Investment Criteria of Singapore Venture Capitalists
Wee-Liang Tan, Senior Lecturer
Dattatreya G. Allampalli., Research Associate,
Ravinder Zutshi and
Patrick T. Gibbons, Senior Lecturers
Nanyang Business School
Nanyang Technological University
Nanyang Avenue
Singapore 639798
Abstract
Venture capital industry in Singapore is of recent origin.
However, funds under management in Singapore have grown from S$
45 million in 1983 to S$ 7300 million in 1995. These developments
together with the recent announcement of government's vision of
Singapore becoming a hub for venture capital in the region,
provides an opportunity for an examination of the venture capital
industry in Singapore. The venture capital industry originated in
the western hemisphere, springing from the US, emerged as a
response to the need of risk capital for high technology
industries.
Considering the nature of industrial developments in South East
Asia, the authors anticipate that the investment criteria
employed by VCFs in Singapore would differ in the light of the
differences in culture and investment opportunities around
Singapore. Although our study on sample of 31 venture capitalists
from Singapore found more similarities than the differences in
investment criteria when compared to US, Asia-Pacific, Europe and
Canada, the mean scores of large number of investment criteria
were higher than US, thus placing higher demands on entrepreneurs
seeking venture capital.
Introduction
Scheela (1994) concluded that Singapore has great potential for
the emergence of a venture capital industry based on Patricof's
(1984) four criteria for the emergence of significant venture
capital activity. These criteria include: existence of a strong
secondary market; a favourable tax structure; a flexible labour
market; and an enterprising culture. Singapore meets these
criteria and in addition to its role as a regional financial
centre, has emerged as a venture capital hub in South East Asia.
The rise of Singapore as a hub in South East Asia has been
supported by two complementary developments. First, the Economic
Development Board (EDB) of Singapore has embarked on a series of
programmes to expand the venture capital industry in Singapore to
complement Singapore's role as a regional centre for finance,
trade and industry. Second, the emergence of lower cost
manufacturing centres in East Asia, in the rapidly growing second
generation newly industrialised economies (NIEs), has placed
competitive pressure on Singapore's manufacturing industry.
Singapore has therefore, moved up the technology ladder and
promoted high value technology intensive industries. This move
has spurred the development of an active venture capital
industry. The existence of an active venture capital industry is
critical to attract and promote new technology ventures. To
catalyse the high-tech industry, EDB has itself entered the
venture capital industry with two funds, EDB Ventures and
Singapore Bio-Innovations, which seek to invest in high
technology companies.
Whilst the industry has been developing and expanding, there is
little information about the venture capitalists and their
operations. There are few studies on the venture capitalists in
Singapore and in Asia. In Singapore, Chia and Wong (1989) provide
detailed case studies on three venture capital funds in
Singapore. Through their in-depth analyses and interviews the
researchers identified the initial investment objectives,
philosophies, appraisal procedures and Investment criteria of the
venture funds studied. Recently, Scheela (1994) using the case
study methodology, also examined the investment approaches of
five different venture capital funds in Singapore. Scheela (1994)
found that the venture capital firms studied had strong
international focus. In addition, he contrasted the management
styles of the venture capital funds studied. In addition to this
case study, the Economic Development Board (1995) conducts a
survey of venture capital industry once in every two year. The
1995 survey (EDB) showed that the rate of increase in funds
committed accelerated rapidly for two year-period 1993 and 1994
when compared with the two year-period between the years 1991 and
1992, with the amount of funds invested increasing by 300%. In
the survey, it was reported that the bulk of funds was committed
to South East Asia showing mounting evidence to the fact that
there are investment opportunities in NIEs.
Overall, although these studies are informative, the first while
focusing on management styles is based on a small sample, and the
other while comprehensive focuses directly on demographic data
about the industry and does not address management styles
employed. It is hoped that this paper will provide an insight
into the current criteria used by the venture capital community
in Asia as represented by the Singapore industry. This
information would prove to be useful to the venture capitalists
around the world, to entrepreneurs seeking capital around the
globe, and to other academics. The study used MacMillan et al's
(1985) twenty-four different criteria, grouped under five broad
classifications.
Research Methodology
A mail survey was employed to obtain the information required.
