Endeavour Ventures October 2020 Update

Building for the builders

Every month I write this newsletter about what's happening in the Southeast Asian start-up ecosystem. I'm writing for people that have broad interests and are willing to take an unconventional stance on non-trivial issues - just like the entrepreneurs that we're looking to support. You can sign-up to receive regular updates below:

Forward thinking countries are aware that they need to be focused on developing emerging technologies. Ever since Marc Andreessen coined the phrase “Software is eating the world,” we have seen an acceleration in technological developments that impact all of the areas of people’s lives. This was evident in Singapore, where the government has made extensive efforts to create a flourishing start-up ecosystem.

The policies in Singapore have been focused on developing an ecosystem from the “Bottom-up,” creating economic incentives for investors to focus on the early-stage space in the hopes that it will cause more high-growth technology companies to be formed and funded. To be clear, for the purposes of this article, the concept “start-up ecosystem” includes large companies, universities, investors, service providers, research organisations, and government support – all of the things that are necessary to develop and incubate companies working on emerging technologies.

The policies implemented to encourage bottom-up development could be misplaced as start-up ecosystems typically develop backwards. The alternative view (“Top-down”) posits that exits from later stage companies push funding and expertise into earlier stage companies, fostering a diverse ecosystem. This paradigm is seldom considered and has significant policy implications for countries that are trying to develop their own start-up ecosystems.

To successfully implement a start-up ecosystem from the top-down, policy makers need to be willing to tackle more difficult challenges. They need to create the systems that change the social stigma that’s associated with failure, encourage the use of local capital market infrastructure, and create funnels to attract people with the skillsets that can enable high growth companies to succeed.

Bottom-up vs Top-down

Bottom-up policies make the implicit assumption that start-up ecosystems are formed from seeding a lot of smaller companies, which then develop into larger companies, bring in additional investment dollars and skilled operators to start even more companies. This is akin to thinking about the development of a start-up ecosystem as the turtle strategy, where a lot of eggs are laid but only 1 in 1,000 hatchlings survive to adulthood.

The problem with this strategy is that it assumes that reflexive loops will be created through the formation of start-ups. There isn’t any opportunity for this to happen as all of the skill and capital moves up the value chain as those companies develop. The skills and capital are only able to be recycled back into the ecosystem once there has been an exit event.

What if start-up ecosystems develop backwards? What I mean to say is that start-up ecosystems develop around later stage companies (let’s say series C & D) achieving profitable exits both for investors and early employees. The initial exits will likely either be through initial public offering (IPO) or an acquisition. In countries or regions where there are limited strategic buyers, the start-up would need to be significantly large enough that it would make an impact to a multinational’s bottom line. Otherwise, it has traditionally been difficult to justify the effort that would be required to complete and integrate a potential acquisition.

This presents a gap in the bottom-up strategy, as the only exit opportunity is through an IPO. If the market doesn’t have the ability to encourage companies to get to IPO quickly via an exchange with lower disclosure or market capitalisation requirements, then this path becomes less viable. The less companies that are able to IPO, the less capital and skills that can be recycled down into emerging companies.

The early employees at the series C & D companies that have been able to exit bring the necessary skills and capital to help the next generation build world changing companies (those at the series A & B stages). Further, the initial batch of companies (C & D) creates more optionality for those up-and-coming businesses to exit through mergers and acquisitions. The companies no longer need to wait until they can list on an exchange or be acquired by a large multinational with deep enough pockets to make the acquisition meaningful. This accentuates the capital and skill flywheels available to entrepreneurs.

Chasing returns

As the market becomes more developed, the strategies that investors used to generate returns in later stage companies (C & D) become well-known. The playbook becomes available to everyone as they have seen those stories play out a number of times before. While the terms might become less favourable for funds that are operating in that space, there are still opportunities for a few.

Those funds that have been able to establish franchises are still able to carve out a niche in the later stages of the market. However, new entrants or incumbents that are looking to play at a less competitive table will be forced to look further down the pipeline to get those opportunities before they’re available to the established franchises.

