I was lucky enough to receive a free ticket to the Hong Kong Venture Capital, Private Equity, and Angel Investor Conference at the Hong Kong Science and Technology Park. Topics and discussions included:
- Silicon Valley Bank’s role in supporting tech startups and how it can apply in Hong Kong
- How greater VC and Angel investment activity can be encouraged in Hong Kong
- Where VC, PE, and Angels fit into the investment food chain
- The next big things to invest in
- What VC, PE, and Angels look for when investing, and what entrepreneurs look for when seeking investments
Name badges make me feel legitimate
It was very interesting to view startup investments from the perspective of the investors. They seem just as confused and disoriented as we are, only they do it while wearing nicer clothes and driving Tesla sports cars to conventions (and mentioning that they drove a Tesla about 10x during their presentation).
The general consensus seemed to be that there is more cash than deals, but deals don’t get done because of an “expectation gap” between investors and startups, with a dash of uncommitted government. There are potential investors, the government wants to help, entrepreneurs are entrepreneur’n, but they don’t know each other, what each other wants, or how to communicate. Sounds like a high school dance where the girls and guys want the same thing but don’t know how to approach one another.
One of the attendees, a rather spirited older man, pointed out the fact that a particular Hong Kong investment group only made about 50 investments in two years. Which is pretty pathetic. So I think Hong Kong is starting to realize that they need to step up their startup investment game.
This is what Hong Kong investors say they expect:
- The business plan should have no mistakes, gaps, or anticipated future changes. If the business plan isn’t excellent, then no communication with the startup is warranted.
- A startup investment should yield returns in excess of other options, quicker. If real estate is returning 15% in a year or two, then so should a startup investment.
- The investor should only provide capital, no mentoring, advice, involvement, or further work should be necessary (this is consulting)
- The startup must succeed, otherwise there is a 100% loss in the investment.
- The startup should scale quickly, to a global company. There should not be a focus on the Hong Kong local market as it is too small and isolated.
- Technology, specifically physical or life science (this means science that is not on a computer), is weird and Hong Kong startups can’t understand it. Startups should stick to online games or financial service technologies.
- Entrepreneurs should locate and come to investors to pitch.
- The investor should have a controlling stake in the company, because it is their money and money is the only thing of value in a startup (this is really just mainland Chinese, and not, as far as I can tell, Hong Kong style).
These sound great, if I were an investor. I too want 15% annual returns on an investment that doesn’t require any work. From the perspective of someone not familiar with startups, these requirements seem reasonable. The Hong Kong real estate bubble has been growing at a substantial pace since about 2002 or so. Really, why would someone invest money in anything else? Until the bubble pops, at least. And, assuming ROI dollars in your bank account is your only concern.
The problem is, startups don’t offer these things, thus the investor side of the “expectation gap”. You could argue, “If you don’t agree with the terms of investing in a startup, don’t invest”. Unfortunately, it seems most people with money in Hong Kong and China don’t agree with the terms, and don’t invest. So, us startup people have to come up with a better argument. Luckily, some Silicon Valley people were on hand to provide insight and help get this party started.
- A business plan, if there is one in the first place, is a dynamic instrument. It is qualitative and artistic. It was written by entrepreneurs, people who are likely not analysts, technicians, and consultants. All in one. One of the Silicon Valley VCs that invested in an A round of Tesla Motors mentioned that Tesla Motors did not even have a business plan. Any business plan will need a lot of work, constantly, but this does not mean the team is sub-par. In fact, one of the speakers pointed out that they noticed no coloration between quality of the business plan and quality of the team/idea.
- According to one of the VCs, the average startup investment is just over eight years. Hey, that’s a lucky number right? Eight years is a long time to lock away money in a high risk venture, so you better have a good argument as to why someone should, especially when HK investors haven’t yet been convinced that startups are a good idea. An investor should have previously compared startups with other investments, they should understand and accept the risks and rewards, but this doesn’t seem to be the case here. So in addition to convincing potential investors that your startup is better than other startups, you’ll have to convince them that your startup is better than the Hong Kong real estate money printing machine.