The research instrument was developed to elicit information on
the size of the venture capital firms, their investment
priorities, time horizons and Investment criteria. The instrument
included the Investment criteria used by MacMillian, I.C.,
Seigel, R. and SubbaNarasimha, P.N. (1985). These five categories
Investment criteria have been used in other studies (hereinafter
referred as "investment criteria"): entrepreneur's personality,
entrepreneur's experience, characteristics of the product or
service, characteristics of the market, and financial
characteristics (Knight, 1986 & 1994; Ray, 1991; Elango, B.,
Fried, V.H., Hisrich, R.D., and Polonchek, A.,1995 ;). In
addition to the criteria employed by earlier studies, for
criteria on country risk and venture team were included
(hereinafter referred to as "additional criteria"). Venture team
characteristics were included as it were part of the original
research carried out by MacMillan (1986) but not reported in the
subsequent research studies by Knight(1986) and Ray (1991).
Country risk as an additional set of criteria was felt to be
relevant in the light of Singapore's venture capital industry
being a hub for regional economies (Allampalli, Gibbons, Tan &
Zutshi, 1996). The scale used for evaluation criteria is a four
point Likert-like scale: 1) Irrelevant 2) Desirable 3) Important
and 4) Essential.
Prior to distributing the survey, the chief executives of the
venture capital funds in Singapore listed in the EDB Directory of
venture capital were contacted and informed about the objectives
of the survey. The questionnaire was then sent directly to the
chief executive officer of each venture capital fund, as it was
expected that these individuals would be the most knowledgeable
about their company's investment criteria and strategies. From a
total population of fifty-eight venture capital funds in the
Directory, thirty-one responded yielding a response rate of 53%,
which is quite high. Of more importance, the total amount of
funds under management by the venture capital funds surveyed
amounted to $3 billion, which represents 56.4% of the S$ 5.32
billion, the total funds under management at the beginning of
1995, as estimated by the EDB. Thence the responses are quite
representative of the population.
Findings
Demographics
In Singapore, there are 58 venture capital funds listed in the
Venture Capital Directory (EDB, 1995). Venture capital funds
under management has grown to S$7300 million in January 1996
from S$5320 million in 1995 after a modest start of $45 million
in 1983. The average amount of funds managed by the respondents
to our survey was approximately $110m. However there was a wide
dispersion in the amount of funds invested. Singapore firms in
our sample ranged in size from the smallest of S$0.2 million to
the largest at S$ 700 million, and the median size of fund is
S$90 million.
The venture capital funds in our sample were classified utilising
the criteria used by Elango, et al (1995) in categorising the
venture capital funds by size. In their sample of 149 US venture
capital firms (belonging to Silicon Valley, Northern and Southern
California, New York and Texas), Elango et al (1995) found that
the average size venture capital fund was US $278.9 million, US
$50.9 million and US $12.3 million for Large, medium and small
venture capital fund respectively. The classification of the
venture capital funds by size is shown in Table 1.
Table 1
Grouping of venture capital funds in Singapore(in S $ millions)
_________________________________________________________________
[1]Singapore [2]United States
_________________________________________________________________
Grouping of Venture Number Mean Number Mean
Capital Fund (SGD) (USD)
_________________________________________________________________
Small (<25 million) 8 12.05 40 12.345
Medium (>=25 but <100 million) 11 54.53 58 50.962
Large (>100 million) 11 230.80 45 278.91
_________________________________________________________________
[1] Singapore - 30 reported out of 31
[2] United States - 143 reported out of 149 venture capital
funds.
It can be seen from the Table 1 that the mean size of venture
capital funds in various groupings for Singapore and United
States also shows a close resemblance. The size of the venture
capital funds involved in the venture capital industry in
Singapore is not significantly different from US in decimal
terms. Moreover, the proportions of firms across the three
categories are similar.
Investment Criteria Used By Venture Capitalists In Singapore
Mean response for each set of the investment criteria is shown in
Tables 2-6. Findings from Knight's (1994) on United States,
Europe and Asia-Pacific and Canada, have been included in Tables
2 to 6 for comparison of investment criteria on a cross-cultural
basis. However, it must be noted that the findings in Knight
(1994) were from studies conducted at different periods of time
and there may be some changes in the means of the responses as
Knight discovered with respect to his Canadian samples (1994).
Of the five categories of investment criteria, entrepreneurs'
personality, experience, characteristics of product or service,
characteristics of market, and financial characteristics, it
appears that financial characteristics are not regarded as
important as the other categories. The mean scores for this
category (Table 6) are generally lower than those for the other
categories.
The ranking of the mean scores for the twenty-four investment
criteria used in earlier studies are indicated in square brackets
in Tables 2-6. The means scores from the earlier studies were
also ranked and their rankings similarly indicated. It must be
observed that the Singapore venture capitalists only include one
aspect of the market and another on the financial aspect in the
top ten criteria as ranked by the means. The other market and
financial aspects are low in the ranking.
