I wrote a piece a while ago talking about the start-up environment in Taiwan. So when I went to Hong Kong recently, I naturally wanted to find out more about the scene there. I know Gang has already talked about the HK scene but I want to focus on generating what they need – investors. The main reason there are few investors in Hong Kong is because the market is too small with only 7 million people – much smaller than Taiwan with 23 million so if investors think Taiwan is too small, Hong Kong must not be worth considering!

Let’s investigate underlying reasons for the lack of start-ups and investors.

Hong Kong is focused on traditional industries

I think a key reason for the low investment appetite for start-ups is that Hong Kong is focused on traditional markets like real estate and finance, so there is less focus on risky start-ups. If you ever travel to Hong Kong, it has the most amazing and connected public transport system. You can go anywhere very easily and quickly but this is a large function of being a small place. With its limited land, demand for it has always been high and therefore property prices are high making it a lucrative market. My friend told me that even the 11th richest person in the world Li Ka-shing’s son, Richard Li, was freely given land to develop Cyberport, aimed at being a high technology development. So there is obviously big money in real-estate. Hong Kong has also long been dubbed the financial centre of Asia and its gateway for Western business. When I cross between Kowloon and Central the most dominant buildings are the IFC Towers – International Financial Centre. All the major investment banks have a presence in Hong Kong.

Talent is diverted away

Many talented graduates flock to traditional industries like real estate, finance or consulting with more prestige and money, meaning less talent for bold start-ups. “This leads to a chicken and egg situation. Top technical talent is less willing to move to Hong Kong when there is less opportunity, and less opportunity is created because the resource pool is less.” Says Hoi Wan of Stepcase. Also many young people are influenced by their family they still live with; “Most families just don’t understand why someone would want to take the risk of starting their own company.” Says Jon Burford of BootHK. Moreover since Hong Kong is a relatively expensive city to live and income tax is very low at a maximum of 16.5% it makes sense to earn as much as you can.

With a poor investment supply for start-ups, it starves them of oxygen to exist and ultimately discourages many from trying.

If Hong Kong can develop a healthy entrepreneurial eco-system where start-ups and investors exist, the start-up industry will grow naturally. So the big difficult question is HOW?

Improve Government support

Government support is relatively low. Although I met some start-ups in a government sponsored Science Park near Sha Tin which houses many start-ups, the general feeling was that the government is not doing enough. Although they give grants and subsidized office rent, they ask for unrealistic things from a start-up like 5 year financial projections. Even most traditional businesses can’t make accurate projections so how can a start-up? Most give fuzzy BS projections. The government should understand that creative and never seen before internet businesses are risky but also rewarding for society and the economy. Over yum cha (I love yum cha), a start-up friend frustratingly said people from the government  called him to just find out more about the start-up industry to ask questions, but they never followed up or took action to really help. “Government investment models are very bureaucratic; it’s like peeling multiple layers off an onion to get to the part that matters. Many different people involved in the process and it’s not conducive to the speed/pivoting/flexibility that a start-up needs. It appears to be more ‘research’ orientated and on the ‘long-haul’ of technology investment which is more focused towards research orientated technologies. This is more suitable for energy, semi-conductor and other such long-haul businesses rather than fast paced consumer focused start-ups.” Says Hoi Wan.

That’s why I think a government sponsored but segregated investment body should be formed – so it has the money and speed to move quicker.  Initiatives are being made by the Government though. I stumbled upon this event which was held by the HK Trade Development Council to ‘address the society’s needs in finding possible ways to develop entrepreneurship.’

Educate the people in creative thinking

A start-up friend in Hong Kong believes that education is the key. Not just education for students but everyone including investors, the public and government. They should learn that start-ups and entrepreneurship is a core part of building an innovative and competitive economy; not just traditional markets like finance or real estate which bubbles can pop. At a grass-roots level, students should be encouraged to test and work on their creative ideas as crazy as they seem. In comparison, although often criticized for being too traditional, Singapore is making good efforts to spur innovative start-ups with events like Echelon 2011.  In Hong Kong movements by StartUps HK to arrange recruitment events at universities are trying to increase awareness of opportunities. At a middle level, investors both private and institutional should start to explore start-ups and learn that finance and real-estate is not the only way to make money. Investing in start-ups that are trying to make things better has positive impacts on society in general. At a government level, they should be more proactive in supporting their youth and talent.

Build a platform for start-ups and investors to connect

In many ways, this is the goal of TechNode. Although the state of Texas is already bigger than the size of Hong Kong, if it had an event like SXSW where new technology start-ups could showcase their products to people and investors, awareness and exposure would help accelerate relationships. But of course this faces the chicken and egg problem of, if Hong Kong doesn’t have enough products to showcase, can there even be an event? The first step is to grown an egg. Other platforms like media such as this, is aimed to giving start-ups exposure and a voice to be heard. Hong Kong doesn’t have a prominent media platform. But initiatives such as BootHK, are trying to light the fire at a grass roots level which is encouraging.

When there is a healthy eco-system in Hong Kong and start-ups are competitive with one another and incumbent large companies, through natural selection the quality will improve and even be exported overseas. Hoi believes that start-ups need constructive criticism rather than just support to boost quality. “As more start-ups become recognised, the quality bar will go up, and feedback should be of higher value helping them to reach the next stage, attract attention of more investors who see HK as a feasible investment market for tech. This will lead to referral, the social proof will attract more investors and more attention will increase awareness amongst the general public and the career opportunities within this start-up ecosystem.” Says Hoi.  However Jon argues this is beginning to happen at the BootHK Startup Monday meet-ups where one guy was shot down because he was not prepared in so many ways. This is a healthy constructive feedback loop that is needed.

To be fair, there are good examples of where start-ups have been given investment support. In 2010, 6 Waves rose US$17.5M venture funding and this year David Zhu of Enterproid has received VC backing.  Also on the success story side start-ups like Anobii, a book discovery community had a big exit and Editgrid, an online spreadsheet provider was acquired by Apple. Let’s hope this activity accelerates to give worthy HK start-ups a chance.