The Delaware of Southeast Asia

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Have you heard of Delaware? No big deal if you haven’t. It’s an American state, in case you were wondering, and I’ll go out on a limb and say that most Americans wouldn’t even be able to find it on a map.

Delaware meets every criteria for what constitutes ‘nondescript.’ It’s the second smallest state in the United States; its national bird is a chicken; and one year it was famous for being the first state in the Union to ratify the U.S. Constitution. There are less than 1,000,000 people living in Delaware. One million people. In other words, even though it’s literally thirty times smaller in size, the city of Kuala Lumpur has over half a million more people living within its borders.

Oh, and one more tidbit: it’s the legal address for over 50% of U.S. publicly traded corporations, 60% of Fortune 500 companies, and over 1 million other businesses. In fact, there are more businesses incorporated in Delaware than there are people. I know this is the second time I’ve used that comparison, but that’s simply hilarious. It collects close to $1 billion dollars in taxes and fees from absentee companies. And while it might be small, companies like Apple, Google, General Electric, and Berkshire Hathaway all call Delaware ‘home.’

Delaware was able to do this because of its progressive (some would argue lax) laws and regulation concerning ease of incorporation and corporate management, the structure of its legal system, and its tax schemes. Instead of incorporating in their home states, corporations chose to incorporate in Delaware, and so benefit from reduced taxes, simpler security and compliance regulations.

Why is this important?

Because Singapore is going to follow suit.

Singapore has always been the economic centre of Southeast Asia. It’s the most politically stable, has the most reliable and robust infrastructure, and the government has implemented genuinely progressive tax, legal, and trade policies that benefits and encourages entrepreneurship and commerce.

And this was before the startup boom that is taking over Southeast Asia. Venture capital funding will necessarily follow the most viable opportunities, which means that a tremendous amount of early-stage capital will be moving into the region over the next two years. The amount of venture capital now available in Singapore is orders of magnitude greater than what was available barely six years ago. The impact of this sea-change will be tremendous, and is one of the many reasons why Singapore is going to cement its status as the ‘Delaware’ of Southeast Asia.

The reasons:

1) The incorporation of holding companies for post-seeded Southeast Asian companies will become much more commonplace. This shouldn’t come as a surprise: many companies at this stage are already collecting revenues, and so would benefit from Singapore’s tax code. Anecdotally, I’m beginning to see more and more companies that have already raised their seed, or are looking to raise their Series A, incorporating in Singapore. I don’t believe this will affect the incorporation of new startups, which will likely continue to be in the founders’ initial market.

2) A fair portion of the money coming online within the next year or so is going to be legally domiciled in Singapore. The government provides significant tax and legal benefits for new funds of at least S$50M dollars. And coincidentally enough, many of the new funds coming online are raising at least S$50M. Simply put, money attracts startups.

3) Even if not domiciled here, a vast majority of funds will base their operations here in Singapore. All new funds will necessarily need to look beyond their immediate borders for quality deal flow, but Singapore will be given first priority simply because it’ll be easier to source and validate quality leads. That means startups with at least a presence in Singapore will have better access to investors.

4) As foreign investors start looking at emerging markets for growth, Singapore is going to be the only market they’re comfortable investing in, further fuelling incorporation here. Right or wrong, Southeast Asia is not considered the most politically stable: revolutions in Thailand; contested elections in Indonesia; corruption in the Philippines, Byzantine regulatory laws in Vietnam, to name a few. Indeed, the most stable is Singapore, and foreign investors understand that.

5) At least $120M dollars is specifically mandated for Singapore-incorporated companies. Funds selected for the NRF’s Early-Stage Venture Capital Financing scheme requires that the monies it matches, up to $20M per fund, are invested only in Singapore-incorporated companies. This means that even if companies are operating in markets across Southeast Asia, they can still access ESVF funding so long as they are incorporated in Singapore.

6) There’s an obvious linkage between the number of dedicated Series A funds in the region, and the number of Series A rounds. Therefore, companies seeking Series A funding will likely consider Singapore as a natural place to expand, especially given the aforementioned points.

The consequences of these changes cannot be understated. As Southeast Asia as a market and ecosystem grows, so too will Singapore. The number and frequency of new company creation in Singapore is only going to accelerate in the coming months and years, further contributing to the country’s already enviable position as the most mature tech ecosystem in the region. And funding, especially post-seed checks, will follow investable startups and holding companies.

There’s always a possibility that other countries will revise their legal, tax, and trade policies to conform much closer to Singapore, but I wouldn’t hold my breathe. If anything, I see Southeast Asian countries demanding that Singapore be less attractive, rather than making themselves more so. Good luck to that. Ireland has been turning its nose up at EU countries demanding the country raise its corporate tax, and it’s been doing that for the last two decades. Singapore will become the Delaware of Southeast Asia, and it will likely remain so for the foreseeable future.