Hong Kong Is Potentially The Next Tech Hotbed

Hong Kong Is Potentially The Next Tech Hotbed
Comments Off, 12/08/2014, by , in Local Startup News

Current support for local tech startups is vibrant. Hong Kong was named by Forbes magazine last year as one of the top tech capitals to watch, and multiple initiatives from both public and private sectors have also emerged to support local tech startups.

The latest one is OGCIO’s iStartup portal. Invest Hong Kong also entered its second year of the StartmeupHK Venture Program to support local startups and encourage overseas tech ventures to set up in Hong Kong.

In the private sector, we see collaborative workspaces like CoCoon, The Hive and Dim Sum Labs. They provide not only comfortable and convenient office spaces, but some are also equipped with 3D printers, providing tax strategy classes and offering investors networking opportunities.

The number of startups has also increased. Cyberport said it has admitted more than 200 startups within its fiscal year of 2013/14. Allen Yeung, vice president of Hong Kong Science and Technology Parks, said it currently hosts 145 tech ventures, as compared to 70 five years ago.

On the funding side, more small-sized funds are available. Cyberport runs a micro fund program, and HKSTP organizes the Hong Kong Business Angel Network (HKBAN) to develop angel investment locally.

HKBAN currently has 85 angel investors, ranging from business professionals, corporate investors, and successful entrepreneurs. The network has facilitated 22 deals with a total investment of HK$111 million ($14.3 million).

Global recognition reaches local talent

Global awards are also extending their reach to Hong Kong, and “2014 Talent Unleashed” is among them. The award began in 2012 and was extended to Hong Kong this year. With a renowned judging panel that includes Sir Richard Branson and Apple co-founder Steve Wozniak, the program aims to recognize exceptional technology talent in Asia Pacific.

Winners of the award will visit the Branson Centre for Entrepreneurship in South Africa for a five-day workshop. Among the five winners, chosen from 600 entries, is Hong Kong-based Paul Lee, managing director of Ace Hearing, a company that incorporate hearing enhancement technology into mobile devices.

“Paul and the team have combined the application of technology and the needs of the community to change the way that people will live their lives and this is the spirit of the Talent Unleashed Awards — to make a difference and use technology to change the world,” said Richard Earl, MD of Talent International, organizer of the program.

“Hong Kong has a very strong technology market with a diverse range of opportunities for skilled technology professionals,” said Neil Bullock, executive GM of Talent International Hong Kong. “It also offers many aspiring entrepreneurs.”

But let’s not forget the irrational exuberance of the dotcom era, when internet ventures emerged, VC funds grew, and IPO prices skyrocketed. But when that bubble burst, it was equally dramatic in the other direction.

What’s different this time? How do we know this is not another trend, but a sustainable development?

Passion trumps quick cash

One major difference now is that “there is a lot more true passion,” said Yat Siu, CEO of Outblaze. “The majority [of the internet ventures in the early 2000s] were financially driven, which is why 99% vanished.”

Siu — also a judge of the Talent Unleashed Award — said: “when startups go through tough times, which they always will, it’s true passion that allows them to make it through.” Since many internet startups were more eager to make quick money than to produce a good product and to run a real business, when the opportunity to exit faded they were not motivated to continue.

“Those that survived struggled — in our case, we had to do whatever it took to survive,” said Siu, who founded Outblaze in 1998 to develop a cloud-based e-mail management services. The company thrived and sold its email business to IBM in 2009. Since then, Outblaze has transformed into a digital media products and services company to develop mobile and social media apps.

Siu said another reason many local dotcom-era ventures failed was due to Hong Kong’s short-sighted business climate. Entrepreneurs did not have enough time to build a track record. “For most cases the cycle started in 1999 and ended in 2000,” said Siu, “making it impossible [for a startup] to generate sustainable wealth.”

In the US, many startups had three to four years to run a business, raise capital, and survive. “They were able to reinvest in their businesses and survive the tough times,” said Siu.

The BAT effect

Another major difference is the success of Baidu, Alibaba and Tencent — collectively known as “BAT.”

The rise of these massive internet companies add fuel to the vibrant VC market in China that extends to Hong Kong and across Asia, according to Tommy Yip, partner and head of North Asia of Hong Kong-based Emerald Hill Capital Partners, a venture capital (VC) fund of funds (FOF).

Yip said BAT generated many outstanding exit opportunities for the early China-based VC funds. With a stronger and proven track record, these venture capitalists are able to raise more capital to continue its investment cycle. BAT also helped develop many quality tech ventures, as they spun off high potential entities like Alibaba’s cloud computing division Aliyun, and Baidu’s location-based service business. The BAT has also developed a large pool of tech talents and business executives that are able to launch their own startups.

Capital dead zone

Through developing more high-performance VC funds, creating high potential spinoffs and supplying a pool of experienced tech talent, BAT has created a strong tech-entrepreneur ecosystem in China, with an impact that extends across the region.

Despite these positive signs, one common issue among different players within the local ecosystem is the lack of Series-A funding.

“Raising money at any level is not easy, but there’s a stage we call the ‘dead zone’,” said Chris Roling, managing partner, Sailing Capital. “It’s between $2m to $8-10m and there are few players in this space.”

Singapore-based Roling was a COO of EMI Music and CFO with Kellogg before becoming a venture capitalist. He said very few players in the space are investing in this area.

“It’s an issue within the capital chain,” said Emerald Hill’s Yip, which focuses on investing in VC funds in Asia.

He said VCs must also raise capital through different investors. If their sources of capital like the FOFs are hesitated to invest in VC funds that focus on Hong Kong-based tech ventures, VCs would have limited capital to make such investment.

Yip said that Hong Kong’s high salaries and property prices make it difficult for entrepreneurs to operate a lean startup model.

Lean operations

“Many failures during the dotcom era were results of their ridiculously high burn rate,” he said. “Having learned those lessons, startups are now using lean operation models, and Hong Kong is a difficult place to put that into practice.”

Siu also agreed that the Series-A funding crunch as a major blockade for local startups, but attributed the cause to a lack of attractive deals for investors. Unlike angel investors, who look for investing in the potential of an individual or team, Series-A investors are more return-driven.

“You don’t have enough professionals to focus on Series-A investment, because you don’t have enough potential deals,” he said. “Having a Hong Kong-focused tech investment is not a strong theme.”

With a lot of attractive deals in China, Siu said local startups struggle with that distraction. He suggested that tech startups look beyond Hong Kong investors for funding, as well as to widen their business scope to include the region.

From service-based to IP-based

Instead of developing a product and IP-based company, many local tech startups remain services-based companies, which limit the scale of growth and opportunity to pursue an IPO.

“It could be a cash cow, but not a business to generate 300% growth. IPO stories need to show not only growth, but scale,” said Siu.

Entrepreneurs that are able to pursue an exit-strategy through M&A can make further investment in IP-based products, which have a higher value. Siu, who became an angel investor after selling Outblaze’s email business, said more entrepreneurs will follow similar footsteps.

He said it is part of the ecosystem evolution. Through the early and smaller size success from service-based tech ventures, the Hong Kong ecosystem is able to grow and move up the value chain to nurture more high value IP-based tech venture.

“IP-based development is an investment over time, it doesn’t make money [in a short time],” said Siu. “But Hong Kong’s ventures are definitely moving in that direction.”

This article originally appeared CFO World.

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