The top five investment criteria in Singapore are drawn from the
first two groups of criteria on the entrepreneur. The
entrepreneur's familiarity with the venture's target market
(Table 3) and capability of sustained intense effort (Table 2)
are the top two criteria with his ability to evaluate and react
well to risk, and his past leadership ability are tied in the
third position. The list is completed by the entrepreneur's
relevant track record. It is interesting to note that the top
five criteria centre on the entrepreneur. This finding is similar
to the situation in Europe but differs from the relative
importance of the investment criteria in the US, the Asia-Pacific
and Canadian samples. In the US study, the entrepreneur features
in the top five criteria. However, the criterion ranked third is
a financial characteristic - that the return must be equal to at
least ten times the investment within a period of ten years. In
the case of the Asia-Pacific sample, one aspect of the intended
market was the fourth most important criterion; namely, the
target market enjoys a significant growth rate. Finally, the
Canadian venture capitalists indicate a product characteristic in
the top five (in the fourth place) - the product has been
developed as a functioning prototype.
Knight in his study (1994) noted that the US venture capitalists
appeared to be more demanding overall in their investment
criteria. When the Singapore results for the same criteria are
compared with the other countries, it appears that Singapore
venture capitalists may be even more demanding than the US ones
as in eleven of the twenty-four investment criteria indicated
with an asterisk in Tables 2 - 6, Singapore venture capitalists
have higher mean scores than the US. However, without the data
from the earlier studies it was not possible to statistically
compare the means.
Discussion
The investment criteria employed in Singapore appear to focus on
the entrepreneur as the rankings of the mean scores indicates.
The market, product and financial criteria appear to be lower on
the rankings of the mean scores.
There has been a change in the criteria over time between the
study of Ray in 1991 and ours in 1996. Ray in 1991 found the top
five investment criteria in his study of five venture capital
firms to comprise a mix of entrepreneur and market criteria.
Where as our study revealed a mix of criteria focusing on the
entrepreneur in the top five. Such a change was found by
Knight (1994) in his two Canadian samples, one taken in 1988 (31
VCFs) and the other 1993 (47 VCFs). This change points to a
limitation of cross-cultural comparison where time lag may exits
between samples.
Investment Criteria on entrepreneur's personality and
entrepreneurs experience
In evaluating the 'entrepreneur's personality' and 'entrepreneurs
experience', the results show remarkable similarity in investment
criteria between Singapore, Asia-Pacific, Europe and US. A
strong similarity is reflected by the rating which falls between
'important' and 'essential' for the first 2 criteria on both
groups. Venture capital community across the globe feels that
entrepreneur behind the venture is the important and essential
consideration for investment decisions.
Investment Criteria on Product, market and financial
Strong similarities can be found in the evaluation of product
characteristics, market and financial criteria across the East,
West and European community of venture capitalists. The degree of
importance of these criteria falls between important and
essential for the first two criteria on product, market and
financial characteristics with some noticeable differences.
Evaluation of these characteristics stems from the common
understanding of the evaluation of feasibility of investments.
Commonality of investment criteria among venture capitalists
across the globe on products, market and financial reflects their
common concern for reasonable reward for risks, liquidity and
safety of their investments.
It was found that the investment criteria employed in Singapore
are similar to those found in earlier studies in the US, Europe,
Canada and the Asia-Pacific. Whilst the industry is at an earlier
stage of development and there is a difference in culture, there
appears to be consistency in the criteria applied across the
various countries.
There are a number of possible explanations for the similarity.
First, US Venture capitalist's early success in posting extra-
ordinary returns of the 1980s returns of 40% to 80% and some as
high as 318% (Huntsman & Hoban, 1980) has led to acceptance of
venture capital as a form investment that can catapult the
economy around the world. As a developing industry, the Singapore
venture capitalists have adopted criteria employed by the venture
capitalists in other countries. Second, the influence of US
extend to many countries as they have joint venture partnerships
which might be based not only common understanding of objectives
besides common ground for investment criteria as well. Singapore
sample includes foreign owned venture capital funds like OCBC
Wears Walden, Hambrecht & Quist, etc. and it would not be out of
ordinary to expect them to apply investment criteria from their
head office. There would be cross-fertilisation of ideas as the
managers from the various funds interact in Singapore, where most
of the managers are members of the Venture Capital Association.