- If a potential investor isn’t familiar with the technology or market you are entering, don’t accept their money. You’re not a mail order bride, you’re a complicated, sensitive artists… you’ll require a lot of attention and encouragement. Investors should provide more than cash, they should provide direction and assistance in getting there.
- (relating to #3) Investors should know the market for their own protection as well. As a presenter pointed out, their early stage investment “bucket” (as he called it), referring to a fund, does not lose money, even though they experience a substantial startup failure rate. The reason being, besides the fact that the ones that do succeed succeed exceptionally well, is that the investors have invested in “something”, something being the technology itself. Even though the team failed to capitalize on the technology, the team (hopefully) used the money to develop a technology further than it was when they started. As a result the investors have a developed piece of technology which they, being familiar with the technology, industry, and other players, can sell to another business, thus recovering their investment even if the startup itself failed.
- The question is, how is a startup going to “go global” before it “goes local”? That’s like learning to run before you walk, it ain’t gonna happen. For one, going global requires a lot of assets, seeing how a lack of assets is a prerequisite of being a startup, a global startup is unlikely. The idea makes sense, though, would you want to invest the same amount of money into a business to sell products to people in Cypress or people in China? The compromise for Hong Kong startups are to focus on a technology or business model which is easily transferable to other markets, such as China. Hong Kong is not China, by the way.
- There were several arguments against investing in only online/non-physical science tech startups, and in theory I agree with them, especially because I’m part of a physical science startup. But in practice I’m not sure how difficult investors realize it is for physical and life science startups, and therefore how difficult it will be for an investor to find and invest in one. Online startups are cheap, it only takes a room, a computer or two (which I’m sure the entrepreneurs already own), and time to research the market and write the code (or whatever they do). Physical science, conversely, is a lot more expensive, if you have the people and resources to operate in the first place. As I mentioned in another post, the laboratory supply stores here refuse to do business with us (we’re too small), we’ve had to order equipment directly from the manufactures in mainland China. Building prototypes are expensive and require space, much harder to pull off than online startups. As a result, there aren’t many physical or life science startups in Hong Kong, and as a result not many success stories…. and as a result not many investors who want to put their money in an “unproven” sector. So if you’re a physical or life science startup, congratulations, and good luck.
- Entrepreneurs think investors should come to them. Amusingly, someone at the conference, during a Q&A session, tried to make a shout out for StartupsHK and BootHK (which I think are the same people). He claimed the investment community did not appreciate the work done by these guys and invited the investors to a Start Club event (I’ve written about one of these events before). The investor panel’s response was that they have heard of StartupsHK but that they were “too English”, also that there was another group of “more local” entrepreneurs who were of more interest. Earlier a Silicon Valley presenter pointed out that the best startup teams are multicultural, something that seems to be missing here. The Start Club events are primarily expats while the more “local group” is all locals (who the investor didn’t name, though my Hong Kong friend thinks this is a well known “all Hong Kong” group which meets in Shatin), so maybe these two groups should get together and team up. Either way, the investor’s conclusion was that VC’s work for their returns, so they might come to entrepreneur events such as Start Club, but if entrepreneurs think Angels will come to them, then they don’t know anything about Angels. Angel investors do not work for money, so they don’t need to go anywhere. They invest because they want to, and it’s your job to seek them out and convince them they want to risk money on you. Whether you are “English” or “local”.
- Obviously if a potential investor, especially a seed investor, wants more than 50% of the company, they aren’t qualified to invest in a startup and have no idea what they are doing. That’s called a trade sale, and you become an employee.
Bottom line, there are a few investors out there, early stage, pre-revenue, pre-customer investors. And they’re just as confused as we are. There aren’t many, but the good news is Hong Kong investors appears to be ready to learn from the wildmen (and wild women) of Silicon Valley and start supporting technology development and venture creation.