Singapore Entrepreneurs

In Singapore, I often hear entrepreneurs asking me financing for their business startups. Most of the time, they have no idea of how much they are asking for even though they are in the industry. Worse, they ask for funding when the business can make revenue by putting in some personal savings. This is a primer for entrepreneurs on the different sources of finance for new busineses.

Generally, an enterprise requires some form of financing to get started. In principle, there are different ways to finance a company. Most entrepreneurs prefer fundraising what I call the textbook model. Yet, most entrepreneurs did not realize that the secret of successful companies does not lie in fundraising but in bootstrapping. Most successful companies usually seek funding only in the later stages of their development, particularly when they are close to be listed on the stock exchange (IPO).

If you can establish the amount of capital you need for your company, the next step is to ask where does it come from. The first rule of thumb is to be creative and think of ways to finance your startup without money. Only very few entrepreneurs can do that. Some entrepreneurs are very unrealistic and refuse to use their own savings to fund their businesses. Here is some advice for them: if you don’t even put your money where your mouth is, then you are likely to fail. It is important to note that the capital may not be necessary all at one go, but spread over through different stages in the company’s development.

Generally, an enterprise is accessible to a wide range of financial sources. One must distinguish carefully between equity (owner’s own funds) and loan capital. The rule of thumb is never to give away equity too early. When seeking funds from venture capitalists, the entrepreneurs need to see whether there is a possibility to place a convertible loan clause. This can give the entrepreneur a degree of freedom to purchase back the equity he gave away to the investors. This approach is also useful when starting up an enterprise in a tertiary educational institution, such as the polytechnic and university. The diagram below shows the types of capital generally available at different stages:

From the above diagram, there are two main sources of capital: loan capital and equity. Examples of loan capital includes loans (friends, family and fools), state support (grants and funds), mortgages & leasing and bank loans. Your own savings, investors (venture capital, angel investing and sometimes, investment corporations for multi-national companies), stock exchange (via IPO) consitute the equity type. In the next page, we discuss in detail on the features in some of these financial sources.

Loan Capital

• Loans: This kind of funding is highly suitable for seed funding. The only requirement is that you need to ask friends, family and fools to rish their own money on you. The good thing is that the process is simple and informal and usually on favourable terms (no interest) and also direct personal relationship with the lender. The only problem is that the loan is usually restricted, and there is a possibility of hurting personal relationships.
• Government Support: This kind of funding is suitable for all stages of development for a business. The good thing is that you have the infrastructure working around you via favourable terms like interest free loans, long repayment periods and even grants. Sometimes, tax deduction also comes into play. To get this kind of funding, you need to be sure of all the possibilities that your business can grow and at the same time, compliant with the rules and regulations set by the bureaucrats. Most entrepreneurs in Singapore tend to go to the government for money. The only problem for government is that with great financial backing comes great bureaucracy. Their processes are extremely slow and the reporting requirements can be tedious. The reason is because you are using taxpayers’ money.
• Mortgages and Leasing: There are two parts to this kind of funds. Mortgages are suitable for financing business property and long term investments while leasing is preferred for financing machinery and logistics. Their requirements are self-explanatory. On the mortgages end, the advantages are: (i) it can be easily determined and (ii) has relatively favorable long-term conditions, for example, no dilution of ownership, low repayment rates over long periods and tax-deductible interest payments. It is the same for leasing except that there is some flexibility in return or exchange of object if the requirements change. The disadvantages are usually either the complete financing of the mortgaged object is nearly impossible, and the leasing can be end up with high interest rates.

Equity

• Bank Loans: This kind of funding is for short term operating capital from company stage to exit. You need to be secured against receivables (payments due from customers). Your inventory and equity can be compromised in the process. The advantage is that it is highly flexible and is adjusted to the current and seasonal needs. There is no dilution of ownership of company. However, the problem is that the securitization of your assets gives limited flexibility when it comes to the solvency of the business.
• Investment Capital: It can go for all stages from a start-up to exit. What you really need is a sound business plan and your company has high growth potential. In US, the advantage is that there is active support to the management team and they are useful when it comes to exit, whereas in the rest of the world, it becomes a disadvantage because the VC just leave you to your own devices. Business angels are similar except that they provide less capital. It is increasingly become popular for business angels to band together and invest in a consortium. This reduces their risk, and these consortium of business angels operate similar to venture capital, and the angels spare more time and energy in helping the management team to grow. You can look at this post for a list of sources for business angels and venture capitalists in Singapore.

Hence the final advice to the entrepreneur is: please know how much funding you seek and if possible, try not to fundraising but bootstrapping to ensure more ownership of your business.

References:
[1] New Venture, Holland, “Starting up: Achieving success with professional business planning”, McKinsey and Company.

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