Late starter: Hong Kong boosts innovation support

Until recently, Ryan Cheung hadn't considered becoming an entrepreneur. After graduating from Hong Kong University in 2011, he followed the well-trodden path into financial services and joined a global private bank. But life as a small cog in a large machine was unfulfilling. Cheung wanted his own business.

This led to the launch of Clipper, a self-developed mobile promotions platform that connects offline retailers with online customers, early last year. Within 12 months, Cheung sold the business to a Singapore-listed company.

He chose to exit because the online-to-offline (O2O) segment, with its emphasis on high cash burn and offline expansion, didn't seem sustainable. For his next venture, Cheung went asset-light, creating an online content generation app called Bessup. Three months in, there are already more than 100,000 users and the next step is to introduce an e-commerce element in order to monetize the concept.

The government should bring together successful Hong Kong entrepreneurs to tell the younger generation that they can make a difference in today's world. But so far no one has contacted me - Joe Lee

"It's the right time to start your own business. Thanks to today's advanced technology, if you have a great product you can scale up quickly," he says. "But the Hong Kong market is too small, so we have to think about going global early on. It would be difficult to expand an O2O business in Hong Kong."

Cheung is part of a small but growing band of entrepreneurs in Hong Kong. The government has ambitions to make it bigger. In his latest policy address, Chief Executive C.Y. Leung announced plans for a HK$2 billion ($256 million) fund that will co-invest in start-ups alongside venture capital funds on a matching basis.

After years of criticism for not being as proactive as Singapore in advocating local entrepreneurship, Hong Kong appears to have taken a page out of Singapore's playbook with the matching fund program. It is not a coincidence.

"We were analysing Singapore and making recommendations to the government on improving on what Singapore has done," says Melissa Guzy, co-founder of Abor Ventures and chairman of the Hong Kong Venture Capital & Private Equity Association's venture committee. "The Hong Kong government has been taking its time, but it has a long-term view on making sure that the program works, and supporting innovation."

Gathering pace

VC investment in Hong Kong reached $131 million in 2015, according to AVCJ Research, up from $67 million in 2014 and $15 million in 2013. The total has jumped to $223 million in the first month of this year, although this says much about the depth of the market. Two companies - mobile lending and credit analytics platform WeLab and mobile app analytics platform App Annie - account for almost all the capital committed (and it is debatable whether App Annie qualifies as a Hong Kong start-up).

"The Hong Kong start-up ecosystem is very young but it has grown dramatically in the last few years so clearly the trend is going into the right direction," says Tytus Michalski, managing director at seed investor Fresco Capital. "Huge companies take years to build and I'm optimistic that we will see many large successes emerge from Hong Kong over time."

According to a survey conducted by InvestHK of 40 co-working spaces, incubators and accelerators, 1,558 start-ups were registered in co-working spaces as of August last year, up from 1,065 in 2014. In terms of the origins of the founders, 43% were from overseas, including mainland China and Taiwan, half were Hong Kong locals, and the remaining 7% were Hong Kong returnees. The best-represented sector was information, communications and technology (ICT), followed by hardware (which includes the internet-of-things), e-commerce, supply chain management and consultancy services.

Over the past 10 years, more global early-stage investors have turned their attention to Hong Kong, drawn by its financial sector credentials, rule of law and intellectual property protection, strong universities, and multiculturalism.

Mind Fund is one example. The early-stage firm focused on Silicon Valley for its debut fund, notably mobile image app Flipagram. Fund II was supposed to stick to a US-focused strategy, but Adam Lindemann, the firm's managing partner, wanted to look closer at Hong Kong. "Over the past few years, I have seen very strong evidence that Hong Kong is reaching the point of becoming a technology start-up hub globally. I would have never said something like that a few years ago," says Lindemann.

A mentor group - the Venture Investors Alliance (VIA) - is also being formed to support Hong Kong start-ups. Mentors include Nisa Leung of Qiming Venture Partners, Andrew Teoh of Ameba Capital, and Denis Tse of Asia-IO Advisors and formerly head of Asia for Lockheed Martin Investment, as well as Arbor's Guzy.

"The group isn't huge, but I would argue that we probably have as many early-stage, qualified VC investors as Singapore. Some have more experience than the whole of Singapore's venture community. For a long time, investors have been focusing on China, and now they've reached here. You start to them invest where they're living. There aren't many deals, but we are starting to see that," says Guzy.

For example, Sequoia Capital China, which has office in Hong Kong, is among the investors in WeLab. This is not a sentimental decision. WeLab is one of those start-ups addressing markets beyond Hong Kong, with most of its resources devoted to a peer-to-peer online platform that provides small loans for college students in mainland China.

Devil in the detail

Previous government efforts to support start-ups have focused on Cyberport - which has nurtured more than 160 start-ups since the early 2000s, offering working space at concessionary rates with flexible tenancy terms - and the Science Park facility. The policy address also outlined plans for a HK$200 million Cyberport Macro Fund to invest in ICT start-ups and HK$2 billion to be channelled through the Innovation & Technology Bureau into research projects.

However, this comparative largesse has yet to be complemented by fine detail. It is unclear how venture capital firms will be chosen for co-investment from the matching fund or how much will be put into each deal. Industry participants expect it to target early stage deals, typically seed to pre-Series A rounds.

"The matching fund is more about direct investments into start-ups, while the initiatives run through Cyberport, the Science Park and the universities will benefit the ecosystem in the medium to long term. This two-pronged approach makes a lot of sense," says Willy Lan, head of strategy and corporate development at incubator Jaarvis Labs.

For all the inspiration Singapore's matching fund program has given Hong Kong, the system has its critics. The primary concern is that the too much money has been pumped. Having started focusing on seed-stage investments, matching funds have since extended into the Series A space. Alongside the various other initiatives designed to facilitate funding or minimize start-up costs, some ask whether low-quality companies are surviving longer than they should because of this support. The challenge for all government-led VC initiatives is knowing when to step back and let the private sector take over.

"I think it's probably true to say that Singapore has made mistakes. It's a common sense that, when you aren't careful about what you're incentivizing, you can easily incentivize the wrong kind of behaviors," says Mind Fund's Lindemann. "You want to support the most deserving start-ups that have the highest potential. You don't want to encourage people who are good at applying for grants."

These are issues to bear in mind when building out a funding program, but at this early stage in the process, Hong Kong's priority is to be that catalyst. Entrepreneurs say there is plenty of angel investment available locally, with the problems kicking in when they try and raise larger rounds. Together with the relatively high-cost environment, it serves as a disincentive to would-be founders.

This conservative attitude towards innovation means Bessup's Cheung is the exception to the rule in that he was willing to give up a secure job to start his own business. Overcoming this hurdle rests on success stories - and founders who put their expertise and capital back into the system. Having seen Kuadi Dache, the ride-hailing app he launched in China, merge with Didi Dache last year and achieve a $15 billion valuation, Hong Kong-raised Joe Lee is now an angel investor. While he sees potential in Hong Kong financial technology, there aren't enough talented people looking to build businesses.

"Talent is the most important part of the start-up community. I could go to industry conferences and universities to share my experiences, but that's not enough to make a lot of noise. The government should bring together successful Hong Kong entrepreneurs to tell the younger generation that they can make a difference in today's world," Lee says. "But so far no one has contacted me."

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• Topics
• Venture
• Early-stage
• Regulation
• Greater China
• Fundraising
• Technology
• Hong Kong (China)
• Fundraising
• regulation
• TMT
• Venture
• seed
• Arbor Ventures
• Mind Fund
• Fresco Capital