This is excerpted from a speech on Wednesday by Ngiam Tong Dow, chairman of Surbana Corporation, at the annual gala of the Singapore Venture Capital and Private Equity Association
The world’s first venture capitalist was definitely not a Singaporean, nor a male. In my book, the world’s first venture capitalist was Queen Elizabeth I of England.
Being single, she devoted herself totally to the affairs of the realm. But few would know that in her spare time, Elizabeth joined her courtiers in business ventures. They formed syndicates to finance, build and arm men- of-war. These warships would lie in ambush at the entrance to the English Channel. When they sighted Spanish galleons on the horizon, they would close in and train their guns on these foreign vessels sailing home with their plunder of Inca gold.
When they were successful in looting the hapless Spanish ships of their gold, the buccaneers commanding the ships were knighted. When they failed, they were beheaded as pirates.
I have taken some liberties in the interpretation of the facts. I believe, however, that this event in history is a fair representation of the origins of the venture capital industry. All the essential ingredients are present – risking your own fortune and even your life for that pot of gold at the end of the rainbow.
In 1985, I was privileged to have been nominated by Mr Tan Teck Chwee, chairman of the Public Service Commission, to be the Singapore Eisenhower Exchange Fellow that year. The Eisenhower Foundation brought all of us Fellows to its headquarters in Philadelphia for a week of lectures and briefings on American politics, economics and society. We then proceeded on eight weeks of travel throughout the United States to call on anyone or any institution we might wish to meet.
As the Rockefeller Foundation had sponsored my fellowship, I asked to call on them to meet the person who ran VanRock, the foundation’s private equity/venture capital arm. I was received by a gentle patrician who ran VanRock. I asked him what the modus operandi of his company was. He told me that VanRock was staffed by himself and a secretary.
When I expressed surprise, he said he was assisted by two or three young men. In his own words, he gave these young men only ‘bus fare’ to scour the country for start-up companies they thought had potential. They would bring these ‘prospects’ back to New York to persuade VanRock to invest in them.
If he was convinced, VanRock would take a substantial, but not a controlling, stake in the company. VanRock also lent money to these young men to take up small stakes. This was to make sure that they risked their own money in the companies they championed. And more importantly, for them to make sure that these start-ups succeeded, and to share in the prosperity.
One such start-up was Apple Computer.
So when I visit our own venture capital companies with their elegant deep-carpeted offices, I wonder whether we are going about business the right way. Are we lean and hungry enough to succeed?
Some time in 1992, I attended a business function honouring the achievements of Mr Patrick Ngiam, founder and chief executive officer of IPC, Singapore’s first indigenous personal computer company.
There was one entrepreneur, namely Patrick (no relative of mine). I was there in my capacity as chairman of DBS Bank, along with probably 120 other guests, including investment bankers, accountants, lawyers, brokers, advertising and other consultants – all highly qualified professionals, all hoping to be of service to one entrepreneurial start-up company.
I went home thoroughly depressed, wondering why there was such a paucity of wealth creators and a surfeit of wealth managers. To jump-start our economic development, unlike larger countries, we had no choice but to welcome foreign multinational companies to establish their factories and logistic centres in Singapore.
In the 1970s, Hong Kong and Singapore were the only developing countries that opened their doors to direct foreign investments. Now, every country in the world competes vigorously for foreign investment.
As the multinational corporations (MNCs) brought with them their technology and, more critically, their markets, Singapore and Singaporeans concentrated on serving the businesses of these companies.
Local neglect
In the process, we neglected our own home-grown companies. We chose to expand, not grow, rapidly on the wings of the MNCs, offering them abundant, low-cost semi-skilled labour.
By the mid-1970s, we achieved full employment with an unemployment rate of 3 per cent.
The flip side of full employment was the phenomenon of job-hopping. Labour turnover was excessive, with no time for employers to train and upgrade the skills of employees. Wages rose rapidly. When marginal wages exceeded marginal increases in productivity, the MNCs relocated their plants to more competitive locations.
