Today I read an article in the South China Morning Post about Nest, one of the more well known startup incubators and investors here in Hong Kong. The outfit holds a pitch day once a month, startups apply and are selected to pitch their startup in hopes of entering into the incubation program. We haven’t applied or pitched, but from reading the article I like they way it appears they run the event. Startups receive quality criticism and feedback immediately after the pitch. Each startup is given 15 minutes to pitch, but Nest allocates 1 hour per startup Assuming 15 minutes for logistics, that gives a startup half an hour to challenge and be challenged by the investors, and it sounds like they really get it. This is in stark contrast to my experience at the Science and Technology Park where it seemed like the board I pitched to couldn’t be more disinterested, much less offer any criticism or advice.
One very interesting anecdote in the article, and the point of this post, was their discussion of past investments. The article states,
Nest offers entrepreneurs seed money – from HK$200,000 to several million, but usually about HK$500,000 – and takes a stake in the business, typically 30 to 40 per cent.
Their average investment is HK$500,000 in exchange for 30 to 40 percent, we’ll use 35%. With half a million HKD equal to US $64,000, an investment of $64k purchasing 35% yields a post-money valuation of $183,000 and a pre-money valuation of $119,000. Therefore the average post-money valuation of a Hong Kong startup is $0.183 million dollars. Lets see how that number compares to the valuations on AngelList:
Average pre-money valuation of startups on AngelList, in US $ millions:
- Hong Kong: 0.12
- Overall: 3.9
- All Students: 3.3
- Mobile Games: 3.7
- Silicon Valley: 4.5
- India: 2.3
- Europe: 2.9
- Startup Chili Incubator: 3.4
- 500 Startups Incubator: 4.6
- Mexican VC* (6 deals): 2.0
It should be painfully obvious at this point that either I have no idea what I am doing or Hong Kong startups are valued, at least by Nest, far below the norm, about 21 times less. The AngelList valuation page’s “about valuations” link defines how to value a pre-revenue startup, so I am inclined to believe AngelList uses the term “startup” accurately and correctly, a startup being “an entity in search of a scalable business opportunity, conducting research on markets and planning for development”. AngelList is not valuating revenue generating businesses or startups that already have IP, full teams, and operations. So we should be comparing apples to apples here: pre revenue, gaps in the team, ideas or prototype startups. Location being the only variable. The question then becomes, is a Hong Kong startup worth 1/21st the value of any other startup across the globe? If so, why? Several options:
- Hong Kong startup founders are not as innovative, dedicated, aggressive, etc.
- Hong Kong startups are targeting only the local market and thus have extremely limited potential scalability.
- The technology, strategy, ethos of the startup is minimal, missing, not innovative, etc.
- Hong Kong startups are just tiny. One or two founders, minimal technology innovation, small business model, small operations.
- Founders are not aware of other startups’ valuations or how to asses their value
- It’s a buyer’s market in Hong Kong. Startups are starving for investments, there are very few investors, so startups will accept an absurdly low valuation just to get some cash and keep on keep’n on.
So why do Hong Kong startup’s pre-money valuations appear to be so low?
*”Mexican VC” is a pretty strange name for an incubator. I’m assuming this was a publicity shy VC based in Mexico. If my memory serves correct you use to be able to see the details of each transaction that made up the chart, but I couldn’t find this option today.