Despite its high cost of living and expected wages, Singapore's highly developed economy makes it a great place to start a business. You may have heard of the success of Garena (an online gaming platform), Grab (ride hailing service) or Ghost (an online publication platform), and wonder if you should try to invest in startups with as much potential as these successful businesses. Below, we discuss factors that you should consider before investing in a Singaporean startup.
Advantages of Investing in Startups
Crowdfunding platforms in Singapore make it possible for individuals to purchase ownership shares in startups. For example, Fundnel offers investors equity investment opportunities in a highly selective group of early to late stage startups, while FundedHere specializes in early-stage startups.
In general, early-stage equity investments are among the highest risk and highest potential reward categories of investments. On one hand, these platforms offer annualised returns of 30% or more, which far greater than the typical annual return from the stock market, government bond or savings account. However, equity investments in startups pose much greater risk, as they are are based on the success of less established businesses. Risk averse investors may not want to add this type of investment to their portfolio. However, investors that are willing to take on extra risk may find the high potential of multiplying their wealth appealing. Additionally, if you are able to invest in several startup funding campaigns, you may be able to diversify your total risk.
Who Can Invest in Startups?
Traditionally, startup investing had been exclusively available to venture capitals and extremely wealthy angel investors. While rise of crowdfunding has lowered the bar significantly, investing in equity of startups is still relatively difficult for an average person. First, the risk associated with investing in startups might outweigh the potential for high returns for some investors, since investing in a wrong company could mean losing all of one's invested capital. Additionally, the best equity crowdfunding platforms are only accessible to accredited and institutional investors. To qualify as an accredited investor, individuals must have net personal assets of S$2 million and income of at least S$300,000. Finally, equity crowdfunding platforms typically require that investors contribute at least S$5,000 per campaign, which may deter investors that would prefer to make smaller investments.
How to Identify Potentially Attractive Investment Opportunities?
It can be difficult, as an investor, to differentiate between several exciting startups. However, this is important as investors must determine which companies will be successful and which will fail. There are a number of criteria to consider, including the businesses' products, finances, competitive landscapes, funding needs and capability to execute. Here, we identify questions that investors should be able to answer before investing.
- What is the company's product and why is it unique? It is highly unlikely that each idea will be revolutionary, but it is important that the product is useful and differentiated in its price, function or quality.
- Is the startup profitable yet? If not, when will they expect to be profitable? Financials are among the best empirical ways to evaluate a company's current and future success, so it is crucial for investors to review these materials.
- Is the market for the product is large or growing? Understanding the environment each startup will compete in gives an indication of the likelihood of its success.
- Why does the startup require financing? It is normal for fast growing companies to need working capital or funds for research and development. Investors should critically examine if the company has real needs for funds and how capital will benefit the company.
- Is the business capable of following through with their idea? Google was not the first search engine (e.g. Yahoo, Ask Jeeves, etc.), but their team was able to outperform the competition. Investors need to find businesses that have teams with the expertise and drive to outcompete other companies.
These criteria are almost all subjective, which makes them difficult to evaluate. This highlights the risk involved with investing in startups and the importance of thorough research. However, investors that are able to clearly identify key characteristics of the companies that they review are more likely to ultimately make good investment decisions.
In our recent study, we found that Singapore was the most startup-friendly country in Asia-Pacific. Crowdfunding offers a unique opportunity for individual investors to purchase a small portion of these Singaporean startups. Ultimately, deciding whether or not to invest in startups depends on your preference for risk in your investment portfolio. This decision, like any investment, requires thorough research. If you have done proper due diligence and would like to pursue a high risk/high reward opportunity, crowdfunding equity investments may be a good fit. If the risk associated with equity investing is more than you are willing to accept, you might be interested in other crowdfunding platforms that offer business loans to small businesses. These business loans typically offer much less risk, albeit with less attractive returns, while providing a similarly exciting investment in a local SME.