MNCs are completely objective and unsentimental organisations, moving from location to location as circumstances dictate. Though Singapore today enjoys full employment once again, our older workforce is trapped in stubborn structural unemployment.
Unlike Singapore, our competitors – Taiwan and South Korea – followed a different track. Their governments supported their own companies all the way, protecting their own indigenous companies from foreign competition. More critically, they supported them in the acquisition of technology.
I was the chairman of the Singapore Telephone Board in 1972 when we invited leading telephone manufacturing companies to tender for the supply of new-generation equipment. In the Singapore tender, not unexpectedly, the top three companies were Japanese.
To my great surprise, there was no Japanese name when the results of a South Korean tender were announced.
When I asked the general manager of the Japanese trading company that won our tender how this came about, he explained that the Korean tender required the successful company to transfer technology to the Korean purchaser. As it was not Japanese companies’ policy to transfer technology to buyers, none participated. This left the field clear for the winning American company, which was prepared to transfer technology.
In Singapore, our procurement policy was to award the tender to the lowest-priced bid. We were not prepared to pay any premium for the transfer of technology. We took a short-term view, unlike Taiwan and South Korea.
In the 1960s, the Taiwan government established ITRI as an advanced research institute in electronics, staffed by PhDs trained in the US. The research results were available free of charge to the researchers involved, who went on to start their own companies for commercial production.
Taiwan today is the world’s leading producer of wafer for microchips. It is almost high noon. Is it too late for us to grow our own timber? In plain English, this means establishing, nurturing, developing and growing our own Singapore-owned and managed companies. Most critically, we need to develop the confidence and the skills to drive these companies ourselves.
And we can. Singapore Airlines, SingTel, our three banks, Singapore Technologies Engineering, Hyflux, Osim, Venture Manufacturing, and Creative Technology are outstanding examples of Singapore-driven companies. These companies, however, are all too few in a landscape dominated by MNCs.
We need to have more home-grown companies led by Singapore CEOs. Which brings me to the core of my angst. The original Small Industries Finance Scheme (SIFS) was conceived in the late 1970s between myself, as chairman of the Economic Development Board, and Dr Tony Tan, who was then with OCBC and chairman of the Association of Banks in Singapore (ABS).
The EDB had a Light Industry Service Unit, whose mission was to nurture light industries through, among other things, loan financing. But it had only a handful of staff, and could not give out more than 10 loans a year. So I invited the ABS banks to join EDB to finance light industries.
The EDB would share the risk, dollar for dollar. To reduce the burden on the banks’ liquidity ratio requirement, participating banks could draw on a line of credit extended by the Ministry of Finance, even for their half of the loans.
Flexibility needed
Requests for loans from their customers were evaluated by the banks themselves, with the EDB being the passive lender. By decentralising loans processing, small-industry loans grew to about 3,000 when I left the EDB in 1981. It gave me a lot of satisfaction later to learn that the default rate on these loans was about 3 per cent, much lower than banks’ overall non- performing-loans ratio of about 6 per cent.
The SIFS and its later derivatives are all just lending schemes. Banks and government statutory boards do not have the mandate to participate in the equity of start-up companies, bearing the risks directly.
The Monetary Authority of Singapore (MAS) allows banks to lend only with collateral. Under the proposed Basel II, loans to small and medium-size enterprises (SMEs) carry higher capital provisions than rated companies. In effect, the big listed companies can borrow at lower interest rates than the SME. Is there a case for the MAS to be more flexible on SME loans? However, we cannot really grow our own timber through lending alone. Like Queen Elizabeth I, venture capital companies and private equity investors have a crucial role to play if Singapore is to grow its own timber.
More than the banks, venture capital companies and private equity investors have the knowledge and the experience to evaluate start-up companies. To be really of use to Singapore, venture companies and private equity investors operating here should not just wait for a structure to reach the mezzanine floor, or worse, swoop down like vultures on the carcass of an old established company that has lost its way.
Why not talk to the EDB, MAS and ABS to establish today’s equivalent of the SIFS? Will venture capital companies and private equity investors here take up the challenge to become the modern equivalent of Queen Elizabeth I?