May 25, 2017

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Authors Posts by Danielle Goh

Danielle Goh

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by Danielle Goh

GAZELLES. Adaptable, fast and incredibly rare.

But these gazelles are not the four- legged animals native to Africa. It’s a term for fast growing and profitable startups. With a 20 per cent increase of profits each year, these startups are highly sought after. Their natural habitat is an ecosystem of cutting-edge research, plucky investors and initiatives by the G.

Only 8.1 per cent of startups in Singapore are gazelles, making them an endangered species here. “While the number of startups have increased, and more have received government support, not enough are becoming successful gazelles,” explained Dr Wong Poh Kam, Director of NUS Enterprise, in an interview with The Middle Ground.

Companies like Razer and gaming giant Garena are examples of gazelles from Singapore. Founded in 2009, Garena has amassed annual profits of US$200 million, evolving into one of Southeast Asia’s biggest startups.

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Before 2010, startups in Singapore were hardly a buzzword, but now they are the talk of the town.

You’ve heard of Smart Nation, and of ministers hammering on about the need for innovation and to transform our economy. In fact, the G has been steadily building initiatives to further develop the startup scene in Singapore. Helmed by Finance minister, Heng Swee Keat, the newly revamped Future Economy Council will implement proposals by the Committee of the Future Economy (CFE) to fund more research and help startups build networks overseas.

With more investors and funding from the G, the number of startups have doubled between 2004 and 2015, showed the findings of a recent study by NUS Enterprise. In the study, younger startups surveyed were companies that were founded after 2010 and mature startups were companies that have been around before 2010.

Dr Wong Poh Kam, director of NUS Enterprise speaking at Innovfest Unbound 2017. Image from NUS Enterprise

The main thrust of the research is that while efforts have paid off in creating a thriving startup ecosystem, few make the leap to become gazelles.

We break down the key developments in Singapore’s startup scene and what it could mean for the future:

1. Increased number of new startups

Startups in Singapore rank first in business churn when compared with other countries, higher than UK and the US.

What this means is that many new startups are set up, and those that don’t succeed exit.

A high business churn generally bodes well for startups. “It’s a dynamic that attracts new players. This suggests that there’s more entry into the startup scene in Singapore, and it could be an indicator that it’s growing,” said Dr Wong.

The booming numbers of startups here can be attributed in part to an improving infrastructure and ecosystem. Yet, the results are not as great as they should be. Not enough startups are becoming successful, and gazelles continue to be far and few.

 

Diagram of different types of High-tech startups in Singapore. Image by NUS Enterprise Study

 

2. Highly innovative and better protected

Younger startups are more innovative than mature startups. And many have introduced new products and services to the world. The NUS Enterprise Study also found that those who dedicate resources to research and developing tech tend to have higher profits.

While more companies own Intellectual Property (IP), a huge jump from 19.6 per cent in 2010, to 49.5 per cent in 2016, still only less than half of startups in Singapore have their own IP.

Having IP is an asset to startups, as innovations are protected. A strong IP also helps investors to be confident that the products of startups are truly unique and new.

Both young and mature gazelles in Singapore list a dependence on major customers as one of their top concerns for 2016. Dr Wong sees this as a result of some gazelles not having a strong IP.

“The large customer, knowing that you are highly dependent on them, may squeeze you on price by threatening to switch if you don’t meet their demand. It will be less of a concern if you, the supplier has strong technology or IP that is not easy for other competitors to replicate.”

3. More cha-ching from the G and investors

Roboy, an advanced robot developed at the Artificial Intelligence Laboratory of the University of Zurich. Image by Wikimedia user Adrian Baer

Younger startups benefit from more government support schemes and venture investments than their predecessors. This is a good thing. However, these resources must be directed toward ideas that can be competitive in the global market.

For Dr Wong, deep tech is the way forward. Think Artificial Intelligence (AI), DNA sequencing and supercomputers.

