ICO boom threatens Singapore's VC scene

With a strong pipeline of ICOs in the city, analysts question the future role of venture capital firms.

Venture capital activity in Singapore will remain robust for the rest of 2018 due to the launch of more early-stage (seed and Series A) corporate venture capital funds and the regrouping of venture capital funds to focus on later-stage (Series B to D) deals, said Ken Cheung, partner at Bird & Bird ATMD, adding that activity will coalesce around artificial intelligence, auto technology, and health technology.

The venture capital market will likely grow further this year with more local startups canvassing for funds, said Marcus Chow, partner at Bird & Bird ATMD, citing a KPMG report that activity should maintain its strong pace in 2018.

“Many of these start-ups which had in earlier years gotten seed funding, particularly from government schemes, may be seeking their Series A or B funding,” said Chow.

Justin Hall, principal at Golden Gate Ventures, is “extremely bullish” on his near-term outlook on Singapore’s venture capital activity. “We see at least a dozen growth stage funds coming online within the next 12 months.”

The viability of strong exits in the region will be a key theme in 2018 and the medium-term horizon, Hall added. “The formation of growth-stage funds and the viability of positive returns from local and regional exits will define the region over the next two to three years,” he said.

James Tan, managing partner at Quest Ventures also expects large rounds to continue to dominate headlines, and for angel syndicates driven by experienced angel investment networks such as BANSEA to gain prevalence. In addition, he anticipates a “rejuvenation” of seed stage deals which slowed down in 2017.

With venture capital activity poised to boom, competition for both talent and deals is heating up. Tan said that the most notable venture capital activity in 2018 so far would be the entrance of corporations into venture investments, particularly from Series B onwards. But Cheung noted that corporate venture funds across the city-state are finding it harder to attract and retain the right talent, and risk losing the best deals to traditional venture capital firms, all whilst having to answer to more stakeholders.

For Hall, the primary challenges faced by Singapore’s venture capital scene lie not in the lack of growth finance, but in the relative lack of exits. “That’s really the only thing the region is lacking now, but I strongly believe we’re going to see a significant uptick within the next two years,” he said.

Tan, meanwhile, identified the threat of initial coin offerings, or ICOs, which could have a “global negative reputation flowover and impact” on Singapore’s brand.

“There are questions raised as to the future role of venture capital firms, especially if ICOs become an effective and sustainable avenue for startups to raise funds as a cheaper and faster alternative to venture capital funding,” said Kenn Lim, senior associate at CNP Law. He added that whilst venture capital firms are seen as a channel for investors to obtain stakes in private companies, the recent ICO surge by startup companies could put the essential role of venture capital in doubt. In 2017, Singaporean FinTech start-up TenX in 2017 raised approximately US$80m through an ICO.

The Singapore government has been trying to ramp up support for venture capital funds, Cheung said, mainly through attractive incentives, including reduced regulatory red tape, increased intellectual property protection and allocated funds for early investments.

But Tan said there needs to be a stronger government push for deep-technology investments as private investment firms are not actively investing into this space. Government support could help the deep-technology companies zero in on their real-world applicability. Right now, these firm “are mostly solutions looking for problems to solve at the moment.” said Tan.