-time entrepreneurs who may have less industry experience, experts note.

"Doing a start-up is brutal. Most start-ups fail," says Mr Johnson Chen, managing partner at start-up incubator Clearbridge Accelerator.

Still, the number of start-ups here has mushroomed in recent years, going by official statistics.

The number of active start-ups has grown by more than 80 per cent from 23,000 in 2004 to 42,000 last year, notes Mr Edwin Chow, executive director for the innovation and start-ups group at Spring Singapore.

Those start-ups employed 306,000 workers or 9 per cent of the workforce in Singapore last year, he says.

The number of high-tech start-ups has also nearly doubled within a decade, from 4,600 in 2003 to 8,500 last year.

"Unsurprisingly, the number of high-profile M&A (merger and acquisition) activities relating to start-ups in Singapore has also increased in tandem," Mr Chow says.

"Slowly but surely, investors in the start-up scene are recognising the value of Singapore-based start-ups."

Still, aspiring entrepreneurs may run into this problem: Even if you do have a business idea, how do you know if it's good enough? And how can you make sure you won't run out of funds?

The Sunday Times asks experts for their tips.

Keep talking to customers

One good way to understand a market is to continually consult customers, which could lead to start-ups changing their business direction for the better, experts say.

Says Mr Chen: "We see too often that entrepreneurs have good ideas and technologies, but do not spend enough time to understand the customers' needs, pain points and payment appetite."

He says: "Developing a good business idea is a continually iterative process - the more you do it, the better it gets. New business and opportunities are created by understanding customer needs - so if things are not working out, again, talk to customers to understand them."

Gun for a profitable market that can grow

Entrepreneurs should calculate how large the market for their business is likely to be. The market should also be profitable and scalable - that is, it can grow to a larger scale.

"When the customers' lifetime value outweighs the cost to acquire them, the customer segment is said to be a profitable one," says Mr Leslie Loh, managing director of venture capital firm Red Dot Ventures.

"To determine a customer's profitability, entrepreneurs should carefully analyse the customer segment - know what customers are willing to pay for, at what price, and for how long. This should equate to a lifetime value that is greater than the cost to acquire those same customers."

As for whether the market is scalable, Mr Loh says entrepreneurs should calculate the size of the market they can tap and look at predicted trends. "A large enough serviceable market is one that is estimated to be worth $1 billion in potential revenue and growing. Given this, know your customer segment, be specific in your analysis, and use conservative assumptions."

Mr Lim Der Shing, an angel investor and director at financial planning site, says: "If your idea is able to replace or do a better job than existing solutions and the market is sizeable, then the idea is worth pursuing."

In Singapore, a rule of thumb for a digital-based start-up is that the market size ought to be at least $30 million, he says.

Make sure you stand out

Start-ups tend to be under-staffed and under-financed, which makes it all the more important for their offering to be differentiated from their rivals', Mr Loh says.

"To survive against the market incumbent, a start-up must correctly solve a significant problem, deliver a unique value proposition, and exploit core capabilities that are difficult for competitors to substitute or replicate."

Estimate cash needs with financial models

Mr Lim says for tech start-ups, making a prototype of their product could cost $50,000 to $150,000, which usually comes from the founder's savings. That counts as "pre-seed" funding.

External funding will come in only at a "seed" round when the start-up is raising anything from $300,000 to $1 million. This money usually comes from angel investors, incubators or early-stage venture capitalists, he says.

Experts say one good way to estimate how much funds a start-up needs is to use financial models.

"A disciplined way of looking at the economics of your business idea would be to build a financial model," says Mr Lim Chu Chong, head of small and medium-sized enterprise banking at DBS. "What is the itemised cost versus the revenue earned delivering the product or service? At what scale does this business turn profitable? Given the size of the target market, can the business scale to the size that it needs?"

A financial model will also help to estimate the amount of funds the business will need, he sa "When you have worked out the assumptions and financial model, you can estimate the amount of capital required to get the business started, and the amount of cash to burn until the business turns cash-flow positive. That is the ideal amount of cash required to fund the business."

Mr Loh says in the "pre-seed" round of funding, the investment size is generally $50,000 to $250,000 and is enough for the start-up to last 12 to 18 months.

