Singapore’s finance landscape drives growth in FinTech investment

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Singapore is the top-ranked FinTech city in Asia, with over 40% of Southeast Asian FinTech companies based there. Boasting an unparalleled blend of regulatory support, talent, tax treaties, infrastructure, and relative political stability, Singapore is widely regarded as a FinTech hub for Southeast Asian investors and entrepreneurs.

While the COVID-19 pandemic has resulted in a decrease in overall FinTech funding in Asia, the funding landscape in Singapore has been reported to be less volatile than in other parts of the region. Despite an initial decline in funding in the first quarter of 2020, Singapore’s FinTech investments rebounded in the second quarter of 2020.

What type of financing can a FinTech company raise?

A company raises funds either by issuing shares or by borrowing money from lenders such as individuals, venture capital firms or financial institutions. The capacity and suitability of a particular type of financing will depend on factors such as: the type of business and its stage of development, any concerns regarding the dilution of existing shareholders, the financial condition of the business and the condition of company assets.

Equity

Equity fundraising covers equity investments in a business such as common stock and preferred stock. Equity instruments generally have the following characteristics:

  • They give the investor ownership of a stake in the business and a share in growing the value of the business.
  • They are not protected – in a liquidation or liquidation of the company, shareholders will not get their capital investment back until all creditors and other costs of liquidating the company have been fully paid. paid.
  • A shareholder has rights in the company which are defined by law and common law and can be modified or supplemented by agreement between the shareholders.

Debt

Debt fundraising covers a business’s borrowings such as loans, credit facilities, and bonds. Debt securities generally have the following characteristics:

  • They rank before equity in the event of a business insolvency, secured debt ahead of unsecured debt.
  • The creditor has no interest in the business and the return on its debt is usually limited to the interest accrued on the loan amount.
  • In the case of a secured loan, the company would generally have charged or pledged certain assets to the creditor as collateral; a secured loan also usually comes with covenants that limit the borrower’s ability to manage the assets that have been billed or pledged.

Convertible loan notes

Fundraising through convertible loan notes or convertible bonds is a form of hybrid investing, with both equity and debt characteristics. These instruments are intended to be a flexible alternative to pure equity or debt instruments. Convertible debt notes and convertible bonds generally have the following characteristics:

  • They are initially issued as a debt instrument and, although outstanding in the form of a loan / bond, constitute debt owed by the company; however, the loan / bond will be convertible into shares at a future date and at a predetermined conversion price automatically or in the event of an event.
  • In the form of debt, they usually accumulate interest on the principal amount of loan notes or bonds.
  • They will be convertible into shares at a predetermined conversion price in certain circumstances (for example, during the next round of the company) or, on the contrary, will be redeemable within a certain period or during certain events.
  • They are generally not secure.

Seed funding / angel / venture capital

Seed and venture capital financing is a type of equity financing typically targeting start-ups and start-ups. Such funding can be done through venture capital funds or angel investors, which can be high net worth individuals or investment firms. Start-ups and start-ups are turning to seed and venture capital finance as they may find it difficult to obtain traditional debt financing from financial institutions due to their lack of business history. or tangible assets to provide collateral for loans.

Angel investors and venture capital funds tend to invest when the valuation of the business is low, paving the way for a potentially high return on investment if the business is successful in the future. However, the risk of the investment is high if growth and expected goals are not achieved or, in the worst case, the company is forced to liquidate or liquidate. Historically, venture capital funds have aimed to complete their investment (usually by selling their stake in the company to third parties or sometimes to their founders) within three to five years, although this time horizon has been recently lengthened due to market forces.

What are the traditional sources of financing for FinTech start-ups?

Seed investment

Founders may first look to family and friends to invest capital in the business in exchange for a small stake in the business. Sometimes founders may also seek out business angels with the relevant know-how and expertise to invest at this initial stage. This form of seed investment will generally take the form of an issue of ordinary shares to the investor, which will give him the right to vote. The investor may also require additional protection under an investment agreement such as a seat on the board of directors or other management controls.

Singapore also has several programs in place that provide public sector financing to young start-ups, such as:

  • SG Startup, where new entrepreneurs can receive mentoring support and a seed capital grant of up to $ 37,000.
  • FSTI, which provides financial support up to 50% of the set-up costs.
  • FSTI 2.0, which applies to the second round of financing to accelerate growth.

The private sector in Singapore has also set up a number of innovation labs that provide support in various forms to start-ups, ranging from providing workspaces, mentoring and funding.

Series A placement

an initial investment by a venture capital fund is called a “series A investment”, when the venture capital fund seeks a minority stake in the business through the issuance of preferred shares in the company (thus as additional protections under an investment agreement, if applicable).

Preferred shares generally do not carry voting rights, so control of the company remains in the hands of the founders along with common stock. Alternatively, the venture capital fund can invest through a convertible bond or convertible bond, which will turn into preferred stock.

A Series A investment round is generally more complex than a seed investment round due to the larger amount invested and the (generally) more sophisticated nature of the investor. A Series A cycle also typically occurs when the company has established a business history with more extensive operating activities than early stage start-ups.

In Singapore, the Monetary Authority of Singapore (MAS) implemented the Venture Capital Fund Manager scheme, which simplifies the rules for venture capital fund managers to make it easier for start-ups to access capital.

Towards other sources of funding

The FinTech community in Singapore has grown rapidly over the past five years, fueled by a developing funding scene. We expect to see more liquidity in the market, especially from foreign capital, as investors seek to diversify their Asia-Pacific portfolios and move away from traditional sector investments in China and India. While investments in FinTech companies will continue to be largely in the form of seed funding and venture capital, there is a growing appetite for alternative sources of finance.

The global equity crowdfunding industry, in particular, has grown over 100% year over year and is expected to outpace angel investing and venture capital in terms of size. Equity crowdfunding has traditionally been suited for start-ups and involves investors providing capital to a start-up company in exchange for shares, with the objective of investing a profit if the business is successful. The benefit of equity crowdfunding for entrepreneurs is the ability to draw on the knowledge, expertise and network of a larger number of investors.

In Singapore, all securities-based crowdfunding platforms (including equity crowdfunding platforms) must be licensed and regulated by the MAS. They are licensed for capital markets services under the Securities and Futures Act. All licensed crowdfunding platforms must ensure proper segregation of investor funds and maintain proper record of transactions. Companies that intend to raise funds on securities-based crowdfunding platforms can make small offers (raising less than S $ 5 million within 12 months) without publishing a prospectus. However, they must disclose the main risks of these investments to all investors.

FinTechs can benefit from Singapore’s strong funding scene and the range of options available to secure the financial support best suited to their business. It is important to understand how the different models can affect the future financial position, depending on the growth of the business, to ensure that this remains aligned with the business strategy.

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