Analyses | Innovation and technology development | 2015-12-10

Start to Finish: Maintaining Startup Growth in Hong Kong



After years of languishing in relative obscurity, startups in Hong Kong are finally receiving some much-needed attention and support. In November, Chinese E-commerce giant Alibaba set up a HK $1 billion non-profit fund to assist budding Hong Kong entrepreneurs.[1] Participating businesses will receive seed money as well as Alibaba services, technical assistance, and training.[2] Alibaba also announced that it would begin providing six-to-12-month Alibaba internships for 200 Hong Kong students each year.

In the same month, the Massachusetts Institute of Technology (MIT) announced the launch of the MIT Innovation Node in Hong Kong.[3] The Node will be a collaborative space connecting MIT students, faculty and researchers with Hong Kong-based students and faculty, along with MIT alumni, entrepreneurs, and businesses across the Pearl River Delta (PRD) including manufacturers and distributors in Shenzhen.

These injections of funding and infrastructure have been welcomed by the HKSAR government, which finally succeeded in establishing the Innovation and Technology Bureau in November.[4] Indeed, the creation of the Bureau capped off what has been a banner year for innovation entrepreneurship in Hong Kong. The government organisation InvestHK conducted a survey in August which showed that 1,558 startups were registered in Hong Kong this year, a 46% increase in the number of firms from last year.[5] These startups employed 3,721 staff members, a rise of 56% from last year.

Hong Kong startups received US$33.7 million in funding last year

Of course, Hong Kong startups still lag behind regional competitors in attracting investment. Hong Kong tech startups received US $33.7 million in funding last year, as compared to $319.4 million for Singapore startups and $202.9 million for Shenzhen startups.[6] However, firms are beginning to leverage Hong Kong’s status as a financial hub to their advantage. This is particularly the case for firms using financial technology, or “fintech,” to provide alternatives to traditional banking offerings and ease payment processes. According to FintechHK, an online community of financial technology businesses, 74 new fintech ventures were set up in Hong Kong this year.[7] An example of a successful startup is WeLab, which launched Hong Kong’s first peer-to-peer lending business, Welend.hk.[8]

Given the fact that Hong Kong is in close proximity with Mainland China, with strong rule of law and intellectual property protection along with low tax rates, startups should be able to attract even more funding in the future.[9] Hong Kong also boasts six engineering schools, five of which are ranked in the global top 100, which suggests that startups have access to an abundance of local talent.[10] But is it advisable for the Government to support startup development? After all, over 90% of startups fail before acquiring any funding.[11] Yet startups that do succeed can bestow enormous advantages to the economy.

According to a report published this year by the Centre for Entrepreneurship at the Chinese University of Hong Kong (CUHK), startups offer many unique advantages as compared to other small businesses.[12] Regarding job creation, the CUHK report noted that local startups (96% of which have less than 20 employees) hire more employees per firm than the general population of Hong Kong businesses with less than 20 employees. In fact, if the Government supported the activities of 2,870 new startups a year to develop their competencies within relevant industries, CUHK estimates that these businesses could contribute 338,800 new jobs and 0.24% of local GDP in their first four years of operation.

Local graduates primarily seek jobs within established companies

There are, of course, many obstacles that will make it difficult for Hong Kong to overtake its Asian competitors in terms of startup growth. Chief among them is the high level of “risk aversion” in society. Since the HKSAR is now an affluent region, local graduates often seek out safe jobs within established sectors and companies, primarily in real estate or finance, and are wary of volatile ventures in new or unproven areas with high chances of failure. Potential entrepreneurs also face peer pressure from family and friends who favour more conservative employment options. Thus, would-be startup founders are dissuaded from founding new businesses, while existing startups find it difficult to compete with investment banks or large tech companies to recruit web developers or graduates with coding skills.

In order to continue the promising growth of the startup industry and overcome deterring factors related to the risk-averse culture and the high cost of living in Hong Kong,[13] it will be necessary to convince local talent to make long-term commitments to entrepreneurship and innovation. Research universities are ideally situated to lead this culture shift, since they have the capacity to train future entrepreneurs with the necessary technical and academic skills while also exposing them to workplace experience and cutting-edge technology.[14] However, while many institutions already offer short-term mentorship programmes, seminar series, startup competitions, and funding options, few schools encourage cross-fertilisation across various faculties in a way that promotes a long-term holistic understanding of startup ecology.

