Hong Kong is well-known for many things. Its vibrant financial markets almost cover all bases — banking, insurance, stocks, bonds, ETFs, private equity — you name it. But venture capital (VC) is not what typically comes to people’s minds. The popular opinion is that Hong Kong’s high land cost and tenacious family oligopolies have stifled the innovative energy needed to nurture a vibrant ecosystem of innovators, startups and venture capital, while Hong Kong VC is considered too niche to attract the kind of attention that “high finance” has been enjoying for decades.
On closer look, though, not only is Hong Kong’s startup ecosystem budding, it is in fact flourishing — and investors should pay attention.
According to a recent survey conducted by InvestHK, the governmental organization that tracks such things, as of 2021:
Hong Kong has 3,755 startups, up 68% from 2017
Startup companies employ 13,804 people, up 118% from 2017
There are 124 locations of co-work spaces, incubators and accelerators, up 100% from 2017
In short, Hong Kong’s startup community has grown extraordinarily from just 5 years ago. Here’s why.
Innovation Power
Venture capital invests in startups, which are founded by innovators and entrepreneurs, who often come from universities. Hong Kong is in fact pulling a lot of weight in terms of higher education. A city of 7.5 million, Hong Kong unapologetically boasts 5 universities among the world’s top 100, according to both Quacquarelli Symonds (QS) and Times Higher Education (THE), as of 2022. Among Asia’s top 10 universities, Hong Kong has two or three, depending on which ranking you look at. This is not to dismiss the strong(er) educational achievements of Singapore or Mainland China, but Hong Kong definitely stands on its own in terms of nurturing talents.
To see it from another angle, since 2005, Hong Kong has been entrusted by the Chinese Government to set up national “key” research facilities to tackle some of the most important research areas of the nation. There are 16 such facilities in Hong Kong at the moment, ranging from infectious diseases, oncology, precision engineering, and environmental science. Fundamental research often needs that initial push by the government, on the premise that the fruits of research will eventually bring immense economic benefits to the society at large, often with the help of market forces. In another words, research funding brings in scientific talents, who attract and inspire other talents, who in turn go places and propagate ideas, and some of these ideas will find their way to the market and become flourishing businesses.
Space for Innovations
By “space” I mean physical space — as we have come to realize, the best way to develop a business is still to gather people in a room to bounce ideas and collaborate. Depending on industry segment, such physical space should also come with lab equipment, workbenches, 3D printers, digital whiteboards, etc. Even better, there should be a community of such spaces, supplemented by people-oriented amenities such as meeting venues, cafes, and other conveniences, so that people from different walks of lives can run into each other and exchange ideas, often serendipitously.
Hong Kong has two prime startup communities, namely Science Park and Cyberport. Both are government-supported, service-oriented ecosystems providing office and research spaces to aspiring startups, completed with a whole suite of services including digital infrastructure, prototyping facilities, events and exhibition spaces, communal areas, marketing and branding services, etc. More importantly, both offer incubation and acceleration programs as well as investor connections which may prove to be vital to any startup in terms of funding, mentorship and business validation.
Without going into the details, let me just quote a few key stats from the Science Park to give you a sense of the scale of the community (as of 2021):
Over 950 technology companies
Over 4.3 million square feet (~400k square meters) of lab & office space
Over HK$80 billion of funding raised by Science Park companies since 2017/18
24 countries/regions of origin for Science Park companies
From my anecdotal understanding, there is currently a waiting list for new entrants to enter the Science Park, and the going rent of its main campus in Tai Po — not exactly close to the city center — is even higher than some urban commercial areas such as Kowloon East. No wonder a new, much larger campus, located literally at the border of Hong Kong and Shenzhen, is currently under development. Like 1.2 million square meters, 67 buildings, large.
Hong Kong is a Sandbox
The unique geography and jurisdictional status of Hong Kong make it an unusual mixture of a densely populated city, a global financial center, an innovative startup ecosystem, a low-tax paradise, as well as a university town. Sort of a mesh-up between New York City, Silicon Valley and the Cayman Islands, if you will. This makes Hong Kong a fertile ground to test and bring-to-market new innovations and business models.
As an example, did you know Hong Kong was literally the epicenter of crypto innovations at the beginning of crypto time (roughly a decade ago)? It all started before the multiple boom-bust cycles of cryptocurrencies even happened. Many of the big crypto names today had their roots in Hong Kong, including Animoca, Crypto.com, OKEx, BitMEX, and even the most infamous of all — FTX. It was until Hong Kong began to tighten regulations on cryptocurrencies several years ago, limiting access by retail investors, then a number of crypto companies decided to move or diversify to more welcoming jurisdictions such as Singapore. To the relief of Hong Kong’s regulators, who announced their bold plan to make Hong Kong a crypto and virtual asset center just weeks before FTX’s epic blow-up, FTX had already moved its headquarters from Hong Kong to Bahamas back in 2021. Well, not our problem then.
To make Hong Kong a literal sandbox for innovations, a few governmental institutions have jointly created a FinTech sandbox where startups and companies can develop and test proof-of-concept FinTech innovations, backed by a virtual data lab and access to open API with over 20 (real) banks, “to glean insights from untapped financial datasets in mortgage, insurance, investment and more.” I am not sure how it compares with similar sandbox programs in other countries, but the sandbox idea is at least positive to innovations and plays to the strengths of Hong Kong as an incumbent financial center.
Eye on Asia Pacific
When VCs look at potential investments, an important aspect is to assess the size of the market. If the market size is too small, or “the ceiling is too low” in Chinese VC lingo, the potential reward would not be large enough to justify the risk of investing into a nascent and deeply cash-burning business. This is in fact one of the retorts I commonly hear about Hong Kong VC — the market is simply too small and too niche to be worthwhile.
However, Hong Kong is never just Hong Kong. It is at the same time China’s most international city and the international community’s most Chinese city. People in Hong Kong, wherever they are from originally, always set their eyes outside of Hong Kong, be it China, Asia Pacific, or the rest of the world. In fact, many homegrown startups of Hong Kong, such as virtual lender WeLab, logistics platform GoGoX, and travel/experience booking company Klook, have long since expanded across Asia Pacific. Another Hong Kong FinTech company, led by a group of expats, is now shifting focus to Japan and the US after successful expansion across Southeast Asia.
It goes without saying that going “inward” — i.e. expanding into Mainland China — is always an option, but many Hong Kong startups I’ve come across with actually found it more logical to tackle some of the overseas markets first. Nevertheless, the challenges of expanding into the Mainland also stem from its covid zero strategy and semi-closed border, and attitudes may change once the holy grail of China re-opening finally happens.
Opportunities for Hong Kong VCs
To summarize, Hong Kong has what it takes to become an innovative hotbed, and it has both the resources and talents to nurture great startups. With its sizable (but not intimidatingly large), fast-moving and open economy, Hong Kong is in fact a perfect market for new business ideas to grow from sandbox to market. Business ideas that successfully stand the test of market can then be expanded both “inward” to Mainland China and “outward” to Asia Pacific.
Hong Kong’s startup ecosystem has already come of age — from university research, talent grooming, entrepreneurship, startup business network, to government funding and support. This is not at all surprising, as Hong Kong has always prided itself as one of the easiest places to do business, startup or not, especially before covid. With Hong Kong’s covid policies fast relaxing, the time is now ripe for investors and VCs to look closer to Hong Kong’s startup scene and assess its investment potential.