“This may require looking at reallocating funding support. Although there are higher risks and higher returns, deep technology is more likely to succeed in the global market,” said Dr Wong.

For more gazelles to be created, both startups and investors must be willing to take risks, and be invested in ideas that can change the world. The G may have already got the memo, as Dr Yaccob Ibrahim, Minister for communications and information, announced the launch of AI.SG at Innovfest Unbound 2017. This initiative will bring together investors, government agencies, startups and universities to advance AI research and development. The National Research Foundation (NRF) will invest up to US$107 million in the project.

4. Younger and more equipped

Founders of startups are getting younger. About 62 per cent are 39 and below, and increasingly more founders are female, up from 5.9 per cent in 2010, to 10.6 per cent in 2016. The majority of founders are also trained in technical disciplines and have work experience.

University programmes like NTUitive and NUS Enterprise help entrepreneurs in their first forays into the startup scene. They provide support for aspiring founders, and aim to transform research into commercially viable products. NUS Overseas Colleges links students with startups from around the world, with opportunities to work in Silicon Valley, Israel, Beijing and Stockholm.

What’s exciting is that these programmes have the potential to link breakthrough research with startups.

5. Many are expanding across borders

More startups are outward looking: over 50 per cent have branches overseas, and 72 per cent derive their income from international customers. For startups to grow, they need to tap into global networks and markets.

“Singapore’s domestic market is too small, if firms want to grow, you need to get regional and global,” said Dr Wong.

Some startups like Ascent Solutions have been global ever since it started and almost all of its business is international. Six years ago, it launched a GPS tracking solution for companies transporting cargo in Africa and now it is dominating the market there.

What is clear is that although the startup ecosystem is teeming with more innovative companies, more gazelles are needed.

It’s difficult to become a gazelle because a startup must be both quick to grow, and also profitable. While there are many fast growing or growth-seeking firms, they must take risks that can sometimes cost them gravely. Cautionary tales abound: Redmart, once the largest online grocery in Singapore, had substantial amounts of VC funding, but it ran out of cash before achieving profitability. Investors quickly pulled out. It was then sold to Lazada at an estimated price between US$30 million to US$40 million, a much lower value than before.

Yet there have been some who successfully make the transition: Razer, an American gaming company jointly founded by Singaporean entrepreneur Mr Tan Min Liang and Mr Robert Krakoff, who is an American, is what Dr Wong terms as a super-gazelle.

“Both startups and investors need to take risks for startups to make the transition to become gazelles.” said Dr Wong. “It may be risky, but if there is a breakthrough product, the startup can achieve success.”

 

Featured image by Wikimedia Commons user Susan Adams. CC BY-SA 2.0.

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Photo By Shawn Danker
A worker walks by the Bedok Reservoir office of the Aljunied Hougang Punggol East Town Council.

by Danielle Goh

WHAT did you make of the PwC report on the finances of the Workers’ Party (WP) town council while it had charge of Punggol East? Did it look like same-old, same-old? Poor PwC. Its limelight had been stolen by KPMG, which released its report on the whole town council administration and finances in October last year.

PwC was put in charge of auditing the Punggol East single-seat ward which was incorporated into the Aljunied-Hougang town council after the by-election in May 2013.

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The WP had a short two years running the ward before it reverted to People’s Action Party control in the last general election. According to the auditors, there was plenty of foot-dragging and procrastination on the part of WP, hence, the lateness of the 94 page report, which was peppered with phrases like “no documentation’’ and “unsatisfactory overall”.

But the report is interesting for some insights into how a handover of town councils is done. The WP took over Hougang in 1991 and Aljunied in 2011. The Punggol East handover meant that both sides would have some experience to fall back on. Clearly, the WP operates a “new broom sweeps clean’’ strategy when it came into power, turfing out vendors even though their contracts had yet to expire. That, of course, is the town council’s prerogative. The question is whether the change led to better services or lower costs.

The chief beneficiary appears to be FMSS, the incumbent managing agent for Aljunied and Hougang, which went on to manage Punggol East. It charged a rate that is 17 per cent higher than the old vendor CPG, which had yet to finish its contract.

