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Access to funding is holding Hong Kong back as a start-up hub as Singapore takes the lead

This despite the HK authorities launching a US$255m fund last September to encourage investment in local innovation and technology start-ups

PUBLISHED : Thursday, 09 August, 2018, 5:19pm
UPDATED : Thursday, 09 August, 2018, 10:24pm

Singapore holds the upper hand on Hong Kong as a place to build a business, with access to funding remaining a challenge in the latter, despite a rising number of venture capital (VC) firms targeting Asia as a whole.

A lack of affordable talent is also holding Hong Kong back, even with its lack of government red tape compared with some rival markets, its proximity to China, and rapidly improving societal attitudes towards entrepreneurs, according to start-ups and advisers.

The Hong Kong authorities launched a HK$2 billion (US$255 million) fund last September to encourage investment in local innovation and technology start-ups, particularly digital, and in the 2018 budget, Chief Executive Carrie Lam allocated HK$200 million more to Cyberport, the government-owned business park, known as a creative digital community, in the east of Hong Kong Island within easy reach of the main business districts.

Tommaso Tamburnotti, however, who co-founded Easyship in Hong Kong in 2014, an online platform that provides cross-border logistics solutions to e-commerce companies, said “there is a lot of money [in Hong Kong], but it depends what you are looking for”, adding “Singapore is much better” for middle-stage funding, with more VCs.

Hong Kong has 70 VC firms, while Singapore has 86, according to data and intelligence company Preqin.

Together, it said, the two cities have led venture capitalist numbers to grow in Asia year-on-year since 2012, boosting total deal value from US$7.9 billion in 2013 to US$84 billion in 2017.

While the two had a similar number of VC-backed deals between 2007 and 2017, at 1,829 and 1,869 respectively, Hong Kong scored better when it comes to value.

In 2016, investors based there generated the highest annual deal value yet – US$24 billion compared with USS$9.3 billion in Singapore.

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Much of that Hong Kong cash was ploughed into early-stage investments, with seed funding being the most dominant type over the past decade, according to data by Oddup, a Hong Kong start-up research platform.

Deal numbers may have dropped, it said, from 85 in 2015 to 44 in 2016 and just 17 in 2017, but their value still represented 84 per cent of all VC funding in the city last year.

Average series-A and -B funding – more middle-stage investments by traditional VC firms – rose from US$2.66 million in 2015 in Hong Kong, to US$12.1 million in 2017. But there were no series-C deals last year, after four in 2016.

While Hong Kong investors begin to focus on larger funding rounds, however, they are still only targeting certain industries, and focusing more on businesses outside Asia.

Enterprise and finance companies, for instance, accounted for almost 40 per cent of total start-up funding in Hong Kong, Oddup found, and last year only 14 companies divvied up 92 per cent of all fresh funding raised in the city.

There are only a few VCs in Hong Kong, and they specialise in certain areas
Florian Simmendinger, CEO of Soundbrenner, which develops technical hardware for musicians

“There are only a few VCs in Hong Kong, and they specialise in certain areas,” said Florian Simmendinger, CEO of Soundbrenner, which develops technical hardware for musicians, “such as financial tech”.

“If you do not fall into one of those categories you can try one of the all-purpose VCs – but there are very few of those.”

George Harrap, CEO and co-founder of Spark, formally Bitspeak, the world’s first blockchain remittance platform, said start-up investors here “have not really been exposed as much to venture capital as portfolio investment”.

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“There isn’t the willingness to understand a new business. Often as a start-up you are doing something weird or disruptive and that is certainly difficult for traditional investors to grasp,” he added.

“It is not as easy as in Singapore to start a business, because there is a lot of money being offered there by the government,” added Harrap, who set up Bitspark in 2014.

“If start-ups survive in Hong Kong, they have a good chance of surviving anywhere.”

Some suggest a lot of the investment being generated in Hong Kong is flowing out of the city, with Preqin estimating a third of deal activity involving Hong Kong-based investors since 2007 has been for companies based outside Asia, compared to a quarter involving Singaporean investors.

Because of the lack of available funding in Hong Kong, a recent survey of 100 entrepreneurs by KPMG revealed just 23 per cent used VCs as their primary source of start-up capital.

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The majority, 82 per cent, used personal savings while 54 per cent turned to family, and others said they looked abroad, in the US, mainland China, or Singapore.

“Many look outside Hong Kong for funding. The easiest in Asia is Singapore or China,” said Simmendinger, who raised funds in Taiwan.

Hong Kong has, however, started to take steps to boost government-led initiatives, which 43 per cent of the KPMG study respondents said they had used.

“For example in Cyberport you can apply for foundation programmes at the earliest stage of an idea and they offer funds to help you kick-start,” said Abby Zhang, co-founder of the four-year old online designer dress rental company, Yeechoo.

She used personal money to launch before applying to the Cyberport Macro Fund.

Jeffrey Liu and Rob Pachter chose Singapore over Hong Kong, however, to set up GuavaPass in 2015, a fitness class subscription service, as “the Singapore government was very apt in setting up accelerators and incubators for VCs firms to set up”, said Liu.

But, he added: “I have heard of there now being more capital in Hong Kong as the government is trying to create the same sort of eco-system as in Singapore.”