This competition for positioning in later stage deals, forces new funds downstream into earlier stage businesses (A & B) where the playbook is less defined. The process is repeated until we see more competitive Seed rounds ad infinitum.

Bottom-up in practice

To understand what a bottom-up process looks like, we can look at how the Singapore government has tried to pump prime the ecosystem. Under the Startup SG Equity scheme, the government will co-invest with independent, qualified 3rd party investors into eligible start-ups. The government will match 7:3 for the first S$250k and 1:1 thereafter up to S$2m for general technology businesses with higher limited for companies that are deemed to be “Deep tech.”

This incentive scheme enables companies to complete early-stage rounds more easily as a lead can bring up to 2.33x their allocation into the round through government matching. However, it can potentially encourage moral hazard as funds take risks that they otherwise wouldn’t if they had a larger percentage of their own skin in the game.

To be clear, it solves for the initial capital requirement but a gap emerges at the next stage of evolution that needs to be plugged by the private markets. It also does nothing to solve for the skills that are required at the early or subsequent stages of company development.

Top-down in practice

If start-up ecosystems are formed top-down there are significant policy implications that need to be taken into consideration. The cost of failure needs to be reduced, public market mechanisms need to be eased and improved to encourage companies to go through the IPO process earlier, and there needs to be a similar focus on skills as there is on capital in company formation and growth.

Continuing with the example of Singapore, beyond the statutory penalties that are associated with bankruptcy, the social stigma that’s associated with failure needs to change. In dynamic ecosystems, failure is part of the process, to be celebrated as having made an attempt as opposed to something to be scorned. If people aren’t failing, then no one is exploring the boundaries of what’s possible. Policy could make it easier for those who have tried to try again, with the implicit assumption that they are pushing the envelope and not wasting resources on frivolous pursuits.

There needs to be the appropriate infrastructure and incentives for high growth companies to use them. In Singapore, there is the SGX Catalyst board that is used to list companies with reduced requirements and increased oversight from a sponsor. The Catalyst board replaced the SESDAQ in November 2007 but it hasn’t been an attractive venue for high growth companies to seek capital for expansion. Beyond the infrastructure, there is room for policy to encourage businesses to use the Catalyst, e.g. increasing the prestige associated with listing. This would generate returns for capital in the local ecosystem and draw in investors that are looking to benefit from the growth of the region. In the eight years that I’ve been investing in early-stage businesses in Singapore, I have never once heard one entrepreneur mention the SGX Catalyst as a potential venue for raising growth capital.

Another factor that is important in the development of the growth-stage capital markets in Southeast Asia is a strong focus on corporate governance. Historically, a number of companies that have listed, have had structures and policies that undermine standard levels of corporate governance. A well-established rule of law is meaningless in corporate matters where economic incentives are concentrated in the hands of a few who can undermine investor interests through nefarious corporate governance mechanisms.

Beyond capital, there needs to be a focus on attracting and developing the skills that are necessary to manage high growth teams. As countries around the world embrace nationalistic policies, it’s important to remember that high growth companies operate with power laws, where the difference between “good enough” and “the best” is an unfathomable distance. Value creation is not a zero-sum game. If you have the best people, they are going to generate more opportunities, which in an age of “software eating the world” will continue to compound. Policies could be put in place to attract and retain people that are able to manage high growth teams before they’re needed.


I need to be clear that all incentives that attempt to accelerate innovation are good but velocity is more important than speed. Focusing on building start-up ecosystems bottom-up might seem like the intuitive approach because that’s where you first see value created.

However, I’d argue that this is the easy approach. To do big things, policy makers need to be willing to tackle the hard challenges. This means creating systems that change the social stigma associated with failure, encouraging the use of local capital market infrastructure to raise and grow capital, as well as gathering the people with the right skillsets.

Waiting for the capital and skills to trickle down when implementing a bottom-up approach means that the ecosystem lacks sufficient density to flourish. There might be some sprouts that emerge in spite of the strategy but not as a result of it. Strategies that exploit the momentum that’s created as capital and skills are recycled into earlier and earlier stages of high growth companies will help to generate an innovative ecosystem faster than a bottom-up approach that suffers from high levels of entropy.


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