The Future Thai Unicorns: Why will they turn Singaporean & what can we do about it?
Unicorns are a highly-coveted species, and they’re migrating offshore. The BOI says we need them; the government says we need them. But, the majority of foreign investors ask them to reincorporate in Singapore. As unicorns flee our homeland and their local population dwindles, does this reflect an off-balance ecosystem?
In any healthy ecosystem, diverse players are bound by common, inter-related life sources. For startups, there are three:
- Talent: the ability to attract and retain talent, whether from foreign countries, local corporates or universities (see ESOP article for a key incentive).
- Customers: As a rough indicator of access to markets, Thailand has a population of 66 million, over 10x that of Singapore, the prime destination for our unicorns (without considering access to larger markets beyond our boundaries).
- Investments: What are the main drawbacks for investment? With pressure on Thai startups to incorporate abroad, let’s pick apart the pieces to reconnect the missing links in our ecosystem:
Thai ecosystem elements needed to reduce friction on investments
First, let’s clarify why our unicorns call Singapore (SG) home, and not anywhere else. Hong Kong used to be in the ranks, with a pro-business, tax-friendly environment with a strong infrastructure. With political instability, many investors may now prefer the more stable, transparent politics and governance of Singapore. But, Bloomberg says that although people are emigrating from Hong Kong, investors haven’t.
On a macro-level, SG is considered an entry point into Asia Pacific. A major port, it serves as a center for industry, trade, and logistics. From this perspective, some may say that Thailand is on par: our location in the Mekong trade region and proximity to China and India means we’re living on pretty “fertile” land.
So how has SG mastered the art of attracting incredible founders to build billion-dollar companies in the city-state?
The Gold Standard. SG sets the standard on doing business, and has become the preferred go-to for investors:
The Rule of Law Perception: SG’s Supreme Court defines this as “a legal principle that requires everyone, including the government, to obey the law”. With a legal system based on English common law, coupled with transparent regulations and governance, SG has established itself as an active financial and tech hub, with a good track record for unicorns.
Call to Action: Complete the Regulatory Guillotine. As our neighbors (e.g. Indonesia, Vietnam) upgrade their regulations to enable investment, much of Thai laws and regulations remain outdated. The government is being called to accelerate reform (i.e. the regulatory guillotine):
Kobsak Pootrakool, former minister to the PM’s Office, says, “Without serious action on the regulatory guillotine, Thailand will find it difficult to improve its competitiveness and return to GDP growth of 4–5% a year.”
Beyond legislation, Thailand’s geopolitical instability is a cause of concern for investors, who worry that their portfolio companies may be shut down at any time. Presented with a choice, this discomfort often leads them to invest in vehicles that are domiciled in Singapore1.
Ease of Doing Business
1. Starting a business. The actual incorporating procedure in SG consists of 2 procedures: the company needs to register with the Accounting & Corporate Regulatory Authority (ACRA) online, and sign up for employee compensation insurance at an insurance agency.
Call to Action: Streamline online systems & ensure consistency. Incorporating in Thailand consists of 5 procedures spanning 4 governmental agencies and a bank. Typically, the hired accountant takes care of the registration — founders just need to come up with the company name. On the accountants’ end, we’ve heard horror stories of booking slots online and submitting paperwork.
On a related note, a 2019 TDRI study of current Thai permit and license laws found that 85% — that’s 1,026 procedures — can be fixed or completely gotten rid of, saving 0.8% of GDP. This high cost of starting a business hinders investments.
2. Using financial services. When opening a bank account in SG, some banks allow the account to be opened without a visit to a branch (e.g. DBS), while others (e.g. Standard Chartered, Citibank) require the authorized party to be present.
Call to Action: Reduce account opening times & enhance liquidity. In Thailand, opening a local bank account typically requires a visit to the branch. Although the documentation is reasonable and the process is smooth, it takes no less than 1 hour to open an account.
