Hong Kong needs to throw more caution to the wind when it comes to backing start-ups
The biggest problem is an acute shortage of angel investors and seed money available, even before any venture capital money becomes involved – we need to take unconventional risks to succeed
The Hong Kong government is trying to transform the economy from its traditional to a new innovative economy, but doesn't realise that creative failure rather than cautious success will lead the way.
Last week, Hong Kong launched its HK$2 billion (US$256 million) Innovation and Technology Venture Fund (IVTF) to encourage investment in local innovation and technology start-ups in an effort to improve economic activity.
The government is inviting venture capital funds to apply to become co-investment partners of the new fund, said Nicholas Yang Wei-hsiung, the Secretary for Innovation and Technology. The government will only make investments alongside VC funds.
The government is risk averse even though it needs to take more risks to build Hong Kong’s new economy. It does not want to directly and autonomously choose which investments to make because historically, civil servants do not want to take responsibility for losses.
Yet successful venture-capital investing requires the ability to accept and learn from losses. So the IVTF is depending on venture capitalists to do the due diligence and cover the bureaucrats’ collective reputations.
Matching funds are the easy way out for the government because this assumes that venture capitalists in Hong Kong are actually effectively serving the unique needs and problems of the city’s start-up ecosystem. Instead, the government needs to take on the most difficult part of kick-starting a new economy – tech or otherwise.
The biggest problem in funding start-ups in Hong Kong is that there is an acute shortage of angel investors and seed money available before venture money.
VCs prefer to invest minimum amounts of about US$3 million and more. Then, there is so much private equity available globally that private companies like Uber can be valued at US$60 billion and still be funded by private money. VC has grown so big that you can’t tell the difference from private equity.
And that tends to crowd out investment at the smaller, seed levels. As high net worth investors would prefer to make bigger investments in bigger, non-listed companies.
But, the problem in Hong Kong’s funding channel is that many start-ups are looking for less than a million US dollars, more like US$500,000 to roll out their product after a few years of development, or angel money of US$100,000 to begin a business.
Start-ups can attract investments of US$3 million and up if they demonstrate revenue or profits, or have completed a desirable technology. But Hong Kong’s relatively new world of new-economy start-ups require more support at an earlier stage. And only the government has the resources.
Hong Kong entrepreneurs have less experience in developing start-ups and even fewer have the initial capital. Even the GoGoVan founders had to desperately scrape together HK$20,000 each seven years ago. Lack of capital and experience are major problems in Hong Kong.
Incubators in Hong Kong tend to rent or give out shared office space; some may render business advice, but few are capable of actually funding start-ups.
Start-ups and their founders also tend to require lots of attention from their investors. Business plans rarely go according to plan. And turnaround strategies rarely turn around, since so much guidance and intervention is required.
The start-up game requires a tolerance of low-level failure. Using a VC expression, this means it is important to “fail early and fail often".
The success rate is low for start-ups. And most people should be working for someone as employees rather than running their own business. It takes tremendous self-confidence and determination to launch a business. Historically, it has been much easier to flip property.
Local Hong Kong investors tend to ask start-ups the wrong questions. They ask, “How does it make money?” The right question is “ What problem does this solve?” There’s a big difference in mentality and mission.
It is difficult to raise VC money in Hong Kong. Many of them are interested in businesses that can scale outside Hong Kong, into mainland China and internationally. They are looking to turn a 10-million dollar company into a billion-dollar company in a few years. Mainland China is the only place in Asia where this can happen quickly.
I detect a natural prejudice against Hong Kong Chinese-founded start-ups. Most VCs think Hong Kong Chinese cannot operate successfully in China and are treated like foreigners in China as they need to take on a mainland joint venture partner.
This is especially risky in terms of divergent management attitudes or outright intellectual property theft or misappropriation.
The entire government and local financial community needs to take on more risk if it wants to transform the Hong Kong economy away from property development and traditional industries.
Hong Kong’s financial industry professionals are still divided over how they can remake the city’s stock exchange. Many of the conservative, traditional stockbrokers think the proposed start-up board is too risky in terms of regulation.
But we will need to take unconventional risks to succeed.