In the "seed" investment stage, $500,000 to $1 million will give start-ups 12 to 18 more months to show that their product appeals to customers.

Keep accounts separate

Experts sa y start-up founders should keep their personal bank accounts separate from their business accounts. This will come in useful when the start-up seeks external funding, especially from banks.

However, Mr Loh sahe early stages "because of the relatively risky business model".

Mr Eric Ong, head of emerging business at OCBC Bank, sa-flow projections, and this gets more important as a company grows bigger".

"Young businesses generally find it more challenging to obtain loans during their start-up years as their level of operations and business activity may be too low, or they lack the necessary financial records or collaterals to obtain external funding."

Start-ups should, therefore, "start to build their credit history early" by separating business expenses from personal transactions, he adds.

Says Mr Ong: "This allows them to build a track record of operating cash flow that banks look at when evaluating financing requests. Setting up a separate financial record for the business also gives the business owner a clear view of where the funds are going and coming from."

Surveillance tech firm keeps an eye on users' needs
By Melissa Tan, The Sunday Times, 14 Sep 2014

For Dr Neo Shi Yong, 34, the idea to set up video analytics start-up Kai Square struck during his postgraduate studies.

The firm's technology was recently launched as a business intelligence service by SingTel, which has a 39.15 per cent stake in Kai Square via its venture capital unit Innov8.

The technology helps retailers, for instance, analyse video surveillance of their shops.

Dr Neo, Kai Square's chief executive, said he and business partner Goh Hai Kiat were studying at the National University of Singapore when they started their business in 2006. At that time, it provided mainly consultancy services in video data management and surveillance.

The business model changed as the pair worked with more customers. "Through interactions with users, we noticed that there was a growing need to make sense of surveillance data that was being recorded," he said.

Raising funds was a challenge at first. "We needed to... come up with an attractive yet realistic business model to gain the attention of potential investors. We did a market survey and provided statistics."

The founders also sought advice from experts to refine their plan.

Dr Neo, who told The Sunday Times that he personally invested about $100,000 in the business, said starting a business was more than just about making a financial investment.

"It is a joy to see your money grow as a result of you working hard to make it grow," he said.

The biggest disadvantage, he added, was the "lack of risk diversification" as his investment was also his job.

Customer's lament sparks tracking idea
By Melissa Tan, The Sunday Times, 14 Sep 2014

The idea to create a system that allows ships to monitor their fuel usage came to Mr Chia Yoong Hui while he was trying to sell someone something else entirely.

"I met a ship owner back in 2008 - when fuel prices were the highest in history - who was telling me that there was no way to monitor fuel consumption."

Mr Chia was trying to sell the owner accounting software, but the lament caught his attention.

That led him to team up with a "former navy buddy", Mr Sia Teck Chong, to create a system to solve the problem. They put in $100,000 and sought external funds from venture capitalists.

"From my past experience in the navy, I felt that there should be an automated way of managing all this," recounted the 46-year-old, who is now chief executive of Ascenz.

Mr Chia spent seven years in the navy after graduating from school and has a background in business software.

"With the world still very much reliant on sea freight to ship our products and with the backdrop of ever-rising fuel costs, we felt that it was a good segment to be in," he said.

Getting funding was easier after Ascenz won business awards such as the National Infocomm Award and Emerging Enterprise Award.

He said: "With the publicity from those awards, we have investors approaching us to provide funding. Of course, we have to prove to them that our business is viable and scalable."

Discovery generates buzz in scientific community
By Melissa Tan, The Sunday Times, 14 Sep 2014

Dr Gideon Ho's medical imaging start-up HistoIndex has come a long way over the past four years.

Having sprung from a "eureka" moment in a cafe, it is now "working out nicely to be my best investment", he told The Sunday Times.

Dr Ho, 41, chief executive of HistoIndex, recounted that his bright idea came while he was chatting with his now co-founder, Dr Dean Tai, over a coffee break in Biopolis.

They had been talking about "the results we got from the imaging of an animal liver tissue sample in our lab".

Then, they realised, they had discovered an imaging technology that could be used to diagnose all sorts of diseases, including cancer.

