Business communities: All together now; What entrepreneurial ecosystems need to flourish

Business communities: All together now; What entrepreneurial ecosystems need to flourish

Jan 18th 2014 | From the print edition

BLOCK 71 HAS long been slated for demolition. A look at the tenant list for the seven-storey industrial building on Singapore’s Ayer Rajah Crescent helps explain why it is still standing: nearly 100 startups live there officially and perhaps as many again informally. Their often strange monikers are interspersed with the more conventional names of venture-capital firms, accelerators and the like.It is the world’s most tightly packed entrepreneurial ecosystem, and a perfect place to study the lengths to which a government can go to support startup colonies. “They essentially force-fed entrepreneurship to the young generation,” says Bowei Gai, a Chinese-American entrepreneur who is working on a “World Startup Report” after visiting nearly three dozen ecosystems around the world, starting in New Delhi in January last year and ending in Singapore in September (see map).

The term “ecosystem” for economic clusters was popularised 20 years ago by James Moore, then a business consultant and now a human-rights advocate, who was fond of ecological metaphors. These days the emphasis is less on “eco” than on “system”. For some experts, such as Daniel Isenberg of Babson College, entrepreneurial ecosystems are made up of “domains”, including markets, policy and culture. Others describe them as collections of actors that play certain roles, such as providing talent, finance and infrastructure. Yet others talk about them as a set of “resources” entrepreneurs can draw on.

In some ways, ecosystems can be seen as exploded corporations. Finance departments have been replaced by venture-capital funds, legal ones by law firms, research by universities, communications by PR agencies, and so on. All are nodes in a loose-knit support network for startups that does what in-house product-development teams used to do.

Silicon Valley is the original entrepreneurial ecosystem, but in recent years such communities have popped up all over the world. They often form in places where young people want to live: Berlin, Boulder, London. Perhaps the most unexpected one is Amman’s; despite the political turmoil in the region and a civil war in Syria next door, Jordan’s capital has a few hundred startups. Israel boasts the largest number of startups per person.


Source: Bowei Gai, World Startup Report


Source: Bowei Gai, World Startup Report


Source: Bowei Gai, World Startup Report

Don’t be selfish

Singapore’s companies are not known for being particularly open, but Block 71 has its own ethos. Vinod Nair of Catapult Ventures, which operates price-comparison websites for financial products, talks freely about problems with government paperwork and immigration rules. Dixon Chan of Burpple, a photo-sharing service for food, admits that his parents were not happy when he started his company. And Ray Wu, a manager at the Joyful Frog Digital Incubator, is remarkably helpful in guiding visitors through Singapore’s startup scene.

Perhaps it comes from reading “Startup Communities” by Brad Feld, co-founder of the TechStars accelerator network. The book is a to-do list for “building an entrepreneurial ecosystem in your city”, as the subtitle puts it. Mr Feld describes startup communities as self-governing bodies of craftsmen akin to medieval guilds. The first point of his “Boulder Thesis” (named after the city in Colorado where he lives) is that entrepreneurs must lead. A second is that a startup community must be open to anyone who wants to join. But the main message is that you must “give before you get”.

For an individual, giving before getting is good business. In a fast-moving and uncertain industry he may need someone’s help some day. “It’s about building social capital,” says Hussein Kanji of Hoxton Ventures, a London venture-capital fund. More important, though, business in ecosystems is not a zero-sum game. Tom Eisenmann of Harvard Business School explains that startup colonies are platforms with strong network effects, a bit like Windows and Facebook: the more members they have and the more activity they generate, the more attractive they become.

This helps explain some of these ecosystems’ other characteristics: their tolerance of failure, the endless succession of startup-related talks, meetings, parties and, above all, the constant hype. But what really gets those network effects going is “exits”—a sale to a bigger company or a listing on a stock exchange. Newly enriched founders often become investors themselves and employees start their own companies. Silicon Valley spawned a succession of “clans” emerging from companies such as Fairchild Semiconductor, Netscape and PayPal.

