How the Startup Friendliness Index (SFI) workslink
By Dannyelle Thompson with the contributions of Aalaa Halaka
30 March 2021
To better understand how each element of the SFI can shape the journey of an entrepreneur, let’s take a look at each phase of building a startup, from Ideation to Global Expansion, and how external factors (besides the viability of the product or service) may determine a startups’ growth. To do this, we will explore through the eyes of Sofia Ong, an entrepreneur in Singapore.
Getting started in Singapore
Singapore is consistently a global leader in our SFI. For that reason, there are many thriving startups and corporations headquartered there.
To begin, there are a few baseline indicators that serve as make-or-break factors in the ability of an ecosystem to support entrepreneurs at any stage. As our index is primarily made of emerging economies, these factors cannot be taken for granted. Of these factors, Infrastructure takes the heaviest toll. In the subdomain of Transport, this means quality of roads, ports, rails, and air pollution. Cities that do not have the most basic functioning infrastructure can not serve entrepreneurs readily.
Infrastructure also has a key part in the second baseline: information and communication technology (ICT). If the internet is unreliable or the penetration is too low, no tech company can get its feet on the ground.
After these basic needs are met, it is important to address three baseline Macro concepts: contract security, corruption, and crime. In order for a startup to develop a product and grow the company around it, they need the basic security of knowing their property rights are protected. They need a baseline of trust in the government to protect them and their interest in the face of crime or corruption. Without these things, there is no incentive for prospective local entrepreneurs to invest their time or energy and no incentive for foreign direct investment.
Luckily for her, all of these factors are well enough in Singapore and it reflects in their scores:
Now we will take a look at what differentiates Singapore from other ecosystems and how Sofia might navigate its ecosystem to build her company.
The beginning spark
By many indicators, a budding Singaporean entrepreneur would have ample support to grow a business. In the Ideation phase, where Sofia would develop a product idea and conceptualize a business structure, we see that she would be a product of an environment where nearly 30% of firms have majority women ownership. That score is above the global average of 10.00 and gives Singapore a score of nearly 60.00. She also benefits from a city where more than 51% of the population views entrepreneurship as a good career choice. These factors can heavily affect whether or not an individual, especially women, will attempt to start their own venture.
As she moves forward to put thought into action (MVP stage), Sofia would need to take steps to formalise her business. She is in luck here — Singapore is widely known for having the legal framework and control on corruption and crime to make it easy for a new business to start. It takes an average of 2.5 days to register a business and an average of 0.5% of the average total income to do it, making the country the global leader. The regulatory quality is also the highest in the index, with perception of the government’s ability to create sound policies receiving almost a perfect score and the perception of corruption and bribery also receiving outstanding scores. It is these regulations, and others such as the competitive corporate tax rate, favorable bankruptcy laws, and low informality in the economy that will later make it easier for her company to become a corporation, without fear of high tax rate, full liability for the failure of the company, and a formal economy to target for sales. These factors push Singapore to the front of the index.
As Sofia moves on to the Seed Stage of her company, she will need to build a team, finance a work space for them, and find some seed funding. Here is where we see Singapore’s startup ecosystem is less favourable to the average citizen’s ability to grow a successful startup. Singapore has a low number of students per 1,000 inhabitants in comparison to the rest of our index. Its score of 3.16 puts it near the bottom.
Part of this is the hazard of being a large city. Berlin is likewise near the bottom of the index. However, Singapore’s university score is also not as stellar as it could be. While there are many good universities in the city, it ranks distantly behind Berlin in its university score as ranked by Times Higher Education. The task of finding talented workers is multiplied by Singapore’s success in the startup scene world. Competition for good talent is fierce, and it is only expected to get tougher.
When it comes time to hire the right team members, Sofia will find it hard to finance their salaries. While ordinarily, a high starting salary for a new graduate is an indicator of the strength of an economy, in the context of a startup, a high starting salary can be difficult to bear in the seed stage. Singapore’s high cost of living and the high average income gives Singapore a score of 0.00 for Average Salary (a score in which low average salaries are more beneficial for startups, thus giving the high earning Singapore a low score).
The expense of the city is also a two-sided coin: while the quality of electricity, water, and internet are high, their costs are likewise high. These are difficult burdens for any seed phase company. Singapore has the second-highest cost of living in our index (after Hong Kong) and the highest costs for coworking spaces. Coworking spaces are vital to new startups — they serve as the place to generate ideas and tackle problems as a team and grow synergy within the new company. The cost of a coworking space in Singapore is $309 USD per month, where the global average is just above $100 USD.
