UPDATE: A look at a Hong Kong Seed Fund in action, valuing Hong Kong startups 33x lower than the norm.

A rather in depth (or long, depending on how you look at it) HKVCA paper on how money gets handed out in Hong Kong.

Venture Capital, Private Equity, and Hong Kong’s Entrepreneurial Businesses (pdf)

The paper has a lot of interesting points (with my personal opinions dispersed within):

• Since 2001 three to four startups per year have successfully reached and surpassed IPO. Just 51 former startups exist on the HK exchange (3% of total listed stocks), but removing the old companies (from the ’80s), leaves only 37 companies remaining. This lack of growth might have something to do with only $10 million being raised in TOTAL through Hong Kong Angels and VCs last year, according to the HK Science and Technology Park.
• Hong Kong has plenty of small “mom and pop” enterprises, but few “go big or go home” players.
• Hong Kong has a rather small (I assume as some percentage of people/gdp/land area/etc.) community of investors, most seed capital comes from the government via SERAP or through the two incubation centers (HK STP and Cyper Port). I don’t understand this statement as SERAP and the STP provide matching funding, so you must also have an investor.
• Hong Kong is too expensive for European entrepreneurs, they are all moving to Shanghai.
• Empty warehouse should be used as startup space. I don’t know what genius thought this up, but it’s probably the most obvious idea of the century. Convert one of the literally thousands of empty and junky looking warehouses into a startup hub. Incubation center in the first few floors, co-working spaces and (CHEAP) residential above. (Fix the “expensive” and “entrepreneurs dissipated throughout the city” problems in one fell swoop).
• Several of the “family entrepreneurs” from the 1960’s-’80s are using their cash to invest in companies outside of their genetic family (family entrepreneurs are the entrepreneurs that hire all their kids, sort of like a family band, but in business). These families like to focus/specialize in sectors.
• There is an organization, a private direct investment platform, called Social Ventures Hong Kong which provides financial and non-financial support to Hong Kong based social venture companies. They are considered to be the most successful Hong Kong “fund” investing in startups.
• There is “no way” startups can compete in the “Red Ocean” of China without over the top, balls to the wall, 111% product quality excellence and unobtainium technology. This means “good enough” or “oh it’s OK” is totally and completely unacceptable. You might as well pack up and go home right now and stop wasting everyone’s time. This might be the most important point of the paper: if you are not going to go big, and give everything you have to create something revolutionary and (eventually) without fault,… you will FAIL.
• There are VC/private equity and angel investor/seed stage investors in Hong Kong, and the government programs are quite generous, yet extremely few Hong Kong entrepreneurs take advantage of them and even fewer produce real companies that think big, employ people, and produce leading quality products and services.
• Finally, don’t indulge in petty fame, you’ll get marginalized (stomped). Think BIG or get ran over.

Vitargent
The paper performs a case study on two startups. One company, Vitargent, is a spin-off from a professor at CityU. A mainland Chinese student studying at the university selected the professors research on tiny “canary in the coal mine” fish that glow when they are near certain types of pollution or chemicals (my understanding of the business) for a business plan competition. They won the competition and the student convinced the professor to license the technology to him so that the technology could be developed at the HK STP.  Their startup capital came from:

• $0 from the founder (he didn’t get paid for 6 months).
• $387,000 of angel investor money for 25% of the company (yikes, 25% for $387?!).
• SERAP loan of $322,500 (the program will provide up to $744,000 in 1:1 matched loan to funding ratio) which is repaid via 5% of future sales and 10% of future funding (yikes, 10% of future funding?!).
• $271,000 grant/in-kind cash from the HK STP. I assume $110,000 is the in-kind/refund money you get from the regular STP Incu-Bio program and the remainder is some grant program.
• A program whereby the STP will buy equipment the startup specifies, up to $516,000 in value, then leases to the startup for free for four years (which happens to be the STP’s incubation program time-frame).

After a year of operation the startup apparently realized glowing fish are good for publicity but not really that great at making money. The founder decided to turn the company into a “roll-up platform” for sensing technologies. I think a roll up is where several technologies are bought up together and combined? So essentially Vitargent’s fish technology isn’t working out but the investors weren’t going to lose money, so they took the shell of the company and started to look for new, more marketable, technologies. I assume they will continue to work on the fish technology as well, failure at first doesn’t mean failure for good. The company has started to look for new funding and is considering:

• Micro-enterprise lending program, Wing Lung Bank, up to $38,700 at P% (prime rate).
• SME Loan Guarantee Scheme, a government loan backing program (up to 80%), 5 year loan at 5.5%, up to $1.55 million

An excellent point they raise is that the HK government could do better (when couldn’t a government do better?). The problem is not in the funding, but in the willingness of various HK government bodies to accept and use startup technologies. The government bodies that fund startups should do more to influence the other government bodies who would pay the startups for their services. If the HK government isn’t buying, and they funded it, what does that signal to other potential customers?

The other company interviewed by the paper’s authors makes mobile games. The founder of another company, Travelzen, (a service which I have used in the past) did have some good points:

• #1 Believe in your vision, and #2, Be incessant in the pursuit of excellence. I combine those together because I think they are the same. Travelzen’s founder was using “vision” to refer to the market, but I am sure it also applies to the team. He fired 4 CTOs before finding one that matched his vision. If you have anything less than excellent employees, you’ll have less than excellent products. And we all now know what happens to companies which produce less than excellent products. They fail. Fail!
• #2 don’t look where the ball is, look where it will be. This is a point that annoys me, when I present my technology to people, they say, “but you can’t do that”. They are looking at where the ball is, and missing the concept of “science makes new things possible which previously weren’t”.

I didn’t actually intend to write a mini review of the paper. You should read the entire thing. Can’t read fast enough? Take a lesson from my ancestors, grow stronger.