To make sure that their idea could work, they tested it on "thousands of human liver tissue samples" in clinical trials in Singapore and overseas.

It did work, and brilliantly. "Our most recent clinical results, published in the world's leading Journal of Hepatology, showed that we are consistently more accurate than the current gold standard of diagnosis," Dr Ho said, adding that it generated strong buzz in the scientific and clinical community.

However, getting there was not easy, especially when it came to raising funds.

One issue was the long time needed for a medical technology company to break even and then generate profits, Dr Ho said.

Noting that he has invested a "few hundred thousand" dollars into the business, he said that he has not realised returns from that investment yet.

In comparison, Dr Ho said that he has made 10 to 15 per cent a year through stock investments and "single-digit" returns on property over a three- to five-year period.

"However, returns on investment can never be the sole motivation for starting a technology company."

Start-ups risk 'going astray' in two scenarios
'Grantepreneurship' and 'predatory incubation' should be avoided: observers
By Jacquelyn Cheok, The Business Times, 15 Sep 2014

Paying it forward - a culture in which veteran entrepreneurs who were once beneficiaries of support and mentorship themselves readily lend support and mentorship to their younger peers - is still in its infancy in the start-up ecosystem here.

And this lack of guidance by experienced mentors, say observers, could lead to two scenarios where young, inexperienced start-ups "go astray".

The first scenario, "grantepreneurship", refers to start-ups wanting to start their businesses only after they manage to snag government grants, or exploiting such grants due to their sheer availability.

The second phenomenon, "predatory incubation", is where investors or mentors demand "sweat equity" (equity in exchange for time and energy invested in a start-up) even before helping them - and entrepreneurs struggle to have to give up a large portion of their business even before starting.

"Grantepreneurship" is not unique to Singapore, and is in fact a function of any government intervention, said Hugh Mason, CEO of start-up accelerator JFDI.Asia. "It's a result of the government wanting to elevate the start-up ecosystem - a complex environment - in a very short time.

"So we have various government agencies wanting to help as many start-ups as possible; and start-ups, on the other hand, sparingly applying for grants - with some even seeing it as helping public servants spend government money and fulfil KPIs (key project indicators)."

James Chan, founder- CEO of tech incubator Silicon Straits, said that it is not possible to effectively promote an entrepreneurial culture by throwing money at the problem just before entrepreneurs start a venture.

"Passion, character and integrity can be inculcated only from a young age - first by the parents and then possibly by the education system," he said.

Vinnie Lauria, founding partner of Golden Gate Ventures, nonetheless believes the various government initiatives and grants have created a vibrant start-up ecosystem and will be beneficial in the long term.

"Maybe these (initiatives and grants) have propped up a few more entrepreneurs for longer than the private market would have, but I think it's a necessary drawback for the greater positive happening in the market," he said.

Government initiatives also have checks and balances in place to prevent the abuse of grants, Mr Lauria added. Start-ups applying for iJam's Tier 2 funding of up to S$100,000, for instance, must have secured a matching amount of funds from private investors first.

iJam - short for IDM (Interactive Digital Media) Jump-start and Mentor - is a programme under Singapore's Media Development Authority (MDA) that provides financial and incubation support to start-ups with breakthrough ideas.

"Predatory incubation" is also not an ideal outcome.

"For instance, an investor values a start-up for S$200,000. He invests S$10,000 and helps the start-up get S$50,000 in government grants. Normally, he would get only 5 per cent of the company but a deal is struck such that the investor gets S$60,000 worth of equity or 30 per cent. The investor is basically leveraging the government grants to get additional equity out of the start-up," explained Ko Tze-Shen, co-founder of Angels Gate Advisory (AGA).

In response, Alex Lin, head of Infocomm Investments (the investment arm of the Infocomm Development Authority of Singapore), said: "There is a knowledge gap that exists between entrepreneurs and investors. In reality, the success rate of start-ups is relatively low at about 5 per cent, based on JFDI's data. So investors have a very low chance of exercising their equity options. To mitigate this risk, they ask for a higher equity option to compensate them for their investment, time and energy spent on coaching the start-ups."