Government policy can make a big difference. Even in Silicon Valley, defence dollars during the second world war and the cold war primed the pump before venture capital took over. Nor would Singapore have much of an ecosystem to boast of without the benefit of government support.

It is not that Singaporeans are unusually afraid of failure. In a study by the Global Entrepreneurship Monitor, only 43% of respondents in the city-state said it would put them off starting a business, only slightly more than in Israel and fewer than in Germany (49%). But entrepreneurs in Singapore do not enjoy a particularly high social status. Families prefer their offspring to get a safe job with one of the many multinational companies or, even better, with the government.

Investors, too, have generally preferred to put their money abroad rather than into local internet startups. After the collapse of the dotcom bubble in 2000 only a few of the venture-capital firms based in Singapore continued to invest there. And those who did lacked experience, explains Wong Poh Kam, the director of the entrepreneurship centre at the National University of Singapore (NUS), who helped set up many of the city-state’s startup programmes, including Block 71.

It may seem surprising that Singapore’s government cares so much about startups, since the country has enjoyed plenty of foreign direct investment (FDI). But officials such as Low Teck Seng, the chief executive of the city-state’s National Research Foundation (NRF), admit that Singapore can no longer just rely on multinational companies and needs to do more to encourage entrepreneurship.

To speed up this shift, it has taken every conceivable step to make life easier for entrepreneurs. Registering a company now takes hours rather than weeks. Every year the NUS sends 120-150 students on a one-year internship to Silicon Valley and other ecosystems, and many of them go on to become founders. Back home, entrepreneurs are offered matching grants of up to S$50,000 ($40,000) and a place in an incubator to get their startup off the ground.

Investors get an even better deal, allowing them to take all the benefits of a venture yet protecting them against much of the risk—a model successfully pioneered by Israel. The NRF generously tops up investments by accredited incubators: for every S$1 they put in, the agency adds S$5, up to a maximum of S$500,000. Investors also have the right to buy back the government stake at the original price plus a modest interest charge within three years.

The results have been impressive. Mr Gai estimates that the city-state now has about 800 internet firms, or 160 for every million inhabitants, which puts it ahead of countries such as the Netherlands and Spain. It has also presided over a few successful exits, notably Viki, a popular video-streaming site which in September was bought for $200m by Rakuten, a Japanese e-commerce giant.

Yet these numbers do not quite tell the full story. Most successful startups in Singapore are still run by foreigners. Razmig Hovaghimian, Viki’s founder, is an Egyptian-American, and never received any government help. And most of the firms that have raised money from the accredited incubators have yet to find any follow-on funding. Moreover, it is not clear what will happen once Singapore’s government scales back its financial support, which eventually it must if it does not want to subsidise the ecosystem permanently. Some investors are already complaining about plans for a cut in the NRF’s initial investment in information-technology startups to about half its previous level. Medical-equipment and other non-IT firms will get more money.

Singapore’s government could spoil the party in other ways, too. A new media law requires certain websites to register, increasing the risk for investors. And new labour regulations make it harder for firms based in the city-state to bring in workers from abroad, exacerbating the scarcity of skilled developers.

With its huge market and vast pool of venture capital, America is still the destination of choice for founders the world over

This is not to say that Singapore’s ecosystem will fall apart. In fact, the city-state’s efficient bureaucracy has a record of learning from mistakes and proving naysayers wrong. Teo Ser Luck, the minister of state in charge of such matters, is in regular touch with entrepreneurs and investors, and the government recently decided to give over another building near Block 71 to startups.

But ecosystems are more fragile than their leaders’ confident manner suggests. Network effects can easily go the other way. And governments have to tread carefully because national ecosystems increasingly form part of larger global organisms. Founders and investors, already used to entrepreneurial globetrotting, will readily consider moving to another place if it seems to have more to offer.

Often that place is America. With its huge market and vast pool of venture capital, it is still the destination of choice for founders the world over, even though the country’s restrictive immigration policy since September 11th 2001 has made it more difficult for them to settle there. If Asia and Europe do not watch out, their best startups could still end up in Silicon Valley or in one of America’s newer ecosystems, such as Austin, Boulder or New York.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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