City's technology sector needs a reset, panel participants say

Panel participants say Hong Kong has to change its ways if it wants a viable hi-tech industry, especially in how start-ups get funding

PUBLISHED : Saturday, 24 May, 2014, 2:25am
UPDATED : Wednesday, 07 January, 2015, 12:16pm

Hong Kong has the basic wiring but needs to make better connections if it wants to be a global technology centre, industry experts said yesterday at the South China Morning Post's Redefining Hong Kong panel discussion.

"Hong Kong can be the brain that drives the technology revolution. We need to reset out brains and rethink," said Simon Squibb, CEO of Nest, an incubator firm that supports technology start-ups.

Local technology start-ups are still bit players in the city's overall economy, which is heavily weighted to trade, industry and financial services.

But there's growing international interest in basing operations in the city, given its educated workforce and proximity to booming Asian markets. That had given techies renewed optimism that the sector could thrive, panellists said.

Watch: The Redefining Hong Kong Debate Series II - Seminar 3

Panel participants discussed ideas such as the best ways to finance start-ups, and whether the government should lend a hand.

Squibb mapped out a vision in which he would invest in local companies and turn them into global players. "Hong Kong should think about becoming a knowledge-based economy," he told the audience, adding that the city's economy couldn't rely on tourism.

The technology sector employed more than 78,000 people in 2012, according to the city's Vocational Training Council.

The city has historically spent little on research as a percentage of its gross domestic product, compared with other economies. In 2011, the equivalent of 0.72 per cent of Hong Kong's GDP was spent on research and development, according to Census and Statistics Department data. The US spent 2.77 per cent of GDP, and China 1.84 per cent, according to World Bank data.

Panel participants said they hoped this would change. Victor Lam, the government's deputy chief information officer, told the audience that Hong Kong was ranked the eighth-most networked economy by the World Economic Forum in its 2014 Global Information Technology Report.

Between 600 and 800 so-called "disruptive" start-ups operated in Hong Kong, said Karen Winton, chief marketing officer at InvestHK, the government body charged with attracting companies to Hong Kong. "Disruptive" refers to innovations that challenge traditional business models.

Charles Mok, Legislative Council member for the information-technology functional constituency, said that the government should offer support schemes similar to ones in Singapore and Korea. There, the state provides subsidies and buys equity stakes in promising start-ups. He also advocated a "buy-local" government procurement policy.

Lam said the government offered several seed-capital and loan schemes for technology projects. But it had generally maintained a "hands-off" approach, he said.

A government interventionist approach was unpopular with some conference participants, who said they worried bureaucrats might waste taxpayer money on failing ventures.

Instead, Squibb and others suggested that the government focus on encouraging education and entrepreneurship, and keeping the gates open for foreign technology talent.

Mok, who did not attend the conference, said he worried that the city would miss an opportunity to diversify its economic base. "We need to refocus on what activities can create real opportunities for this generation and the next."

Equity crowdfunding - in which ordinary investors pool capital through a website to help start-ups - is used worldwide. But Hong Kong regulators only allow professional investors to use this method. Mok said the government should explore ways to liberalise the sector.

"We have not done anything. We're always behind," Mok said.

Some Hong Kong companies have borrowed the model of sharing office space from the US. One example is CoCoon in Tin Hau, which mixes a low-cost work space with an open-office networking culture, getting entrepreneurs to mingle and exchange ideas.

The number of such spaces in Hong Kong had grown 10-fold in four years, to more than 30 this year, Winton said. This meant about 1,600 such desks for workers in the city.

Technology executives praised the city's infrastructure, corporate services, and intellectual property protection. Allen Ma, CEO of Hong Kong Science and Technology Parks, estimated that 50 Israeli technology firms would open Hong Kong offices within the next two years.

Ma noted that he had visited Israel as a member of Hong Kong's largest-ever delegation to the Middle East's answer to Silicon Valley.

But the city lacks some key components that would make it more alluring to technology entrepreneurs. Sky-high housing costs and limited international-school space had deterred talent from moving to Hong Kong, Ma said.

Technology companies struggle to bridge the financial gap between money that comes from initial angel investors, which support companies in their early days, to what is called Series A investing. This is typically a US$3 million to US$10 million capital injection for testing new products in the marketplace and expanding the payroll.

Without that financing, companies often struggle to move beyond the concept stage.

While Hong Kong has plenty of wealthy investors, local investment in start-ups is not sophisticated. "It's nascent," said Jon Medved, the Israel-based founder of OurCrowd, an online investment platform that targets up-and-coming technology firms.

The market needed more success stories to get big investors interested, he said. Silicon Valley and Israel were the only two markets where investors were comfortable backing fledging technology firms, added Medved, who plans to open a Hong Kong office this year.

Panel participants complained that not only did Hong Kong investors prefer businesses with short-term cash flow, such as property or restaurant ventures, but the city's financial system did not understand the technology sector.

Hong Kong banks provide to manufacturers trade-receivable financing - loans backed by a company's promised revenue. But technology firms don't get these, even if the money is coming from a company like Apple, "which has more money than the US Federal Reserve," said Siu Yat, CEO of Outblaze, a Hong Kong-based digital media company. "It is completely lopsided."

Siu, who appeared on the Post's panel, suggested that banks develop products to support the technology economy. They could, for example, mimic the existing model that provides loans to Hong Kong's film-making industry.

The older generation of wealthy Hong Kong families want control when they give money to a venture. That was not how start-ups worked, Siu said. Start-ups are lean and investors are giving money to people they believe in. Why should the investors have control, he asked.

He said he saw signs of change, with some scions of wealthy families showing interest in investing in technology.

Hong Kong lacked analysts who understood the technology sector, added Mok. Banks did not have technology teams, and did not understand the ecosystem.

He said he was upset that Alibaba Group chose the US for its initial public offering, not Hong Kong. Had it chosen Hong Kong, it would have encouraged other technology companies to list in the city, boosting public interest in the technology sector, he said.

"If we don't do something about the knowledge economy in the next three to five years, I worry that we will be overtaken by Shenzhen," Mok said.