Students could benefit from greater interaction with tech companies and alumni networks, so that they can be more exposed to the benefits of pursuing careers in entrepreneurship. Also, more cooperation across the faculties, for instance by pairing up science students with MBA graduates or by instructing engineering students how to design mobile applications, could help teach Hongkongers the importance of an interdisciplinary approach. Professor Au Yuk-fai, from the Centre for Entrepreneurship at CUHK, believes that the curriculum for CUHK engineering students needs to be updated along these lines. Au states: “Cross-subject training is quite limited. Mainstream courses are designed to cater for big companies and organisations. However, entrepreneurs badly need cross-subject skills to fix issues.”[15]

The MIT Innovation Node is a model example of a collaboration between students, faculty, researchers, and alumni. Key to this objective is MIT’s intent to encourage cooperation with Shenzhen. Charles Sodini, faculty director of the MIT Hong Kong Innovation programme, noted that Hong Kong possesses world-class universities and the ability for startups to scale up due to its close proximity to Shenzhen, whose manufacturers can produce small quantities of prototype units at unparalleled speeds.[16] Thus, MIT students will be able to learn how to design and manufacture products for commercialisation.

50% of Mainland students leave Hong Kong after graduation

This scale-up capacity is unique to the PRD. It would be advisable therefore for the Government to promote more cooperation between students in Hong Kong and Mainland China. For instance, the HKSAR could encourage more companies in Shenzhen to facilitate internships for local students, similarly to Alibaba. Startups could also be linked up with Shenzhen manufacturers to test out their products. Finally, Mainland Chinese graduates should be incentivised to launch businesses in Hong Kong. At present 50% of Mainland students leave Hong Kong after graduation,[17] including Frank Wang, a Hong Kong graduate who founded the world’s largest drone marker DJI in Shenzhen.[18] Wang reportedly left due to a lack of government support and funding. Convincing graduates like Wang to stay, for instance by relaxing visa restrictions, connecting startups with local talent, or providing financial incentives, may prevent a second “DJI situation” from occurring.

Promoting a more entrepreneurial and risk-taking culture is difficult when entrepreneurs work in isolation. Thus it will be essential to continue promoting “co-working spaces” in Hong Kong, where entrepreneurs can share office space and free WiFi, foster a sense of community, receive mentorship by senior executives, and pool knowledge. The number of co-working spaces in Hong Kong has already increased from just one in 2009 to over 30 in 2014, with many being sponsored by prominent companies such as Swire Properties and AIA Group.[19] Additionally, it could be beneficial to develop communal facilities with advanced tools and materials specifically for invention and prototyping, also known as “makerspaces.” MIT plans on building a makerspace in its Innovation Node that will enable students to build prototypes that can later be produced in small quantities in Shenzhen.

Incubators and accelerators, which are cohort-based programmes that train and provide investment for small businesses over a period of time in exchange for equity, are also of critical importance. Not only do they connect investors with startups at an early stage, but they also teach entrepreneurs how to sell their company’s visions for success. The Bauhinia Foundation Research Centre has previously discussed the importance of incubators and accelerators in making Hong Kong a startup capital.[20] Fortunately, several accelerators focusing on fintech have been launched this year, supported by multinational companies such as the management firm Accenture, Chinese search engine Baidu, Singaporean bank DBS, and New York’s CitiBank.[21]

In the race to become the leading innovation hub of the Asia-Pacific region, Hong Kong has made significant progress. But it will take a significant cultural shift for the Hong Kong people to fully embrace entrepreneurship as a viable career option. Still, if this shift in mentality is achieved, it will pay enormous dividends in terms of job creation for young Hongkongers. In this regard, it may be advantageous for Hong Kong to work with Shenzhen to provide mutually beneficial exchanges of ideas and product development. By leveraging the unique strengths of Hong Kong as well as the greater PRD region, Hong Kong startups can continue growing and developing at a breakneck pace.

