Simpler equity terms needed to help Singapore startups flourish

Overly complex investment agreements can hold back startups from succeeding, say executives from muru-D, who urge angels and investors in Singapore to rethink their documentation model.
Written by Eileen Yu, Senior Contributing Editor

There are efficiency gaps between the startup ecosystems in Singapore and Silicon Valley, which the former can address by introducing simpler and clearer investment terms.

Doing so would, in turn, attract more mature startups to their fold and better set up founders for success, according to executives from muru-D's Singapore outfit.

The Telstra-owned accelerator had just completed its second batch of eight startups under the six-month programme, with demo day held this week in Singapore. This year's graduating participants included founders from Singapore, Indonesia, Thailand, Malaysia, and Vietnam, offering products and services offered included micro-financing, education, logistics, and recruitment.

During the course of the programme, the startups added more than 12,000 customers and grew their revenue by more than S$300,000 (US$212,905), according to muru-D. As per last year, participants in the programme received S$40,000 (US$ 28,387) each in seed funding as well as access to muru-D's Singapore office and network of mentors. Participating startups also visited Silicon Valley and New York.

Jamie Camidge, muru-D's Singapore head, said it would continue to offer graduates support as they looked to raise funds and expand into global markets. muru-D also had alliances with other global accelerators including 500 Startups, TheJunction, and Chinaccelerator.

Speaking to ZDNet in an interview ahead of demo day, Camidge said his team had gained valuable insights from managing the first cohort and applying its experience from Australia to the Asean programme in Singapore.

One such lesson was the need for simpler and clearer agreements between investors and startups, noted Craig Dixon, muru-D Singapore's entrepreneur-in-residence.

Urging the need for more "founder-friendly term sheets", he said documentations used today in Singapore were too complex, some stretching past 140 pages. Startups would not typically have the luxury of a legal counsel to go through such documents, some of which included terms that were deemed unfavourable for startup founders.

Dixon suggested that platforms such as SGInnovate could provide a list of standards or templates to better guide startups, which currently remained largely uninformed as such advice were provided on an ad hoc basis.

These would further raise the level of understanding about industry best practices, said Camidge.

In this aspect, muru-D recently adopted the Simple Agreement For Future Equity, or SAFE, which was established by Y Combinator to replace convertible notes and offer a simpler and clearer document. It was designed to remain fair to both investors and founders.

Convertible notes are a form of short-term debt that later convert into equity, usually when startups initiate funding rounds in future.

SAFE notes determined the startup's future valuation and investor's equity based on how investors valued the company. This provided more flexibility for the accelerator and offered startups a better deal, said muru-D, allowing the accelerator to attract more mature startups to its programme and placing its funding structure in line with global best practice.

SAFE had been adopted for muru-D's latest cohort in Australia and would be introduced for the upcoming third cohort in Singapore, for which applications would open in June this year.

It would be frustrating for VCs to have identified a great startup only for the founders to realise they had signed a convertible note or agreement that was not proper, Dixon said.

He also noted that in Silicon Valley, it was not uncommon for a startup to shake hands with an angel and, within 24 hours, sign the necessary documents and receive the investment. This would not be the typical practice in Singapore, which revealed a significant gap in efficiency between the two startup ecosystems, he said.

Camidge explained that complex terms and agreements might be expected between larger corporations, but were not necessarily appropriate for startups. A lot of these clauses could turn into complexities and hurdles and, often, would lead to a breakdown in relationships between investors and founders.

Dixon urged angels and investors here to relook this process and break out of the mould to address the shortfall. It also would be in their interest to simplify the terms, since complexity could worsen the startup's chance of succeeding and investors would end up having equity in a startup that would not be able to survive in the market.

By adopting SAFE notes, for instance, muru-D startups would get the best deal possible out of the funding programme, Dixon said.

To further support startups, Camidge added that governments should look at making it easier for human capital to move in and out of the country.

Asian customers more focused on solving business challenges, not technology

Apart from the ability to acquire the right skillsets, startups in this region also would need to focus on the issues that mattered to enterprises here.

For instance, enterprise customers in Silicon Valley were usually interested in the technology startups offered. In comparison, their counterparts in Asia were more concerned about the startup's traction and the business problems its product could help solve, because this translated to revenue, said Eric Meyer, founder and CEO of Apvera.

Part of muru-D's first cohort in Singapore, the cybersecurity startup last December raised S$1.7 million (US$ 1.21 million) in a funding round that included Nest Ventures, muru-D Singapore, and Central Exchange. With operations in Singapore, Hong Kong, and San Francisco, the startup's focus now was on the financial services industry and it was targeting to expand into other global markets including New York, London, and Tokyo.

Meyer explained that most entrepreneurs in Silicon Valley were tech-focused and tech-savvy, given the exposure to technology there. In comparison, entrepreneurs in Asia were not as innovative--not from lack of initiative, but due to the region's readiness, he said, noting that the maturity of the overall market was critical in driving innovation.

This compelled entrepreneurs to adapt to market conditions, which required less technology expertise but demanded other business expertise, he said. So while there might not be a lot of innovation along the lines of technology, the reverse was true in terms of business because it was far more challenging to do business in Asia compared to other matured markets, he noted.

Recognising the differences in global markets was an important lesson one founder learnt, after a visit to Silicon Valley as part of muru-D's programme. It underscored the need for product localisation, said Saify Akhtar, co-founder of Hafta.

Part of the second cohort in Singapore, the Malaysia-based startup offers online tools that capture and analyse behavioural and personality data to determine a person's likely performance in a company. The equivalent of a credit bureau, organisations used its services to assess and manage their human capital.

Both Saify and his co-founder previously worked with ride-sharing operators, Grab and Uber, in Malaysia to help them determine which drivers were suitable of managing their higher range car models.

Because Hafta extracted data insights from questionnaires filled out by employees, some questions had to be rephrased to take into considerations local culture and norms. This had to be done while ensuring the clarity of responses remained unaffected, Saify said, adding that muru-D's programme provided the international exposure and access to mentors that his startup would not have had otherwise.

Through its affiliation with Telstra, muru-D's programme also provided a suitable testbed for new products, said Swami Sekar, founder of Singapore-based Winimy, who was looking for a telco to test and evaluate its app. Also part of the second cohort, the startup developed its SeeChat platform to power digital directories that enabled businesses to communicate, engage, as well as transact with consumers.

On demo day, it launched its first directory for Singapore directory operator, Medianusa, which wanted a more sustainable model by going digital, Sekar said, adding that it also supported a directory of 800,000 businesses in Middle East. Winimy was founded in November 2014 and launched SeeChat in June 2016.

Before joining muru-D's programme, the Singapore startup was supporting 100 SMBs on its platform, some of which were paying customers. Sekar added that the accelerator programme provided access to Telstra's network as well as industry partners, which helped his team improve the SeeChat platform and formalise Winimy's go-to-market strategy.

Hafta also learnt what was needed to transition into a "high-growth entrepreneur", pushing Saify to "diagnose" the company's business model and change the way it generated revenue. "They helped us focus. There was a lot of fat in the way we marketed [our services]," he said.

Founded in early-2016, Hafta currently provided its services to private schools attended by local students in emerging markets. It would be expanding its offering to Indonesia and Vietnam in the next 18 months.

Echoing the difficulties many startups faced in finding good technical skillsets on a limited budget, Saify said he eventually employed a competent team in Vietnam who supported the company's operations remotely.

Editorial standards