Mark Gustowski, Managing Director at Innovation Architects and Partner at Mandalay Venture Partners, says that the ability to quickly transfer large sums of money in and out of Thailand is challenging compared to other countries1. A possible improvement is to evaluate our current banking systems to streamline processes and enhance speed. Recently, the Bank of Thailand (BOT) has relaxed much of these foreign exchange conditions to increase liquidity and ease pressures of a stronger Baht.
3. Infrastructure Support. SG requires appointing a local official company secretary, and outsourcing through most incorporation service providers is also an option. Generally, strong service providers are quick, accessible online, and can be managed remotely.
Call to Action: Encourage the presence of strong, specialized service providers. Although outsourcing a corporate secretary isn’t mandatory in Thailand, Greenhouse, an Asian market entry services provider, recommends hiring a qualified legal company to ensure compliance with complex regulations.
A Thai accounting expert says that most startups aren’t good at back office processes and need one corporate secretary hire who can consolidate them all. This includes setting up the HR system (to include a governance framework, rules, and benefits) and the accounting system (e.g. managing payables and chasing receivables to ensure liquidity).
Call to Action: Go Digital. Reducing the use of pen via digital services, and ensuring documents are available in English may increase ease of business. Open API can also enable easy connection to corporate secretarial services.
Startups’ Access to Capital
- The Role of Government.
- Leadership: For decades, the SG government has remained agile to market changes. As challenges have evolved over time, so have they. They’ve built strong global linkages — attracting tech giants to set up their regional HQs, and local networks — connecting researchers, students, startups and industry. They stay at the frontline of new industries: the Singapore Week of Innovation and Technology (SWITCH) 2021 will span topics including Tech for Good, Deeptech, Smart Cities, and Space Tech.
Call to Action: Adopt a holistic, forward-looking approach. Although the Thai government has a 20-year plan, execution remains very short-term as it juggles other priorities. Although well-meaning, the programs have been piecemeal, suggesting whether these efforts are lip service to Thailand 4.0. Also, the focus so far has been on large-scale industrial parks (e.g. EEC), big investment and corporates, rather than on nurturing young companies.
Leadership is looking forward to many decades ahead, engaging with industry to build a long-term vision, and baking in the ingredients players need to succeed — through planning for manpower and building capital programs.
- Grants: Enterprise Singapore, the government platform for tech startups, has 2 grant programs: Startup SG Founder and Startup SG Tech. The former provides a grant of S$50,000 (~37,000 USD) for the ideation stage, where startups must raise S$10,000 (~7,000 USD) to co-match. The program also has a ‘Train’ track, where venture builders and mentors are appointed to help innovate, commercialize and source capital. Startup SG Tech aims to ease cash flow while scaling up. Grants are given when a milestone is complete; they are capped at S$250,000 (~185,000 USD) for proof-of-concept and S$500,000 (~370,000 USD) for proof-of-value projects, and contain an equity component.
Call to Action: Scale the grants. The Thai startup scene is considered fairly nascent: Mark views that we’ve successfully gone through the first phase of mobilizing the ecosystem, with massive events and community activities held in the past. As with any maturing startup ecosystem, now’s the time for grants and incentive programs1.
The NIA, DEPA, InnoSpace, and TED Fund are players that provide funding to Thai startups. Although a great start, 45% of those surveyed in an ANDE report sees the lack of early-stage funding as a key challenge. Building up on existing efforts, and being more generous and proactive with funding may be the name of the game to build these industries and catch up with other markets1.
Also, the heavy paperwork required for startups to apply for grants reflects the government’s intention to ensure that the funds go toward their intended use. Although this free, undiluted capital at the ideation phase enables startups to invest in their business to create value, Thai founders must jump through hoops to secure this funding. Can transparency be achieved via other means?