Silicon Straits' Mr Chan agrees it is common, and reasonable for mentors to ask for "sweat equity" as long as both parties are agreeable.

"I don't think there's a need to be excessively concerned about 'poor entrepreneurs' being conned of their equity. If they feel cheated, it's usually in hindsight, and there's no better teacher than real-world experience to motivate them to do better," Mr Chan said.

A pay-it-forward culture will help young start-ups avoid such pitfalls, said observers. And hoping to cultivate this and foster a Silicon Valley-like ecosystem of support is AGA, the two-year-old homegrown incubator. Said Mr Ko: "Our hope is to promote a culture where entrepreneurs become entrepreneurs because of their passion and love for their business - not because they are able to subsidise the risks with a grant."

AGA provides free advisory services and free incubation space (of up to three tables) to start-ups, and does not ask for equity in exchange for government grants even though it is an iJam-appointed incubator with access to such grants.

"If we contribute and invest time and energy freely in start-ups, when they grow and become profitable, they too will contribute and invest time and energy (freely) in the next generation of start-ups," said Christopher Quek, AGA director and resident mentor.

The incubator - backed by investment firm Khattar Holdings - has mentored over 50 start-ups, among them educational gaming platform, mobile search engine Loco, and food data analytics firm Taste Genome.

S'pore is top start-up spot in S-E Asia
$578m in venture capital deals, 40% of acquisitions in region happen in Republic
By Grace Chng, The Sunday Times, 28 Sep 2014

Singapore is the No. 1 spot for start-ups in South-east Asia.

More venture capital (VC) deals happen here than in neighbouring countries. And about 40 per cent of all start-up acquisitions in the region happen here.

Last year, US$454 million (S$578 million) worth of venture capital deals were done in Singapore, compared with US$918 million invested in the rest of South- east Asia, according to a report from the Singapore Venture Capital and Private Equity Association (SVCA).

That sum funded 73 start-ups here, up from 41 in 2012, said the association, which did the survey with private equity research firm Preqin earlier this year.

Acquisitions hit a high of 13 start-ups sold for a total of over US$300 million last year, said local VC firm Monk's Hill Ventures. In 2012, only four start-ups were acquired.

This is only the tip of the iceberg as the research combed only publicly available financial data. Other acquisitions where details were not disclosed were not covered.

Mr Hian Goh of local VC firm Silicon Island said money is necessary for start-ups to grow until they become attractive to be acquired. Government financial support has encouraged more start-ups and this, in turn, has attracted VC money to Singapore.

"With more start-ups, the potential for acquisitions by larger companies on the lookout to expand their business or to get new technologies rises," said Mr Goh.

The largest VC investments went into two-year-old e-commerce start-up Zalora, founded by German Internet incubator Rocket Internet. Based here, Zalora is aimed at the Asian market. So far, it has received about US$217 million from overseas investors.

Local high-end fashion e-shop Reebonz was a distant second, receiving US$40 million in funding from MediaCorp last year.

VC deals in South-east Asia have been growing yearly since 2007, with the highest increase from US$248 million to US$918 million seen between 2012 and last year.

SVCA chairman Jeffrey Chi said there is a lot of interest in South- east Asia given its 600 million consumers and a growing middle class with cash to spend, and "Singapore is the natural choice for many VC firms to base their operations".

Almost three-quarters of the VC funds came from non-Singapore- based investors, showing that the start-ups here are good enough to attract them.

"Singapore is exposed to the global environment, so right off the bat, (the start-ups) are expected to perform better," Mr Chi said.

"In recent years, many corporate 'escapees' became entrepreneurs, and with the experience, network and expertise, they have a better chance at success."

Some of the biggest Singapore acquisitions in recent years include the sale of Singapore-based online video-streaming site Viki to Japanese e-commerce giant Rakuten for US$200 million last year, and Singapore Press Holdings' acquisition of online motoring portal sgCarMart for US$48 million.

Singapore start-ups accounted for about 40 per cent of the 85 South-east Asian start-ups acquired since 2008.

Monk's Hill Ventures partner Ong Peng Tsin said: "Singapore has been supporting entrepreneurship and start-ups, so now the fruit is realised."

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