According to the PwC, the WP said that the managing agent contract went to FMSS because CPG wanted to terminate the arrangement. PwC said CPG could have been made to stay.

The PwC report had an interesting list of companies which seemed to have done well bidding for work in the WP’s Punggol East ward. According to the auditors, they won contracts even though they charged higher rates than competitors, or because there were no other bidders, or were simply handed the job.

Here’s what the auditors said about the way they were hired.

1. Rentokil Initial Singapore, which does inspection and extermination of termites, bee’s nests, rodents and other pests

Rentokil was awarded the contract from Sept 1, 2013 to Aug 31 last year. It was not the lowest bidder, and received 71.8 per cent on the Price Quality Method (PQM) score, falling behind Pest-Pro Management, which achieved 90 per cent on the PQM score. The PQM score measures the price and quality of a tender, and is the method of choice to help the G with its selection of contractors for the town council.

The Tender Evaluation Report submitted by the Aljunied-Hougang Punggol East Town Council (AHPETC) did not explain why it awarded the tender to Rentokil.

“In our view, neither the circumstances and reasons for not accepting the lowest tender in this case were fully justified, nor the reasons for not doing so properly recorded,” PwC said.

Rentokil was paid $10,385.42 in total. If the contract was awarded to Pest-Pro, the lowest bidder, it would have saved $2,700.21.

2. Red-Power Electrical Engineering, which maintains booster pumps, automatic refuse chute flushing system and roller shutters

Red-Power was hired for work in the Hougang and Aljunied estates in 2012, before the town council absorbed Punggol East in 2013. It was the sole bidder then. Instead of calling for a new tender for Punggol East or extending existing contracts with incumbent vendors, WP handed the work to Red-Power. The WP town council said the work went to Red-Power so that it would have greater leverage when the main contract for the whole AHPETC ran out. PwC, however, noted that when compared to other vendors who do the same kind of work, Red-Power was expensive. One comparison showed that its rate was higher by 775 per cent.

If the town council had chosen to extend the contracts of existing contractors by 12 months, it would have saved $25,920.

“Exercising [such] options would have allowed the Town Council to enjoy the significantly lower rates for a further year, while, at the same time, providing the Town Council with the additional time required to call for a second tender,’’ said the PwC.

3. Neela Electrical System, which maintains the electrically operated roller shutter doors at bin compounds and centralised refuse chute chambers

Neela was the sole bidder for a tender for the work in Punggol East.  It was given the job although its rates were 10 per cent higher than what other vendors charged and Neela itself had acknowledged to the town council during an interview that it had no experience in such repair and maintenance work.

The Finance Department of AHPETC was unable to provide the necessary payment documents and information to verify the work done by Neela, which was paid $27,545.65 in total.

4. Titan Facilities Management, which does conservancy and cleaning works

Titan was hired by the old PAP town council. When WP took over Punggol East, AHPETC could have extended Titan’s contract term by an additional 12 months. It did not do so but chose to call a new tender. While Titan had the lowest tender price of three bidders, it was charging 67 per cent more than before. If its contract had simply been extended for 12 months, the town council could have saved $423,147.

5. J. Keart Alliances, which maintains the fire protection systems including standby generator sets

Like Titan’s contract, the AHPETC could have extended J. Keart’s contract for another 12 months for the same rates.

Instead, the AHPETC called for a new tender for this too. J Keart won but with a new rate that amounted to a 400 per cent rise of rates for the weekly maintenance of generator sets, and a 2,567 per cent increase for the annual maintenance of fire extinguishers. If J Keart had stayed on, PwC estimated that the town council could have saved $27, 249.20 from April 1, 2015 to March last year.

Now that the town council is back in PAP’s hands, we wonder if it also adopted a new broom sweeps clean approach. We asked and we are waiting for an answer.

PS. The PAP town council has declined to comment.

 

Featured image from TMG file.

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