JAKE'S VIEW
Jake's View
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A third board for hi-tech firms is just a bad idea

The biggest problem with making it easy for fancy ideas to raise money through a special board with relaxed listing requirements is that then we don’t have the filter of professional venture capitalists to sift out the bad ideas.

PUBLISHED : Sunday, 22 January, 2017, 2:58am
UPDATED : Sunday, 22 January, 2017, 2:58am

Hong Kong may change its listing rules and introduce a dual-class share structure after the exchange operator said it plans to consult the market on the launch of a third board in an effort to attract more listings by technology and new economy firms.

SCMP, January 20

Here is a law of investment which is not declared but rather left to you to discover on your own when you explore investment – There is never such a thing as a shortage of money. There is only ever a shortage of good ideas in which to invest that money.

I can’t prove it with science or statistics and yet I assure you from an almost 20-year career as an investment analyst that it is true. There is always money looking for worthwhile opportunities.

Yes, I know that people tell you it’s not so, that they have had wonderful ideas but they just could not raise the money to bring those ideas into reality. You don’t pick a fight by telling such people that perhaps their ideas were not quite so good but I’m sure the thought occurred to you. Stick with that thought.

What many ideas people also propose is that they bring their ideas to their deals while the backers put up the money and, when (if) the ideas have proved successful, the ideas people will get the money and the backers will get to feel good about it.

Get real, say I. In the first place, ideas are communally derived. Copyright law may allow you to claim an exclusive benefit to them for a period if you were the first to express them but don’t let that give you a swollen head. You do not live on a desert island. If you did you would not have any worthwhile ideas. More than that, however, venture capitalists generally find that only one out of 10 ideas really pays off. It’s proof of my law of investment. Risk money is willing to explore many bad ideas on the hunt for a good one.

But it should also tell you that the risk takers expect to be compensated by that tenth one. And that’s exactly how things should be. On your first good idea you will have to share most of the benefits. If it’s the only one you ever have then you aren’t much of an ideas person anyway. Find another way to get rich.

HKEX rekindles plans for dual-class share structure in Hong Kong

Investment is also not about fulfilling politicians’ dreams of creating a hi-tech economy. Investors put their money down to get a return on it in money terms.

And that’s also how things should be. Financial markets are not easy ways of fulfilling dreams on the cheap. Ignoring the people who have entrusted you with their savings is the worst idea of all.

The biggest problem with making it easy for fancy ideas to raise money through a special board with relaxed listing requirements is that then we don’t have the filter of professional venture capitalists to sift out the bad ideas.

All we get is investment bankers promoting every idea they can find to that board’s listing authority.The bankers don’t care. Once the listing is approved they walk away from it to their next listing.

For the evidence, look at the chart of how our second board, the GEM market, fared relative to the Hang Seng Index last year. That’s a multi-year record by the way.

And now our exchange wants a third board?