Hong Kong’s unique business opportunities are attracting more start-ups than ever. In the first half of 2014, Invest Hong Kong assisted a record number of companies to set up or expand in Hong Kong, with new ventures accounting for 17.5 per cent, marking the third year of steady growth.
As the city’s start-up ecosystem matures, so too do the fund-raising channels. Data from the Hong Kong Venture Capital and Private Equity Association (HKVCA) shows that record volumes of private investment are being channelled into promising Hong Kong enterprises, spurred by recent successes.
HKVCA’s half-year report shows that 2014 is expected to significantly exceed previous years in terms of the number of consummated venture deals in Hong Kong. Already, private-equity investment in Hong Kong has reached US$5.86 billion (January to June 2014), whereas deal value in the past three years has hovered between US$1.2 billion and US$1.8 billion annually. The statistics exclude incubation funding by government-related entities.
Sophisticated Investor Base
Conrad Tsang, Chairman of the HKVCA, said Hong Kong has a growing pool of sophisticated investors, “and they have deep pockets.” These professional investors, together with professional services firms, including lawyers, accountants, asset appraisal and due diligence providers, form a community of considerable business influence, Mr Tsang said.
Especially since the global financial crisis, he said that Hong Kong has used its geographical advantage to gain ground as a global centre for private equity and venture capital.
“Half of the world’s population can be covered within five hours’ air travel of Hong Kong, which of course, is also the gateway to China; and Asia is a region of vast investment opportunities. That in itself is very powerful, together with the things we know: low tax, rule of law and free flow of information.”
Hong Kong’s maturing fund-raising environment began gaining traction about 10 years ago, particularly for private-equity venture capital, when the industry in general started to grow after emerging from the Internet bubble.
“Asset owners wanted to increase their exposure in Asia, and Hong Kong is a natural location for them to park their money and deploy [funds] to the rest of the region,” Mr Tsang said. “Particularly in the past five years, there’s been a lot of money we didn’t see before in Hong Kong, from such places as the Middle East, Russia, North America and Europe.”
In the past, he added, Hong Kong companies had to go offshore to fund-raise, but nowadays fund houses come to Asia often, with some setting up offices in Hong Kong, making it much easier to access capital. This makes Hong Kong seem “very favourable” compared to other cities in the region, even globally, says Mr Tsang.
China and Beyond
Hong Kong is the preferred fund-raising platform for Chinese mainland companies going global, but China is “only half the story,” Mr Tsang said. “Other than Chinese companies, I see a lot of ASEAN countries leveraging Hong Kong’s platform to raise money, such as Myanmar, Vietnam, Cambodia, Laos, Indonesia and Malaysia, as well as Mongolia, Kazakhstan, Japan, and Russia.” As to where VC funds are directed, Mr Tsang said that technology, media and telecommunications (TMT), healthcare, consumer products and services, financial services, and environmental protection “are quite favourable sectors these days.”
Hong Kong has various avenues for earlier stage companies domiciled in Hong Kong to approach for funding, Mr Tsang added, citing HKVCA gatherings and conferences, “where a lot of people are looking for projects,” as well as the Government’s Applied Research Fund, InvestHK and Cyberport. “[There are] a lot of opportunities there,” he said.
Highly Profitable
One new Hong Kong VC company launched just a few months ago with US$10 million in seed funding on offer. Since the May 2014 debut of SXE Ventures, nine companies have been invested, including US$1million into 500 Startups Southeast Asia Fund, with more in the pipeline.
Danny Yeung, one of SXE Ventures’ three founding partners, is himself a self-made entrepreneur who moved to Hong Kong from the United States in 2010 to launch the latest in a string of ventures, uBuyiBuy, funded by personal capital and angel investment. After just six months of operations, the start-up was acquired by New York-listed e-commerce giant Groupon. Prior to leaving the company this year, Mr Yeung, as CEO of Groupon Hong Kong and Taiwan, had scaled the business to a size of more than US$130 million annually in sales, overseeing a staff of 350, while being highly profitable.
“I set foot here in March 2010, had a website (uBuyiBuy) up in June 2010, and within five months of operations, we were already doing US$800,000 in monthly deals. It was crazy, traction-wise, [and shows how] Hong Kong consumers, when they see good value and a good product, start talking and using it.”
All Eyes on Hong Kong
Hong Kong’s fund-raising scene, he said, has vastly improved in recent years. “A lot of people (investors) are looking at Hong Kong start-ups.”
He expects that, similar to the US, as entrepreneurs exit successful companies, they will want to re-invest in young entrepreneurs. Inspiring new graduates to move away from traditional career paths, such as banking, brings “so many benefits,” including job creation, and putting Hong Kong on the innovation map. “There is a risk [in entrepreneurship], but the rewards are there to take up the risk, and the business infrastructure in Hong Kong is there to support them,” he said.
SXE Ventures invests anywhere from US$75,000 to US$500,000 per investment, offering mentorship and funding. Among the company’s nine seed projects is a Hong Kong biotech company using Next-generation sequencing to offer non-invasive pre-natal DNA testing for such genetic conditions as Down’s syndrome and other common chromosomal abnormalities. Mr Yeung called the project a “game changer” as it can test for 99.9 per cent accuracy by just taking the mother’s blood sample, alleviating the risky procedure of inserting a needle into the fetus.
Mr Yeung is particularly bullish about the e-commerce market in Hong Kong, pointing to Groupon’s revenue, and two e-commerce start-ups SXE Ventures is backing. One is mydress.com, a women’s fashion portal which, in the first 12 months of operation, is doing more than US$6 million in annual sales; another is shoplineapp.com, a platform that makes it easier for small business and retailers to open an online store without the need to code, which signed up over 4,000 merchants in a matter of months. “There’s definitely potential here – people just need to see the numbers to believe it,” Mr Yeung said.
Bright Future
Mr Yeung is upbeat about Hong Kong’s start-up investment scene. “Fund-raising is improving and will continue to improve over the next three to five years,” he said. “Once we have more exits of Hong Kong companies, it’s like a funnel.”
His advice to start-ups seeking funding is to be realistic with one’s valuation and goals. “You can’t compare to valuations in the US; it’s not apples to apples comparison,” said Mr Yeung. “But if you have a great product, with great start-up founders, the funding is there – not a problem.”