- Other Support Programs & Incentives: The SG government provides loans to support SMEs in 6 financing areas (e.g. working capital, project loans), a 200% tax deduction on eligible expenses for international market expansion, and countless programs covering growth, financials, training, and talent attraction. As of 2017, R&D expenditure made up 1.00% of Thai GDP (4.56 billion USD), and 1.94% of Singapore’s (6.67 billion USD). SG’s corporate tax rate is 17%, while Thailand’s is 20%.
Call to Action: Encourage intergovernmental collaboration & expand on support programs & incentives. In 2020, The Thai government set aside 568.9 million THB (~17 million USD) of R&D spending on the startup industry (incl. universities and ecosystem support players), through over 5,000 projects4.
Although various governmental agencies and ministries are hard at work to drive the Thai startup ecosystem, collaboration issues exist among them, which contributes to slow progress.
Right now, income tax exemptions are available through BOI incentives. To be eligible, the startups’ activities must fit specific BOI criteria for technology and innovation (e.g. digital services). Funding is available for products and services that haven’t been launched into the market, which contradicts startups’ business conditions, where they continually improve upon and invest in their solutions after market testing.
2. Accelerators. The SG government’s Startup SG Accelerator provides financial and non-financial support to incubators and accelerators, which may cover program development, startup mentoring, and partial operating expenses. There are over 200 accelerators listed in the Startup SG database.
Call to Action: Increase accelerators’ quality & quantity. There are few incubators and accelerators in Thailand: 13 accelerators (including corporate accelerators) and 2 entrepreneurship programs are listed in the Sphere 8 Finder. Few early-stage support programs, such as dtac Accelerate (closed in 2019), are no longer operating.
Existing programs should focus on adopting international best practices. Additional funding to these ecosystem enablers will boost the Thai startup ecosystem and allow for businesses to scale internationally.
3. Ease of Raising Follow-On Capital. At the birth of SG’s startup ecosystem, MNCs were the main capital providers. VC presence then grew in the 1990s with government co-investment (e.g. through Temasek Holdings, TIF Ventures). In 2017, 69% of SG startups participated in government schemes, which has caused concerns regarding overdependence on the public sector.
Call to Action: Attract more investment & engage all players. Similar to SG in its early stages, Thailand’s corporate venture space is healthy1: up to 80% of venture capital comes from corporates, which is poured into those who are at least ready for Series A. Mark says that the challenge with corporate venture capital (CVC) is that the expertise, experience, and exposure all sit within the walls of the corporate, leaving the startup with no chance to go to other investors1.
Thailand’s strategic push appears to be driven by the corporate agenda, which calls into question whether the space is as inclusive compared to SG, where the ecosystem is driven by an integrated solution for all stakeholders.
Although Thai banks are forward-looking in how they can support the early-stage startup community1, they, along with other investors, are driven primarily by financial returns and exit opportunities.
To sum it up, not only do more opportunities exist where the government can partner with large corporates to make material startup investments1, but also to engage with all stakeholders to drive the ecosystem forward — academia, students, entrepreneurs, and industry professionals.
Investor Benefits
1. VC Conditions. Besides a lower corporate tax rate and 0% CGT, Startup SG offers the Fund Management Incentive, where VC funds are exempt from qualifying investment income tax for up to 15 years. The government also runs a co-investment scheme into startups, and invests in selected VCs through a fund-of-funds approach.
Call to Action: Expand on VC incentives. Thailand’s CGT (see our previous article) makes private VC investment tax-inefficient2. PE trusts and VCs that registered with the SEC within 2018 got tax exemptions for capital gains and dividends for 10 years. Now expired, many VCs have been pushing for this regulation to be effective again.
Mark points out that VC experts and individuals in Thailand typically don’t have generational experience (i.e. they’re first timers):
“VCs should be given incentives so that they don’t fall out of love after the first go1.”
He raises a few Australian incentives that have contributed to retaining homegrown startups in Australia: CGT exemptions when investing through certain legal vehicles and an expired government co-investment scheme (with hands-off management) — the Innovation Investment Fund.
