Prime Insight
Prime Insight

Singapore: The Start-Up Capital of Southeast Asia

Posting date: 29 July 2019
Genevieve Seah our consultant managing the role

Funding for Tech Start-Ups Is Booming in Singapore

Hong Kong used to be the kingpin for tech start-ups in Asia, but in recent years this has changed. Now Singapore has positioned itself as the destination of choice for start-ups. When it comes to doing business, there are many similarities between the two cities, but Singapore currently has the lead over Hong Kong. Here we look at why funding for start-ups in Singapore is storming ahead of Hong Kong: a big factor when considering tech jobs in start-ups.

For Start-Ups, Is There a Clear-Cut Choice Between Hong Kong and Singapore?

The similarity between Hong Kong and Singapore as destinations to start a business is astounding. In many respects they could be twins, with only small differences in key areas:

  • They are both ideally located to access key, fast-growing economies in Asia, including China and India
  • They both have pro-business environments and policies
  • There is little to choose between the corporate and personal tax rates of both cities
  • They are innovative centres that attract top talent from around the world
  • English (the world’s biggest business language) is recognised as an official language in both

Incorporation of businesses follows a similar process in both territories, and laws are based on British Common Law. The standard of living is high, though in the 2018 Mercer Quality of Life Survey, Singapore was ranked 25th in the world, compared to Hong Kong’s 71st position. That same survey found that both cities are among the safest in the world, with advanced healthcare systems and highly educated workforces.

So, both Hong Kong and Singapore are great places to live and work. Indeed, the 2018 World Bank Doing Business project rates both jurisdictions as among the top five locations in the world for ease of doing business and starting a business (Singapore 2 and 3 respectively, Hong Kong 4 and 5 respectively).

As you can see, there appears little to choose between Hong Kong and Singapore. So the question is, why are so many more start-ups choosing the latter over the former?

Early-Stage Government Funding Has Turned the Tables

Singapore took a leap ahead of Hong Kong for a place for start-ups when it introduced funding and tax incentives.

Singapore has some of the most beneficial tax incentives for small businesses in the world. There is a special tax exemption to start-ups for the first three assessment years, and tax benefits include exemption from tax on the first S$100,000 of normal chargeable income, and a 50% exemption on the next S$200,000 of normal chargeable income. Above this amount, companies pay corporation tax at a flat rate of 17%.

There are also tax deductions available for businesses that invest in innovative activities, deductions for charitable work, and double taxation agreements that aid international expansion. (Read more here)

In late 2017, Hong Kong announced measures aimed at boosting its SME economy. These included a halving of corporation tax to 8.25% for the first HK$2 million of profits. Above this amount, profits are taxed at 16.5%. There are also some other tax incentives available, though these mostly relate to capital expenditure on plant and machinery. Albeit, they also include profit tax deductions for capital expenditure relating to intellectual property rights.

The outcome is that corporation tax in Singapore is charged at a lower rate for those companies who are making only small profits – and this is an important consideration for start-ups. However, it is how start-ups access funding that makes a big difference.

In Singapore, depending upon a start-up’s eligibility, it might access cash grants, business loans or equity financing via several government agencies.

For deep tech start-ups, the government will provide 70% of the funding in an initial funding round up to S$500,000. For funding above this level, the government will match private investment 50/50 up to an investment cap of S$2 million. For start-ups that are improving existing technologies, the 70% share invested by government is capped at a funding round of S$250,000.

For companies that are developing breakthrough technology, the government provides funding by way of grants of S$250,000 for Proof-of-Concept projects and S$500,000 for Proof-of-Viability projects.

Singapore’s Startup Founder scheme provided up to S$30,000 by way of matching S$3 for every S$1 raised by the start-up. (You can read more about these grants and funding opportunities here.)

Like Singapore, Hong Kong offers several funding routes. However, these are not as advantageous as Singapore’s funding schemes. For example, its Innovation and Venture Fund, seeking to stimulate interest from venture capital funds, matching investment on a 1 for 2 basis – for every HK$2 the start-up raises from venture capitalists, the government will put in HK$1.

For venture capitalists seeking to invest in start-up technology businesses, the funding environment is more conducive to investment in Singapore rather than Hong Kong. This is evidenced by recent funding figures.

Singapore Is the Asian Stomping Ground for Venture Capital into Technology

Figures from the Hong Kong Venture Capital and Private Equity Association (HKVCA) and e27 (a Singapore-based platform for entrepreneurs), venture capital funding for tech deals in Singapore was almost three times that of venture capital funding for tech companies in Hong Kong in 2018. In both Singapore and Hong Kong, family offices are raising their profile in private investment for start-ups.