Third, as the size of funds managed by the venture capital funds
in Singapore are similar to the size-structure reported in his
study by Elango et al, it perhaps should not be surprise to
learn that the investment criteria of Singapore VCFs are similar
to the US. Thus such a strong similarity in emphasis on the
entrepreneurs personality and experience is not surprising.
Further research work needs to be conducted to examine whether
the investment criteria differ between venture capitalist's who
focus in the regional markets versus those whose focus is
Singapore. Yet another aspect that has to be examined is venture
capitalist's strategies may be found in their management of the
investments and their degree of involvement in investee
companies.
Conclusion
The venture capital industry is still at the stage of development
seeking to fulfil the role set by the policy makers who desire to
see Singapore become the hub for venture capital in the region.
The study showed that the primary focus of the venture
capitalists in Singapore is on the entrepreneur. Apart from some
differences in the mean scores of the investment criteria, the
Singapore venture capitalists appear to apply investment criteria
similar to those of other countries/regions comprising in this
study. Going by the higher mean scores on the eleven of the
twenty-four investment criteria, Singapore venture capitalists
are more demanding than the US. However, without the data from
the earlier studies it was not possible to statistically compare
the means.
References
Allampalli, D. G., Gibbons, P.T., Tan Wee-Liang; & Ravi Zutshi,
(1996) "A Profile of Venture Capital Firms in Singapore" Paper
presented at 7th ENDEC World Conference, Singapore.
Chia, Robert and Wong, K.C. (1989) Venture Capital in the Asia
Pacific Region, Toppan, Singapore.
Economic Development Board, (1995) "Singapore Venture Capital
Directory".
Economic Development Board (1995) "Survey on VCFs in Singapore"
Press report. dated 28 December 1995.
Elango, B., Fried, V.H., Hisrich, R.D., and Polonchek, A. (1995),
"How Venture Capital Firms Differ", Journal of Business
Venturing, 10, pp 157-179.
Huntsman, B. and Hoban, J.P., (1980), "Investments in new
enterprise: Some empirical observations on risk return, and
market structure. Financial Management, 9, pp 44-51
Knight, R.M., (1988), "Criteria Used by Venture Capitalists"
"Journal of small business and entrepreneurship", Vol. 1, No. 1
Knight, R.M., (1994), "Criteria Used by Venture Capitalists: A
Cross Cultural Analysis" International Small Business Journal,
Vol. 13, No. 1.
MacMillian, I.C., Seigel, I.R. and SubbaNarasimha, P.N.,
"Criteria Used By Venture Capitalists to Evaluate New Venture
Proposals", Journal of Business Venturing, Vol. 1, pp 119-128
Patricof, A. (1989), "The Internationalisation of Venture
Capital", Journal of Business Venturing, vol., pp 227-230.
Ray, Dennis, (1991), "Venture capital and Entrepreneurial
Development in Singapore" International Small Business Journal,
Vol. 10, No. 1. pp 11-26
Scheela, W.J. (1994), "The Increasing Importance of Venture
Capital in Singapore", Journal of Asian Business, 10(3),pp.73-86.
Table 2 ENTREPRENEUR'S PERSONALITY (Mean Scores)
CRITERIA Singapore Asia US Europe Canada
(31) Pacific (100) (195) (81)
(53)
_________________________________________________________________
Entrepreneurs personality must be:
_________________________________________________________________
1. Capable of
sustained
intense effort. 3.58[2] 3.74[1] 3.60[1] 3.55[2] 3.56[2]
_________________________________________________________________
2. Able to evaluate
and react to risk
well. *3.52[3] 3.45[3] 3.34[5] 3.57[1] 3.31[3]
_________________________________________________________________
3. Articulate in
discussing
venture. 2.61[14] 2.77[10] 3.11[9] 2.77[10] 2.74[7]
_________________________________________________________________
4. Attends to
detail. 2.81[12] 2.77[11] 2.82[12] 2.60[13] 2.68[8]
_________________________________________________________________
5. Has a personality
compatible with
mine. 2.26[19] 2.19[17] 2.99[11] 2.10[17] 1.99[17]
_________________________________________________________________
[] denotes overall rank on 24 criteria on Singapore or respective
country/region's sample
* Rank of Singapore VCFs higher than US
() Sample size
Table 3 ENTREPRENEUR'S EXPERIENCE (Mean Scores)
CRITERIA Singapore Asia US Europe Canada
(31) Pacific (100) (195) (81)
(53)
_________________________________________________________________
Entrepreneurs experience must be:
_________________________________________________________________
1. Be thoroughly