These hurdles might be easier to tackle if Singapore’s ecosystem was more favorable for the average citizen to find seed funding. However, this is the second poorest performing area for the nation city (while they remain the sixth-best overall in the index). Our data, pulled from CrunchBase, analyzes how many listed startups are funded by a variety of sources. Singapore’s total score in our Finances Sources subdomain is 53.25. The city is the leader in Access to Loans and SME Loan Access, and also performs above average for Series Funding (third-best in the index). However, it lags in other areas of funding, bringing its score down. This rings true with our research and interviews with ecosystem builders, who highlight that Singapore is an area that draws a lot of funding for well-tested ideas and high-performing startups, but is not the place for new concepts to develop. The other common source of seed funding, friends and family, will of course vary greatly according to the socioeconomic status of Sofia. Lucky for her, our compilation of Gini indices puts Singapore at 45.9, making its economic equality about average.
As Sofia’s company progresses she will develop her product, refine it through testing and iterative design, and update and refine her business model. As she works through those steps, she will be ready to approach investors for her Series A funding. With a business underwing, Sofia can now approach business angels and venture capitalists. To her advantage, Singapore scores first in its number of VCs and PEs available to pitch. Our index indicates that many startups found Series Funding, ranking Singapore at 63.28. There is also a wealth of foreign direct investment in the city, ranking at 60.40 in the index, making Singapore the third most attractive economy for foreign investors (by percentage of GDP).
In the Series A stage, Sofia will also need to expand her team to keep up with the growth. Once she has the funding to do so, she will start to hire team members. Here, she might have specific hiring needs that didn’t exist before: an expert in SEO and content creation, legal staff that specializes in intellectual property, or a blockchain developer. In Singapore, there are some challenges and advantages. 90% of firms identify labour regulation as a constraint to their firms and 43% of firms identify an adequately educated workforce as a constraint. Again, the salary expectations of firms present a problem, with software developers making on average over $3000 USD according to our surveys. She might have trouble finding the labour she needs and will need to hire internationally, likely incurring extra cost.
The activeness of the startup scene too will be a barrier for her, with its score of 47.00 being a low point for Singapore (however this is the third-best in the index). This reflects the number of startup scene events and the number of startups in the ecosystem. This will impact her ability to find partners and co-founders to fuel her growth.
Lastly, we consider how developed the digital market is in the ecosystems we evaluate. For internet-based startups, the level of digital penetration is vital, as it defines how large their given market might be. This is not a problem for Singapore, which is also among the leaders in our index. Indeed, even low levels of digital market penetration are not necessarily ‘problems’. As we will see later in this report, many times entrepreneurs thrive off of making solutions tailored for their environment, in which case they create innovative solutions to work around digital penetration.
Finally, Sofia’s business is ready to scale up. To envision her business scaling, many previous factors will return in full force here — level of inequality, depth of ICT penetration and transportation infrastructure — but many new ones come into consideration. How wealthy is the country? Can consumers, as a whole, afford to buy her product? Has there been economic growth? What does trade look like? These factors affect her domestic marketplace. To her advantage, Singapore is a top performer here as well with a Market Performance score of 89.09. Singapore is a hub in the region for trade, with its score for trade openness (89.62) almost double the next highest scoring city (many ports and travelers stopover in Singapore before continuing to their final destination). The nation is only outperformed by Hong Kong.
That is, until global or regional expansion. At this point, Sofia’s company may or may not still be a startup. She may have gone public. As her company expands internationally, the market’s connectedness comes into full force into consideration. How open is the country for trade? How much tourism comes in? Again, Singapore is a leader here with a score of 63.34, behind only Hong Kong.
Of course, Singapore is a stellar example of how an ecosystem can serve an entrepreneurial culture. These factors alone, cannot guarantee that a startup will succeed; the founder and product are vital components of the success equation. However, the right ecosystem factors can contribute to the ability of a startup to start, grow, and thrive, not just once, but for many founders and many companies. This is what the SFI was built to measure: how successful an ecosystem is in aiding its entrepreneurs.
Dannyelle works as a Research Analyst for enpact’s Data&Research sector. Originally from Los Angeles, Dannyelle has lived and worked in Berlin, Germany for two years. Her primary work at enpact revolves around product design, policy research, and authoring SFI reports. In June 2021, she will graduate from The Hertie School with her Master of Public Policy with a concentration in Policy Analysis.
Dannyelle is the Chief Editor and creator of the empower magazine.