Venture capital showing more money for Hong Kong's tech start-ups

PUBLISHED : Friday, 20 June, 2014, 11:36am
UPDATED : Saturday, 21 June, 2014, 1:49am

Hopes are growing among technology start-ups that venture capital cash will finally start pouring into the sector this year and give Hong Kong a chance of laying claim to being a true "tech town".

New ventures continually complain of a chronic shortage of cash, particularly for expansion and development after the initial start-up period, despite government incentives to support home-grown technology companies.

But fresh data from the Hong Kong Venture Capital and Private Equity Association (HKVCA) and a flurry of recent funding successes signals that change might be in the air.

Because the local tech sector hasn’t grown … nobody felt the need to offer financing

The average size of investments made by venture capital firms in local technology start-ups topped US$6 million in the first half of this year, versus US$4 million for the whole of last year, HKVCA data shows.

Meanwhile the legendary California-based venture capital firm Sequoia Capital recently joined Li Ka-shing's Tom Group and other investors to invest US$14 million in the Series A funding - the first round of financing from external investors after seed capital - conducted by WeLab, an internet finance technology company that launched the first social lending platform in Hong Kong last year.

"We expect the average size of funding for tech start-ups to significantly rise as more venture capital deals are consummated this year," Alfred Lam, research manager at the association, told the South China Morning Post.

That is good news for the more than 300 technology start-ups operating in the city, according to the latest estimate from the directory.

But that would still be a tiny amount of money compared with the HK$6.46 trillion in total loans outstanding recorded by Hong Kong's banking sector last year. Those represent the kind of resources unavailable to fund local technology start-ups.

In Lam's estimation, Hong Kong is on course for a record year for venture capital investments, but the absolute number and size of deals are miniscule when compared with those in the United States. Venture capital investments there hit US$36.81 billion last year on a total of 4,012 deals, according to venture capital database CB Insights.

The HKVCA reckons there were a total of eight venture capital deals reported in Hong Kong in the first six months of this year.

It says the highest number of reported venture capital deals in the city was 11, which was reached last year and in 2011.

Lam said this year "could significantly surpass previous years in terms of consummated venture capital deals in Hong Kong".

"We consider the first start-up investment made by Sequoia Capital in Hong Kong as an important milestone that could encourage other overseas venture capitalists to enter the local market," he said.

Technology, media and telecommunications made up about 90 per cent of deals completed since 2009, followed by retail, consumer, industrial and healthcare investments. Funding raised from government-related entities was excluded in the estimate.

Lam said home-grown venture capitalist Red Chapel Advisors has been the city's most active investor in technology start-ups. Other active firms included 500 Startups, Arbor Ventures, Fresco Capital Advisors, Horizon Ventures and Mandra Capital.

Most technology start-ups, however, still need help to strike deals with "angel" investors for seed financing and venture capital firms for larger investments to expand their businesses.

Yat Siu, a local angel investor and chief executive at technology group Outblaze, said: "There are hundreds of software developers in Hong Kong who can't really make ends meet by just making games and mobile apps.

"What Hong Kong needs are investors for Series A and Series B funding rounds. I think Hong Kong can fill that gap if the city's strong banking sector can provide facilities to start-ups."

Successive rounds of financing for venture capitalists or private equity investors are termed Series A, Series B and so on. In general, the Series B round will take place when a start-up has realised certain milestones in developing its business.

Siu said current funding levels, from either angel investors or government-backed schemes, was not big enough.

"It's the Series A financing that gives the push companies need to expand," he said, noting that the city's manufacturing and movie industries grew because of support from banks.

Unlike banks in California's hi-tech hub of Silicon Valley, those in Hong Kong lack the expertise to fund technology start-ups.

"Because the local tech sector hasn't grown, other than the IPOs for Chinese companies, nobody felt the need to offer financing facilities," Siu said.

WeLab chief executive Simon Loong, a former banker with Standard Chartered, expected no change on that front, "because banks still look at profit and loss" statements when considering business loans.