Venture Capital In Hong Kong

According to the HKVCA, the amount invested into technology deals in Hong Kong leapt by 81% to US$2.87 billion in 2018 from 2017. However, the number of deals remained unchanged at 42. Most of this funding went to homegrown start-ups. Three major deals attracted more than half of this investment cash:

  • US$1.2 billion into SenseTime, a facial recognition company
  • US$300 million into Tink Labs, a developer of smartphones for hotel room guests
  • US$200 million onto Klook, a travel choice and booking company

The remaining 39 deals averaged around US$31 million.

In terms of sectoral investment, the technology, media and telecom sector accounted for 89% of all venture capital funding in 2018. The remainder was split between healthcare, consumer and retail, and business services.

SenseTime may have been the standout investment of 2018, as it signals a clear intention to invest in AI – in line with the Chinese government’s stated intention of being the leading player in AI by 2030.

What is also noticeable is the move toward quality, as the world economy has entered a more uncertain era and growth becomes more difficult. Investors are examining companies more closely, looking at quality of research, operations, technology and capabilities. This is likely to make it more difficult for start-ups in Hong Kong to access financing, as investors focus more on late-stage deals

This said, it is also noticeable that high-wealth individuals and families are partnering with VC funds to invest in technology start-ups. There was a surge in IPOs in 2018, and this has created many millionaires and billionaires seeking to invest their newfound wealth. These new monied investors are more au fait with technology, and see traditional real estate development as history.

Existing largescale corporates have also begun investing in digital transformation, with around nine in 10 companies boosting investment in digital transformation, or planning to. Many of these have set up their own investment arms to facilitate partnerships with start-up companies..

Venture Capital in Singapore

Singapore is the major destination for start-up funding in the Asian region. According to e27, in 2018 there were 189 deals that captured US$7.5 billion in funding. Though the average investment was around US$29 million, like Hong Kong’s venture capital flow the market was dominated by a handful of super deals:

  • Grab, the ride-hailing and takeaway delivery app, raised around US$1.5 billion
  • Lazada, the online shopping site, raised US$1.5 billion in second-round funding
  • Sea Group, the e-commerce platform, raised around US$600 million.

All three of these companies have their foundations in Singapore.

Main sectors for investment were:

  • Fintech (21 deals)
  • Enterprise solutions (20 deals)
  • Ecommerce; Healthtech; Big Data (12 to 14 deals each)

Boosted by the investment received by Grab, the automotive sector stole the show in terms of average funding size at US$1.3 billion. Ecommerce averaged more than US$15 million, while Aerospace raised an average of US$50 million.

As in Hong Kong, family office investments are growing rapidly. They have been expanding into the start-up space, and providing more at early-stage investment rounds. According to UBS and Campden, private equity now accounts for more than 20% of family office investment in Singapore, with eight in 10 of these investments outperforming expectations.

Regarding government incentives, Hong Kong allows a partial tax exemption for the first HK$20,000 earned (approx. USD 2,560 as of July 2017). Additional government incentive schemes in Hong Kong primarily focus on the financial services industry.

In comparison, Singapore has taken major strides to provide government tax incentives that reduce effective tax rates by more than half on the first SGD300,000 of annual profits. For small to mid-sized companies, this is an important factor. In addition, Singapore offers a variety of tax breaks for companies that invest in innovation, conduct charitable work and expand internationally.

Sectors To Watch

There are several sectors which are drawing investment to them, and you can expect them to do so. We expect these to include:

  • Fintech, which will continue to reinvent financial sectors as governance relaxes and virtual banking licenses are rolled out
  • Enterprise solutions, with software and systems enabling companies to work more collaboratively and with greater integration and efficiency
  • Healthtech, enabling national health systems to cope with growing and ageing populations with more complex health issues
  • AI, which will be a key focus area for business going forward

In Conclusion

Hong Kong and Singapore are both great locations for business, and fantastic for start-ups. They have positive business environments, low tax rates, and access to highly qualified employees. However, Singapore is currently leading the way, and it is easy to see why its ease of doing business is ranked so highly.

In Singapore, start-ups can access cash grants. Investment is matched by government money at better ratios than in Hong Kong. There are numerous tax advantages that help to reduce tax burdens, ensuring that more profits can be reinvested in businesses. The legal system, government business policies, and access to the rest of Asia further make it a great place to set up – all these factors increase the potential for the success of start-ups in Singapore.

In its Global Startup Ecosystem 2019 Report, Singapore is ranked at number 14 – 11 places higher than Hong Kong. Subsectors with particular strength are noted as Blockchain and Fintech, in which Singapore is 4th and 5th ranked in the global ecosystem respectively. In this report, Vinnie Lauria, Managing Partner at Golden Gate Ventures, notes:

Singapore and Silicon Valley share a unique quality: they are magnets for talent across the globe. Magic is sparked when people from different backgrounds come together to solve a problem.

If you would like to become a part of this magic, contact Prime Insight today for a confidential discussion about your career and the opportunities in Singapore and Hong Kong that could unleash your full potential

.

Connect Genevieve Seah, Singapore, Prime Insight

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