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.

Jason Lim

Jason is an Australian born Chinese living in Beijing, specializing in entrepreneurship, start-ups and the investment eco-system in China, especially in the tech and social area.

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15 Comments

  1. Actually, the government does have an microfund incubation program for startups in digital media and technology called the Incutrain Centre. Alivenotdead is one of the current incubatees and they provide HKD$100K, a nearly free office at Cyberport in the Incutrain Centre facilities, lots of free or subsidized government services such as utilities, office internet, postage, legal and accounting services (subsidized), and a large subsidy for hiring HK tech graduates. The micro-investment isn’t a huge amount, but some of the other offerings including the sweet Cyberport office space are quite good.

    I believe they accept twelve companies a year.

    http://www.incutrain.hk

    1. Thanks for sharing Stephen! It looks like a great micro-fund – Good on them!

      I noticed Alivenotdead was based there and cool since that’s where I stayed in HK.

  2. I’m not overly convinced that the lack of startups in Hong Kong is due to its small population – in fact, the population of the Bay Area is roughly equivalent to that of Hong Kong.

    I guess also interestingly, one might expect there to be a decent amount of IT talent in Hong Kong, if you ever have a chance to wander around the hardware malls of Shamshuipo and Wanchai. But the reality is that, even if there is alot of IT talent, they don’t end up doing startups.

    What causes this seeming disconnect, are perhaps the following:

    – Negative attitude towards failure – it’s a black mark on your life history, not a lesson learnt
    – A general tendency towards conformity in Hong Kong – doing your own thing by definition is unique and anti-conformist
    – Weakness of the IT sector in comparison to finance, advisory and real estate (and hence the top minds go off to study finance or law rather than computer science)
    – Parental influence, and their general preference for their children to find a job rather than start on their own
    – Lack of (local) startup heroes that inspire the next generation
    – Relatively low appetite for risk

    I’m not convinced that government funding will necessarily help develop a startup sector – I believe it requires more of a mental shift in HK’s society; you aren’t going to make people creative just by waiving a blank cheque.

    1. Very good points Kevin. Another friend in HK very much believes the issues are more cultural.

  3. Jason,

    Great points.

    Growing up in the Bay Area and now living in Hong Kong, we decided to grow in Hong Kong because it is less saturated in terms of quality start ups.

    This allows up to get better press penetration and this leads to product feedback during the incubation space.

    Despite Campusfork.com focusing on Hong Kong due to the penetration of food photos, we understand on the business development side that we focus on the global market.

    Cheers,

    Rayfil Wong
    Founder
    http://www.Campusfork.com
    | hot or not for restaurant food photos |

    1. Hey Rayfil, thanks for your perspective.

      Do you find it easy or difficult to launch into the global market from Hong Kong in terms of resources and support?

  4. I have seen companies become big with hardly any investments. I have also seen well-funded companies go down the drain.

    20-30 years ago there were many “startups” in HK and today they are multinationals. People were forced to start their own companies to earn a living because life was tough and there were no job opportunities.

    Fast forward to today’s HK and life is easy. Get a government job and you are set for life. Or become a lawyer. Anything is easier than being an entrepreneur.

    An IT startup is no different than any other non-IT startup. If you have a passion for success, you will figure out ways to survive despite all the obstacles.

    1. Compare the current situation with 20-30 years ago is not so suitable. That’s a economy-fast-growing era. There was opportunity in every industry. Hong Kong economy nowadays is just focus on finance or real estate. It’s hard for IT startups.

      But I agree that life in HK now is much easier than before. “Anything is easier than being an entrepreneur.” 🙂

  5. Vivek Wadhwa has an interesting take on how you foster entrepreneurial spirit in a society: http://wadhwa.com/2010/11/27/554/

    The answer is, no, not money from the government. Quote, from Techcrunch (http://techcrunch.com/2011/03/30/startup-visa-d-o-a-and-startup-america-just-a-giant-press-release/):

    “these well-intentioned efforts to build Silicon Valley–style technology hubs are all based on the same flawed assumptions: that government planners can pick industries they want to develop and, by erecting buildings and providing money to entrepreneurs and university researchers, make innovation happen.

    There is not one example of a Government-sponsored tech cluster—anywhere in the world—that has worked. Yet our leaders talks about clusters as if they are the secret sauce for entrepreneurship.”

    His suggestions are, summarised:

    – Work toward removing the stigma associated with failure
    – Teach entrepreneurship, not just to university students, but also to experienced workers.
    – Reward university researchers and technology-transfer officers for the numbers of start-ups and jobs created by university research
    – Create formal and informal linkages between university researchers and entrepreneurs.

    It’s also interesting that UK is (belatedly, perhaps), trying to throw money to foster innovation and entrepreneurship (through StartUp Britain, http://www.smarta.com/blog/2011/3/david-cameron-launches-startup-britain). I hope for the UK that they succeed, but I think there are alot of parallels with how HK is trying to foster entrepreneurship, both of which might be missing the point.

  6. Nothing has changed since I started covering HK startups in 2006, same reasons then, same reasons now. The startup community has grown though and a few of the startups I covered then have exited or got funded, which is totally awesome.

    I think what needs to noted though is that those startups mentioned, aNobii, EditGrid, 6waves, those teams never focused on investments. They just continuously build and improve their product (traction) until they were noticed which led to their investments and exits from US based VCs and companies, UK for aNobii and not HK investors, although EditGrid did receive some funding from a HK government scheme (SERAP) and I believe local angel(s) early on.

  7. Actually, if you look at all the startups in Hong Kong, almost all of them are started by ex-pats or by Hong Kongers that grew up or were educated abroad.

    1. Not exactly Patrick 🙂 At least we (PandaForm) are grown up and study in Hong Kong… and as far as I remember Editgrid were started by a group of HKU graduate too.

      I’m doing a mini-programme in CUHK recently too, having some local students focus and build products.

      Ben

  8. It’s hard to find angel investors here. Don’t know how to start with. Even with the support of the government, there is no private investors for startups to collect enough fund. Just like a dead pool. Eventually an internet startup will do consulting service to sustain the business, which make us feel crazy. Imaging a startup creates a product and provide service to make money. Marketing product, Conducting sales activities at the same time. I wonder how a good quality startup can be found here.

    Take a look in the HK Science Park / Cyperport and you’ll know that. Support from the government with loads of paperwork. You’ll be desperate to handle the reports. If you read techcrunch everyday you’ll have a basic understanding of the US startup level. Only a few internet startups are working on track. HK Science Park / Cyperport definitely has a lot of work to catch up.

  9.  Hong Kong established a new business for a real estate investors. If it have a sufficient starters than it will be a very easy to develop business for that organization. You discuss the points in this article is really useful for us.  
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  10. Good article, some great comments too. I’m a Bay Area VC from NVP (invested in Lashou, AdChina, amongst others in China) who just relocated to Hong Kong full-time. We are ramping up our China investments; to be fully honest we are spending most of our time in mainland China but there is no reason why we wouldn’t consider quality HK-based technology startups as well. Feel free to reach out to me at bchiang (at) nvp.com whether you have a startup or would like to discuss the challenges fostering a startup culture; I can’t promise I’ll be able to meet everybody but I will respond to all emails and try my best to be helpful!

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