Call to Action: Increase secondary market liquidity. In May 2021, the SEC and SET agreed to set up the SME Board, a secondary market for SMEs and startups to access capital. Compared to companies listed on the SET and MAI, the SME Board will have less stringent criteria for companies to access capital market funds and drive entrepreneurship engagement — and on the investor side, increase liquidity to buy and sell shares.
2. Angel Incentives. A National University of Singapore study found that 3.5% of adults in Singapore have invested in startups. The city-state has a number of investor networks (e.g. Bansea), and up until 2020, the government provided the Angel Investors Tax Deduction for individuals who can commit a minimum of S$100,000 (~74,000 USD).
Call to Action: Expand on incentives. There seems to be few informal active angel investor groups in Thailand. This lack of funding for risky, early-stage startups serves as a bottleneck in the ecosystem. Incentivizing these investors through CGT exemptions or tax breaks may increase their activity (see our previous article).
If we heed this call to action, what do we gain from retaining our unicorns?
On a basic level, our startups are able to save on the higher salaries and operating costs that they would have to pay in Singapore, although the benefits are much more far-reaching.
Most importantly, Thailand gets to enjoy the potentially enormous economic benefits that have been pouring out of (and have been unable to seep into) our country. Think of our current system as a one-way filter (unlimited outflow, minimal inflow).
We introduced Nassim Nicholas Taleb’s concept of unlimited gains and limited losses (moving beyond resilience into antifragility) in our last article.
If we maintain the status quo, we might find that we are in the opposite situation — that we are fragile:
An asymmetry between the upside and the downside, from unicorns’ economic outflows & restricted investor inflows (adapted from Taleb’s ‘Antifragile’ book).
Our unicorn migration is not a root cause that we must fix, but a symptom of an underlying, off-balance ecosystem at its tipping point. Our tech startup flywheel is broken. We have the key life sources: talent (enabled people to ideate and build businesses) and customers (relatively big market, with nascent-but-rapid technology adoption), both of which attract investors.
However, our supporting ecosystem, which serves to bind them all together, is still in the early stages. Now’s the time to connect our pieces, restore our ecosystem, and scale.
*If you have new information regarding the contents of this article and would like to share, please email us at ama@aimventures.co — we’ll update the content.
Thank you to my co-author Sheena Narula for making this article possible!
Contributors:
- Mark Gustowski is an experienced investment executive and has worked with innovative, fast-growth businesses and governments for over 20 years. A significant portion of that time focussed on equity investments for startups in the creative, food, agtech and FMCG sectors. Mark has been involved in a number of his own startups in the biotech, real-estate tech, edu-tech and FMCG spaces, as well as an angel investor, and has designed and delivered investment and accelerator programs across Australia, China, the US, UK and Thailand. Currently sitting on the boards of a number investee companies, Mark supports strategic direction, structuring, capital raising and market strategy. He has worked with Australian governments at all levels on program structure and delivery, policy implementation and investment, with key experience across Australia, SE Asia, the UK and the US. Following his BAppSci, he also completed the Venture Capital Executives Program at the HAAS Business School (UC Berkeley) on a Victorian Employer’s Chamber of Commerce and Industry (VECCI) scholarship, is a member of the Australian Institute of Company Directors (AICD), the Australian-ASEAN Business Council, and the Australia Thailand Business Council.
2. Sarun Sutuntivorakoon, Partner at N-Vest & President of TVCA
3. Kasama (Kate) Jatejarungwong, Founder and CEO of The Omelet
4. Saowaruj Rattanakhamfu, PhD, Research Director for Innovation Policy for Sustainable Development. Thailand Development Research Institute (TDRI)
Other Sources:
- TDRI, “Total Thai government R&D spending to boost the startup industry (based on NRIIS)”
- Thai Accounting Expert
