June 25, 2017

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gazelles

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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