familiar with the
market targeted
by venture. 3.61[1] 3.57[2] 3.58[2] 3.54[3] 3.68[1]
_________________________________________________________________
2. Demonstrated
Leadership ability
in past. *3.52[4] 2.98[5] 3.41[4] 3.18[4] 3.01[5]
_________________________________________________________________
3. Has a track record
relevant to
venture. *3.39[5] 2.92[7] 3.24[7] 3.03[5] 2.68[9]
_________________________________________________________________
4. Was referred
to me by a
trustworthy
source. *2.52[15] 2.22[16] 2.03[20] 2.01[19] 2.10[16]
_________________________________________________________________
5. I am already
familiar with the
entrepreneur's
reputation. *2.30[18] 1.72[21] 1.83[21] 1.55[22] 1.50[23]
_________________________________________________________________
[] denotes overall rank on 24 criteria on Singapore or respective
country/region's sample
* Rank of Singapore VCFs higher than US
() Sample size
Table 4 CHARACTERISTICS OF PRODUCT OR SERVICE (Mean Scores)
CRITERIA Singapore Asia US Europe Canada
(31) Pacific (100) (195) (81)
(53)
_________________________________________________________________
Characteristics of products or service must be:
_________________________________________________________________
1. The product is
proprietary or
can otherwise
be protected. 2.94[9] 2.64[13] 3.11[10] 2.74[11] 2.28[15]
_________________________________________________________________
2. The product enjoys
demonstrated market
acceptance. *3.10[7] 2.81[9] 2.45[13] 2.85[9] 2.66[10]
_________________________________________________________________
3. The product has been
developed to the
point of a functioning
prototype. *2.94[10] 2.92[8] 2.38[15] 2.97[7] 3.05[4]
_________________________________________________________________
4. Product may be
described as
"high tech." 1.87[22] 1.42[23] 2.30[19] 1.45[23] 1.25[24]
_________________________________________________________________
[] denotes overall rank on 24 criteria on Singapore or respective
country/region's sample
* Rank of Singapore VCFs higher than US
() Sample size
Table 5 CHARACTERISTICS OF MARKET (Mean Scores)
CRITERIA Singapore Asia US Europe Canada
(31) Pacific (100) (195) (81)
(53)
_________________________________________________________________
1. The target market
enjoys a significant
growth rate. *3.35[6] 3.15[4] 3.34[6] 3.00[6] 2.86[6]
_________________________________________________________________
2. The venture will
stimulate an existing
market. *2.68[13] 2.52[14] 2.43[14] 2.36[14] 2.37[14]
_________________________________________________________________
3. The venture is
in an industry
with which I am
familiar. *2.39[17] 2.10[20] 2.36[17] 2.14[16] 1.81[20]
_________________________________________________________________
4. There is little
threat of
competition during
the first three
years. *2.52[16] 2.42[15] 2.37[16] 2.23[15] 2.40[12]
_________________________________________________________________
5. The venture will
create a new
market. *2.23[20] 2.17[18] 1.82[22] 1.75[20] 1.63[21]
_________________________________________________________________
[] denotes overall rank on 24 criteria on Singapore or respective
country/region's sample
* Rank of Singapore VCFs higher than US
() Sample size
Table 6 CHARACTERISTICS - FINANCIAL (Mean Scores)
CRITERIA Singapore Asia US Europe Canada
(31) Pacific (100) (195) (81)
(53)
_________________________________________________________________
1. I require a return
equal to at least
10 times my
investment within
10 years. 2.84[8] 2.94[6] 3.43[3] 2.86[8] 2.56[11]
_________________________________________________________________
2. I require an investment
that can be easily made
liquid (e.g. taken public
acquired). 3.00[11] 2.67[12] 3.17[8] 2.72[12] 2.39[13]
_________________________________________________________________
3. I require a return
equal to at least
10 times my investment
within at least
5 years. 2.16[21] 2.12[19] 2.34[18] 2.1[18] 1.99[18]
_________________________________________________________________
4. I will not be expected
to make subsequent
investments. *1.77[23] 1.72[22] 1.34[23] 1.57[21] 1.92[19]
_________________________________________________________________
5. I will not participate
in latter rounds of
investment(requires my
participation in the
initial round of
investment). *1.68[24] 1.24[24] 1.20[24] 1.40[24] 1.56[22]
_________________________________________________________________
[] denotes overall rank on 24 criteria on Singapore or respective
country/region's sample
* Rank of Singapore VCFs higher than US
() Sample size