CommentInsight & Opinion

Hong Kong should be a financial capital to all - including tech start-ups

Yat Siu says outdated thinking in Hong Kong's banking industry is denying local technology companies the short-term financing they need to develop and thrive, harming the city's economy

PUBLISHED : Tuesday, 21 January, 2014, 11:04am
UPDATED : Wednesday, 22 January, 2014, 6:07am
 

Much has been said recently about Hong Kong's role as a city for technology start-ups. The fact is Hong Kong is surprisingly unfriendly to technology companies. We have low taxes, rapid company creation, efficient business practices and world-class infrastructure; why don't we have a thriving tech start-up community?

While Hong Kong's infrastructure bears a resemblance to Silicon Valley, we have less focus on software engineering or information technology. Google chairman Eric Schmidt recently made a similar point, saying Hong Kong needs to develop more technology talent. While this certainly wouldn't hurt, I don't think it's the main problem because we already have good technical universities and an abundant supply of students. Plus, Hong Kong has no trouble attracting talent (especially senior talent) from overseas.

True, in Hong Kong, there is a lack of a software programming culture and limited interest in entrepreneurship among young people, who tend to prefer "safer" sectors like finance or property. But the real problem that frequently hinders Hong Kong's more ambitious start-ups is a lack of carefully thought-out and structured support from the finance community.

Hong Kong is a financial capital and a keystone for much of the business activity in Asia, yet it offers technology start-ups little assistance compared to what we see in Silicon Valley - or even compared to the assistance regularly provided to other Hong Kong industries.

Why doesn't the finance industry support technology the same way it supports the film, textile, trading and manufacturing industries?

In our early days as a business-to-business electronic messaging services provider, Outblaze faced significant delays in customer payment; in many cases, these delays were disruptive to business. To mitigate the problem, we attempted to raise financing against outstanding invoices, a common practice known as "factoring".

We ought to have been a sound risk for any bank, because we were backed by a good payment history and long-term contracts with reputable international businesses. However, unlike the local companies which regularly solve cash shortages by obtaining letters of credit, we struggled because no bank was prepared to offer us financing. We were forced to close each cash flow gap ourselves, which put extreme pressure on our company.

Outblaze survived and (eventually) thrived, but we were probably an exception. How many promising local tech start-ups have been suffocated by a lack of financial support?

In 2009, the company sold its messaging unit to IBM. After the deal, we focused on app development and publishing. Once again, we found ourselves with substantial sums of money locked up as receivables owed to us by highly reputable customers like Google's Android Play, Apple's App Store and Amazon's Appstore. These companies delay payments, sometimes for 60 or 90 days or even more. Marketing costs in the mobile app business are extremely high, and having ready capital is therefore essential.

Time moves fast in the tech world, and a delay in payment of 60 or 90 days can be a serious obstacle because you need that cash to publish and market your next product before the window of opportunity closes. This is exactly the kind of problem that short-term financing exists to address.

Despite the fact that our debtors were some of the wealthiest and most powerful companies in the world, and despite our 15-year history and success as a local technology company, banks refused to provide us with short-term financing. Such financing is critical to established businesses but even more so to technology start-ups who risk losing out to better-financed rivals.

Competition is increasingly globalised and Hong Kong's start-ups need a level playing field to compete with rivals in more accommodating business centres. Without more enterprising and creative financing, tech start-ups will continue to struggle here - or they may simply choose a location that is more start-up friendly.

To develop an effective and competitive start-up culture, Hong Kong's financial institutions must be prepared to support the cash-flow requirements of new companies. We're not talking about high-risk methods, but merely the same financing services already offered to other industries.

Contrary to old stereotypes, technology companies can present a good risk profile: to secure a long-term contract from companies like IBM or Microsoft, a start-up must already have satisfied an exhaustive due diligence process to demonstrate operational viability. And receivables from leading online app stores - Google, Apple, Amazon and so on - really ought to be as good as cash in the bank - you can't get much bigger or more cash-rich than Google and Apple!

The problem, I think, is that virtual goods (like e-mail services or apps) are still poorly understood and poorly supported by a local finance industry that has traditionally dealt with tangible goods and services. This may have been understandable back in the 1990s, when financial institutions were presented with outlandish technology concepts such as software as a service. Today, such excuses do not apply.

A change in the short-term financing status quo could rapidly boost growth in the start-up technology sector and bolster the overall strength of Hong Kong's economy. The resulting tech boom could generate millions of dollars of new business. It may even attract more overseas companies to consider Hong Kong as a hub for regional expansion instead of Singapore.

Yat Siu is the founder and chief executive of Outblaze, a digital entertainment and technology company

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