Singapore 'deep tech' startups face funding hurdle as risks higher

Because investment risks typically are higher and returns slower with startups that deal with deep technology such as artificial intelligence and medtech, venture capitalists in Singapore are less willing to stick their bets in early-stage startups.

Singapore startups specialising in "deep technology" need investors that are less risk-averse and more willing to stick their bets on young companies that take longer to generate returns. One government-funded firm is aiming to plug the gap by focusing on early-stage startups in this space and helping them in areas such as fundraising, strategy, branding, and talent management. 

Comprising technologies that emerge from scientific discoveries or engineering innovation, deep tech products typically are developed on research-based intellectual property (IP) and difficult to replicate. They encompass technologies such as artificial intelligence (AI), robotics, medtech (medical tech), blockchain, and quantum computing. 

However, while investing in deep tech might yield large returns, the payout could take several years and risks were higher, according to Alan Goh, co-founder and CEO of Singapore-based NDR Medical Technology, which develops AI-powered robotics systems to assist surgeons. 

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This could prove challenging as VCs (venture capitalists) in this region usually were more willing to invest in startups that already were generating revenue or could prove their ability to do so within the first one to two years of starting out, Goh said in a phone interview with ZDNet. An e-commerce company, for instance, would be able to show revenue within a year and a track record over three years and, hence, faced an easier task convincing a VC to invest.

Medtech companies, though, needed longer gestation period of between three and five years before churning their first revenue dollar, he said. 

He noted that VCs in Southeast Asia had more funds in their pocket, but were more conservative in their choice of investment, parking their dollars in startups that were more established. In comparison, their counterparts in the US and China were willing to take bigger risks and be involved in early-stage funding. 

This is where SGInnovate hopes to lend a helping hand, according to its head of venture investing, Tong Hsien-Hui. Funded by Singapore's Ministry of Finance, the investment firm has funded more than 50 local and foreign startups from pre-seed to Series A since it was established in November 2016. 

Tong said in an interview with ZDNet: "From a VC perspective, later stage is where things are de-risked. There are many companies in seed stage but very few make it beyond Series B or Series C simply because deep tech is so difficult. With a lot of these deep-tech startups, the technology is often unproven and not productised. There's no clear product fit or market sizing...a lot of it is speculative. There's so much risk at that level."

SGInnovate believes it can help with several components in early-stage development such as building the communities around deep tech, which is crucial since deep tech in its nature is "a lonely pursuit" with few case studies and players in the market, he said. It also brings in different stakeholders including lawyers and corporations interested in the technology and helps the startups find the right talent, he added. 

Tong said: "We're not here to hold on to them for the rest of their lifecycle. When they've met the milestones and suited to get additional funding from a larger VC, they can get on to the next stage. At the minimum, at least, we've given Singapore deep-tech companies a chance."

NDR Medical itself received a funding boost from SGInnovate in early-2018, becoming one of the startup's biggest external shareholders, according to Goh, who declined to reveal how much stake the investment firm held in the startup. Founded in end-2014, the medtech company has raised more than S$1 million. SGInnovate also provided links to mentors and partners as well as other investors.

Powered by AI, NDR Medical's automated needle targeting system is touted to facilitate accurate needle punctures to organs such as kidney, pancreas, and spine, enabling surgical procedures such as biopsy to be conducted at an earlier stage. It currently is running clinical trials and is targeting to raise another S$6 million in its Series A to complete its trials and seek the necessary regulatory approval. 

If secured, regulatory approval would provide critical validation for the startup, he said, adding that the Series A funds also would be tapped to commercialise its business. 

He commended the Singapore government's efforts in setting up policies to de-risk and encourage VCs to invest here, but noted that Singapore remained a small market. While the city-state provided a good starting platform for young companies, those looking to scale and get validation for their products should head overseas, he said. 

Goh also underscored the need for more knowledge-sharing and mentoring. "There isn't a good [platform] of knowledge transfer from other startups, so we end up manoeuvring through a lot of roadblocks and the hurdles before realising these were steps others had taken before. We could have easily learn from their mistakes, so it would be good if the government could establish the structure to support this," he said.

Startups, too, must do a better job with their competitive analysis and identifying their market differentiator, according to Tong. He also pointed to an apparent obsession with valuation, especially amongst young founders, and urged against comparing Singapore's startup scene with Silicon Valley. 

He noted that startups should be benchmarked based on the stage of their technology development and the market they were in, as well as against other similar players in the local, regional, and global markets--and not just those in Silicon Valley, which would have a different valuation system than startups in Singapore.

He also stressed the need for deep-tech startups to understand their weaknesses and strengths and be cognisant of potential market risks. 

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