Funding the Future: How Urban Policymakers are Supporting Investment in the Innovation Economy

As cities continue to serve as global economic growth drivers, metropolitan governments are consistently doing more to encourage and nourish access to capital for innovative companies. Whether through the launch of strategic initiatives or the implementation of regulatory reforms, a range of strategies have been employed to stimulate the flow of private capital to high-risk, fast-growth companies. This global trend provides an excellent opportunity for governments to learn from one another, and capitalize on each other’s successes and failures. New York and Singapore offer a number of innovative approaches.SingaporeWhile Singapore’s standing as a global business hub spans dozens of years, the city-state’s startup economy only began to emerge over the past decade. Startup funding has grown rapidly since 2011, and some would attribute elements of that growth to government-led initiatives."We are fortunate to have an able, stable, and prosperous government with a strong intent to help spur the startup ecosystem. Lots of resources have been set aside and deployed." said Jeffrey Paine, the managing partner at Singapore-based venture fund, Golden Gate Ventures. "Overall it has been great to watch."Arguably, the government’s most impactful programs have centered on grants for product development; the IDM Jump Start and Mentor Program is a prime example. Under this two-tier funding program administered through a network of appointed incubators, startups receive an initial grant of approximately $38,000 to offset the development of an alpha product. Subsequently, qualifying startups can also receive an additional grant of approximately $75,000 if they obtain one-to-one matching funds from the private sector.Accessing private sector funding in Singapore has become easier for startups, in part, because of the city-state’s competitive tax regulations. “Singapore has an extremely business-friendly tax regime which has been very helpful both in attracting foreign angel, seed, and venture capital into the country and, as a direct result of this, in attracting people and ideas from outside of Singapore to set up in Singapore,” said Dennis Tan, a senior associate on RHTLaw Taylor Wessing LLP’s corporate technology team.In addition to other tax benefits, Singapore doesn’t tax capital gains, boasts a one-tier corporate tax system, a foreign-sourced dividend income tax exemption, a 17 percent corporate tax rate, and, in 2010, launched the Angel Investors Tax Deduction (AITD) Scheme, which provides individual investors a tax deduction of 50 percent of the cost of qualifying investments.The government also offers programs that leverage taxpayer dollars to grow the city-state’s venture capital and startup community. According to Suleen Ding, a senior associate on RHTLaw Taylor Wessing LLP’s corporate technology team, the Early Stage Venture Funding Scheme was launched to seed selected venture capital funds to invest in Singapore-based early stage tech companies by providing selected venture capital funds with up to $7.5 million in one-to-one matching funds for investment.Singapore also utilizes public funds to make equity investments in startups. SPRING, Singapore’s enterprise development agency, offers a dollar for dollar co-investment match up to $1.5 million dollars for qualified startups with international scalability potential through its Startup Enterprise Development Scheme. Under another program, the Technology Incubation Scheme, Singapore’s National Research Foundation is able to make individual co-investments of nearly $400,000 into startups at the recommendation of 14 select technology incubators.New York CityThe Big Apple’s innovation economy—which saw more than $1.2 billion of venture capital investment in Q1 of 2015—has experienced significant growth over the past decade, despite federal regulations that significantly restrict individuals from investing in startups. As New York City’s tech sector grows, policymakers in both the city and state have taken note, and have launched several initiatives that support a continued flow of investment into New York City startups.One marked example of this is a $10 million investment by the New York City Economic Development Corporation (NYCEDC) in the $150 million public-private partnership Early-Stage Life Sciences Funding Initiative, which intends to spur additional investment in research and development within the five boroughs.“For over a century, NYC has been a world leader for basic biomedical research and clinical care. The investments we are making will activate the untapped economic potential of this sector, which is poised for enormous growth,” said Deputy Mayor Alicia Glen.The co-investment fund, which intends to make Seed and Series A equity investments into life-science startups, will leverage a minimum one-to-one match for seed investments of less than $250,000, and a one-to-two match of public and private funds, respectively, for investments greater than $250,000. By doing so, the NYCEDC aims to create 15-20 life science ventures and 2,000 private sector jobs.New York State’s Empire State Development Corporation (ESD) also utilizes taxpayer dollars for the Innovate NY Fund, which launched in 2012.  Specifically, the fund intends to invest $35 million of federal funds in partnership with eight regional early-stage venture funds. According to ESD’s website, the fund has invested $23.5 million into 64 companies across the state, leveraging $124.7 million of private investment.While the Innovate NY Fund utilizes a fund of funds model—investing in venture capital funds rather than making direct equity investments—the State is also set to engage in direct investment with the recently announced New York State Innovation Venture Capital Fund. The $50 million fund will both 1) directly co-invest in seed and early-stage rounds with individual investments ranging from $100,000 to $5 million, and 2) make individual investments of up to $100,000 under a fund of funds model that will target the commercialization of research coming out of the state’s universities and laboratories.A Difference in ApproachThe key delineating factor between Singapore and New York’s approach to government investment in the startup community is the aggressiveness of Singapore’s attempts to attract startup funds from the private sector. The breadth and depth of the Singaporean government’s support of startup financing is truly impressive. In addition to extremely favorable taxation schemes, Singapore also offers a slew of investment and grant programs for both startups and venture funds. It is important to note, however, that these programs exist, in part, because of historic gaps in Singapore’s private equity markets—gaps that, arguably, do not exist in New York City’s and New York State’s robust venture capital infrastructure. Nonetheless, if New York government does decide to launch new programs, it may want to look east for a few innovative approaches.