Should Hong Kong introduce tax breaks for start-up investors?

Howard Winn

Published: 1:59am, 17 May 2014

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Taxiwise, a Hong Kong start-up company with a taxi-booking app, was sold last week. The firm that bought it - Ikky - has not disclosed the price which is believed to be north of seven figures, but an interesting aspect of the deal is that the firm that invested in the company about six months ago and helped it get in shape - incubated it - made a return of 22 times its investment.

That's an arresting business proposition by any standards. But the company, Bigcolors, has been making waves in the Hong Kong start-up scene over the past year.

We last wrote about the company six months ago shortly after it launched as a crowdfunding site. However, as co-founder James Giancotti freely admitted, people weren't keen on selling shares in their companies and secondly people didn't want to invest with a crowd of other people and preferred either to take a bigger position or to give the money to Bigcolors to invest in the start-ups and to do the incubation. So he has changed the business model and turned Bigcolors into a start-up fund and uses the website Bigcolors.com for the initial processing of the ideas, and to get access to ideas from outside Hong Kong.

Taxiwise was the first company Bigcolors has since invested in under its new format, but there are other projects in the pipeline. It is looking for investors to increase its ability to invest in more companies. "The idea is to buy into companies, grow them, make them successful and sell them," Giancotti says.

It's an approach that has appealed to the bankers who have invested in Bigcolors. Giancotti says they see this as their ticket out of banking where they have may have worked for many years and are looking to do something different. It particularly appeals to bankers who have made their money already and "want to help build businesses and be remembered for doing something cool rather than working in a bank all their lives."

Although this highlights the interest in start-ups, Giancotti is uncertain over the prospects for crowdfunding in Hong Kong, saying it would need education and pro-crowdfunding legislation. At present only so-called professional investors as defined under the Securities and Futures Ordinance are allowed to buy equity in start-ups over a crowdfunding platform. Investors are required to have assets of HK$8 million with revenue of about HK$2 million a year, and must also be conversant with the risks of investing in start-ups. Over the past year, crowdfunding legislation enabling retail investors to invest in start-up equity over crowdfunding platforms, has been passed in the US, Britain, much of Scandinavia, and Italy among others. But it's unlikely to happen in Hong Kong soon.

However, the Singapore government is actively considering pro-crowdfunding legislation. Should it get enacted that might make the Hong Kong government sit up and take notice. It would encourage start-ups to move to Singapore, says Giancotti: "I love the entrepreneurial culture in Hong Kong and for a long time I've been saying it could become the start-up hub of Asia. But this will not happen if Singapore passes crowdfunding legislation and Hong Kong doesn't."

But unless more people get interested in supporting start-ups there is a real danger that start-ups will move away from Hong Kong. While it is relatively easy, says Giancotti, for companies to find initial capital of around US$250,000 to get started and underway, it is very difficult to raise follow-on capital here, which is typically between US$1-US$5 million. "What usually happens if they are any good is that they end up going to Silicon Valley." The website 9gag.com for example, was a Hong Kong start-up which was later financed by US investors.

One other measure that he believes would boost start-up funding in Hong Kong is tax deductions for investors. This was something the British government introduced in 2012 with some success. Investors in start-ups get upfront tax relief of 50 per cent and profits up to a certain level are also tax-free. The British scheme is raising an average of about £1.3 million (HK$16.9 million) for 19 firms a week. Offering tax breaks would be a radical departure for the Hong Kong government, which has eschewed them in the past. But Giancotti reckons that if they were introduced, "Hong Kong would rapidly become the biggest start-up hub in the world after Silicon Valley".

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