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15 Nov 2019 Updated 15 Sep 2020

[BT Exclusive: SFF X SWITCH] ESG's venture arm SEEDS S$140m in funds over three years

The Business Times Claudia Chong

SINGAPORE-BASED venture capital (VC) firm Wavemaker Partners might now be known as one of the handful of VCs specialising in deep tech, but it might have turned out differently had it not taken its first taste of the sector through a co-investment.

In 2014, Wavemaker injected seed funding into dental 3D printing startup Structo, together with the National Research Foundation. It eventually built its conviction that deep tech was a valuable area that saw too little love compared with more popular picks such as e-commerce, marketplaces, or fintech.

That said, the capital requirements for deep tech investing were too much to bear alone. Then SEEDS Capital, the investment arm of government agency Enterprise Singapore (ESG), came calling for partners to inject a dose of capital and belief into startups in the country. Since kicking off a contract with Wavemaker in 2016, SEEDS Capital has co-invested in 19 startups with the VC firm.

SEEDS Capital chairman Ted Tan said the co-investment model works because by lowering the risk for VCs to part with their money, startups get the lift they need for a chance to prove their ideas on the long runway towards commercialisation. This has a knock-on effect on the development of the sector as a whole.

SEEDS Capital has catalysed close to S$140 million of early-stage funding across 100 deals in the past three years, Mr Tan told The Business Times in an exclusive interview. The investment arm contributed S$66.7 million, while S$70.8 million came from co-investors.

For general tech, SEEDS Capital invests in a 7:3 ratio (SEEDS:co-investor) up to S$250,000; it then matches the investment dollar for dollar up to a total contribution of S$2 million from SEEDS.

For deep tech, the 7:3 investment cap is S$500,000, while the total investment cap is S$4 million. Co-investors must be prepared to cut cheques of at least S$50,000 for each startup.

As deals go, SEEDS Capital offers them sweeter than most. When an exit occurs, it allocates part of its investment profits to its co-investment partners based on agreed-upon terms.

"That's how we incentivise them to come in and play a bigger role in some of these more difficult sectors," said Mr Tan, who is also deputy chief executive of ESG.

Seeds Capital's Chairman Ted Tan For BT Exclusive Interview

In its early days, SEEDS Capital had to offer greater upside to the VCs to encourage more early-stage startup investments, but the investment environment has since matured.

SEEDS Capital has 291 companies in its portfolio as of the third quarter of 2019. They span urban solutions and sustainability, health and biomedical sciences to advanced manufacturing and engineering.

The investment arm has inked partnerships with 25 Singapore-based co-investors to-date, including Jungle Ventures and Trendlines Medical. It is currently calling for partners to invest in maritime tech.

In evaluating co-investors, it looks for a strong track record, expertise in relevant domains, and familiarity with the risks and opportunities in such investments, said Mr Tan.

In 2017, SEEDS Capital injected S$9.3 million into 17 startups. Seven of the portfolio companies went on to raise S$22.5 million in the next three years, working out to S$2.40 in follow-on funding raised by portfolio companies for every dollar invested by SEEDS Capital.

Government co-investment is not a new concept. In the 1950s, the US government's Small Business Administration created a fund-matching programme that helped spur the growth of Silicon Valley - it matched every investor dollar with two of its own. In Malaysia, authorities are setting aside RM2 billion (S$656 million) for co-investment.

But what about the argument that if a startup has growth potential, it would naturally attract the attention of investors on its own?

Mr Tan believes investors need a gentle push to look at underappreciated and developing sectors. "There are some areas where even the government doesn't get involved in because of market trends. In the area of infocomm, for example, in the very early days when innovation was still very nascent, many VCs invested in ICT (information and communications technology) companies," said Mr Tan.

"Many of them followed the wave and it's a quick win, but we are not looking at just that. Over the years we actually focused on areas that are more difficult, where there's a market gap, where there are companies that VCs are not investing in because it's a longer gestation period (before the technology is commercialised). So I would say that there is still a role for the government to address this market gap."

SEEDS Capital even bumped up its investment quantum in 2017 in tandem with the maturing startup scene. It split its investment parameters under two kinds of tech (general, and deep tech that requires more funding), and doubled the investment cap for general tech to S$2 million.

Beyond assistance with capital, SEEDS Capital provides business networks and mentorship to startups. ESG has a network of more than 35 overseas offices to support Singapore-based firms in expanding regionally. Its New York office helped facilitate the set-up of the US subsidiary of Smartkarma, a marketplace platform for investment research, and a SEEDS portfolio firm.

Mr Tan said key trends that SEEDS Capital is closely watching include sustainability, food security, and ageing population - issues that present opportunities for startups to address needs.

For instance, it led agrifoodtech firm Nutrition Technologies' Series A round alongside Openspace Ventures. The funds - which BT understands to be US$8.5 million - will be used in part to set up a commercial-scale insect protein facility that can produce over 18,000 tonnes of insect-based feed ingredients and organic fertilisers every year.

As more investors spring up to capture the opportunities in the startup space, SEEDS Capital will look at widening its pool of partners to include more sector-agnostic VCs and corporate venture capital (CVC) funds. CVCs are the investment arms of corporations.

"CVCs play a very important role because they are captive customers who really need the technology, and they have clear problem statements," said Mr Tan.

Source: The Business Times © Singapore Press Holdings Limited. Reproduced with permission.