 

 

1 Yue Wang, Alibaba Launches Investment Funds for Hong Kong, Taiwan, Forbes Asia, November 19, 2015, http://www.forbes.com/sites/ywang/2015/11/19/alibaba-launches-130-million-hong-kong-investment-fund/ .
2 Jon Russell, Alibaba Puts nearly $450M into new funds for Hong Kong and Taiwanese SMBs, TechCrunch, November 19, 2015, http://techcrunch.com/2015/11/19/alibaba-launches-130m-fund-to-support-entrepreneurs-in-hong-kong/#.rpy4xk:dwp3 .
3 Wei Gu and Anjani Trivdei, MIT Picks Hong Kong for its first Innovation Center, Wall Street Journal, November 9, 2015, http://blogs.wsj.com/digits/2015/11/09/mit-picks-hong-kong-for-its-first-innovation-center/ .
4 Kenneth Lau, Top Tech university “node” clicks for CY, The Standard, November 11, 2015, http://www.thestandard.com.hk/news_detail.asp?we_cat=4&art_id=163082&sid=45548580&con_type=1&d_str=20151111&fc=4 .
5 Startup Ecosystem grows 46%, Business & Finance, News.gov.hk, http://www.news.gov.hk/en/categories/finance/html/2015/09/20150915_150357.shtml .
6 Newley Purnell and Lorraine Luk, Despite challenges, Hong Kong startups begin to take off, Wall Street Journal, May 18, 2015, http://blogs.wsj.com/digits/2015/05/18/despite-challenges-hong-kong-startups-begin-to-take-off/ .
7 Bien Perez, Search giant Baidu launches fintech incubator in Hong Kong with Standard Chartered, TusPark Global to open gateway to China, South China Morning Post, October 6, 2015, http://www.scmp.com/tech/start-ups/article/1864566/search-giant-baidu-launches-fintech-incubator-hong-kong-standard .
8 Lucy Colback, Simon Loong: big ambition for small loans, Financial Times, April 14, 2015, http://www.ft.com/cms/s/0/d7a1c17e-d39b-11e4-a9d3-00144feab7de.html#axzz3t9h7sXVA .
9 New Accelerator Brings Global IoT Startups to Hong Kong, InvestHK, July 2015, http://www.hongkong.se/wp-content/uploads/2015/07/2015.07-newsletter-en-web.pdf .
10 Alice Woodhouse, Hong Kong lures world’s top drone maker DJI back from Shenzhen with vast talent pool, changing business climate, South China Morning Post, August 19, 2015, http://www.scmp.com/tech/start-ups/article/1850581/hong-kong-lures-worlds-top-drone-maker-dji-back-shenzhen-vast-talent .
11 Carmen Nobel, Why Companies Fail- and how their founders can bounce back, Harvard Business School Working Knowledge, March 7, 2011, http://hbswk.hbs.edu/item/why-companies-failand-how-their-founders-can-bounce-back .
12 Marta K. Dowejko and Kevin Au, Crouching Tigers, Hidden Dragons: Eight action plans for invigorating Hong Kong’s startups and awakening local innovation, Center for Entrepreneurship at the Chinese University of Hong Kong, April 15, 2015, http://entrepreneurship.bschool.cuhk.edu.hk/sites/default/files/page/research-crouching-tigers-hidden-dragons/dowejkoau2015crouchingtigershiddendragonshkstartupreport.pdf .
13 Enid Tsui, How big business helps foster Hog Kong’s start-up culture, South China Morning Post, September 1, 2015, http://www.scmp.com/lifestyle/article/1854105/how-big-business-helps-foster-hong-kongs-start-culture .
14 Ibid.
15 Mina Chan and Jeff Pao, How to boost talent supply for Hong Kong startups, EJ Insight, October 19, 2015, http://www.ejinsight.com/20151019-how-to-boost-talent-supply-for-hong-kong-startups/ .
16 Rob Matheson, MIT announces “Innovation Node” in Hong Kong, MIT News Office, November 9, 2015, http://news.mit.edu/2015/innovation-node-hong-kong-1109 .
17 News Analysis: Hong Kong’s charm to mainland students dims, Ministry of Foreign Affairs of the People’s Republic of China in the Hong Kong Special Administrative Region, June 25, 2015, http://www.fmcoprc.gov.hk/eng/xwdt/xjlc/t1275740.htm .
18 Ibid 10.
19 Michael de Waal-Montgomery, Meet Blueprint, Hong Kong’s latest B2B tech accelerator and co working space, e27, November 20, 2014, http://e27.co/meet-blueprint-hong-kongs-latest-b2b-tech-accelerator-co-working-space-20141120/ .
20 Turning Hong Kong into a “startup capital”, Bauhinia Foundation Research Centre, October 27, 2014, http://www.bauhinia.org/index.php/english/analyses/267 .
21 Bien Perez, Asia-Pacific financial technology investments seen quadrupling this year, South China Morning Post, November 4, 2015, http://www.scmp.com/business/companies/article/1875267/asia-pacific-financial-technology-investments-seen-quadrupling .