Can Hong Kong start-ups change the city’s fortunes?
Hong Kong start-ups are watching to to see if Leung Chun-ying’s government delivers on measures to support the burgeoning sector
A solid grey door with a simple black sign along a drab corridor in a Sheung Wan office building is the unassuming face of one of Hong Kong’s fastest-growing start-ups.
WeLab co-founder and chief executive officer Simon Loong, a former banker, started the company in 2013 with the vision to democratise finance by bringing small loans directly to customers through a simple online application process.
WeLab now boasts 2.5 million customers in Hong Kong and the mainland, a loan volume of 9 billion yuan (HK$10.7 billion) and last month announced it had raised US$160 million in its latest funding round.
The company is among a growing number of financial technology, or fintech, start-ups sprouting up in Hong Kong as the city’s bankers strike out alone.
The Hong Kong start-up scene has expanded rapidly in the past couple of years and was last year ranked as the fifth-fastest growing start-up ecosystem in the world. A 2015 survey by InvestHK reported a 46 per cent growth in the total number of start-ups at 1,558 compared with 1,065 in 2014.
Government support for start-ups has also grown as entrepreneurship and technology-related start-ups are seen as a way to diversify the economy, with fintech and the Internet of Things being put forward as potential strengths for Hong Kong.
The sector is looking to next week’s budget for the government to deliver on measures outlined by Chief Executive Leung Chun-ying in his January policy address.
He promised a HK$2 billion Innovation and Technology Venture Fund, which will invest in local start-ups by partly matching private venture capital funding, and a HK$200 million Cyberport Macro Fund to support investment in information and communication technology start-ups and increase the quota for Cyberport’s incubation schemes. The Innovation and Technology Commission said IT start-ups, particularly in the growth stage, would be targets for the matching fund.
It will follow examples from Singapore, Israel and Britain with the government providing HK$1 in funding for every HK$2 from the private sector. Venture capital firms will be responsible for selecting companies, and conducting due diligence.
The fund was expected to draw more international investors to make deals in the city as the many venture capitalists based here generally focused on the Chinese market, according to Denis Tse, founder and managing principal of Asia-IO Advisors.
Total venture capital investment in Hong Kong last year reached US$324 million, up from US$139 million in 2014, according to the Hong Kong Venture Capital and Private Equity Association. However, this figure is skewed by three investments or more than US$50 million in 2015.
Rachel Chan, founder and chief catalyst at consultancy InnoFoco, last month co-authored a report on the Hong Kong start-up ecosystem for Compass, which recommended creating market demand for the innovative ideas built by entrepreneurs.
Chan welcomed the latest government initiatives, but said she wanted to see it provide more than just funding, recommending the public and private sectors work with start-ups to promote innovation through partnerships, contracts and competitions.
“Even start-ups themselves do not believe that kind of funding support on its own can be the
only channel to encourage and stimulate the growth of start-ups,” Chan said. “A lot of them really believe in a market-driven approach with a government or private body to stimulate the growth of innovations.”
The former government employee said research was needed to find where the funding gap lay for the city’s start-ups as some claim there was too little seed stage funding, while others said the issue lay at the later stages.
Hong Kong-based start-ups rating firm Oddup claims the funding gap lies at the stage growing companies are trying to raise between US$5 and US$20 million, and that if implemented correctly, the government matching fund could help relieve this issue.
Oddup chief executive officer James Giancotti said that for maximum impact, the government must select a pool of more than 50 partner venture capital firms to identify and invest in the start-ups. A larger number of venture capitalists would also prevent the possibility of bottlenecks delaying money getting to good ideas.
Even with the best efforts to ensure careful investments, the government should view the money it handed out through the scheme as grants, he said.
“When they back the successful venture capitalists, then they effectively are putting the trust in their hands,” he said. “Based on numbers, 92 per cent of companies fail, then they should expect a 92 per cent chance of not getting their money back.”
To limit the risk, Giancotti suggested the fund focus on companies with a proven audience and growth potential that had been in business for one to two years.
Describing the Hong Kong start-up scene as a “tall baby”, he predicted it would take at least 10 to 15 years before the start-up ecosystem was fully established and recognised by the public.
He said one way to further support start-ups in the budget would be to provide tax incentives for private investors. However, he said that while similar schemes had proven successful in Britain and more recently Australia, it might still be a little early for Hong Kong to benefit from such a move.
“The money’s coming out one way or it’s coming out the other, you give the tax incentives for private enterprise or give money out of the budget to do these schemes … it’s just the process would be much faster, more rapid if you had private investors managing this rather than a scheme,” he said.
He also wanted to see the government develop long-term plans to support start-ups as they became more established.
Loong has watched the interest in start-ups grow since he launched WeLab three years ago into a city with no commercial accelerator programmes. In the past 12 months he has met more and more experienced bankers interested in joining or funding fintech start-ups.
“We just need to now find a way to promote that and foster that environment ... for people to know there’s a lot of viable fintech models out there, there’s government support, there’s private sector support,” he said.
Loong supports the concept of the investment matching fund. “It will encourage more investors willing to invest in Hong Kong start-ups and allow Hong Kong start-ups to have additional capital so that they can do more innovative things and have a longer runway,” Loong said.
Loong said he would like to hear more details about the funding matching scheme in the budget as well as the findings from the steering group announced in last year’s budget to study the city’s potential as a fintech hub.
“From my perspective, because the last budget was so successful in increasing the public awareness of fintech, I obviously want to see more updates or more fintech-related support in this coming budget,” Loong said.
He said that as fintech companies were dependent on a regulatory system that allowed them to operate, the findings of the steering group were particularly important. But while he saw the need for more capital in the city to back strong ideas, Loong said there was only so much support the government can or should provide and that strong teams and good business models would succeed on their own, as WeLab had shown.
Loong stressed it was important to encourage more young homegrown entrepreneurs to start their own businesses and said this was starting to happen with more university courses on entrepreneurship. Hong Kong locals now make up 50 per cent of start-up founders in the city, according to an InvestHK survey.
Loong said it would take time for the traditional Hong Kong mindset of pursuing a career in a large bank to turn in favour of joining a start-up, but that local success stories would help speed this along.
After expanding WeLab into the mainland within one year of its launch, Loong highlighted the need for start-ups to begin thinking beyond the limited Hong Kong market. “Something we should talk about is that in 12 to 18 months’ time, is now you have a bunch of start-ups in Hong Kong,” Loong said. “For the successful ones … the next step we need to think about is how to support Hong Kong start-ups’ overseas expansion.”