Shenzhen Insights from Hardware Investors

Duncan Turner (SOSV/HAX), Bay McLaughlin (Brinc), Henry Tan (Q Venture Partners), Ben Joffe (SOSV/HAX)

This is the first session of the IoT Trends Event hosted by HAX and KPMG in Hong Kong on July 2018. (Session 2: Shenzhen Insights from Hardware Startups)

Ben — tell us more about your company

Duncan — HAX is often the first institutional money into hardware startups. We invest $250k in cash and resources at the early prototype stage to help access manufacturing and VCs. Our program has two stages: in Shenzhen then SF. We have invested in over 200 companies, about 50% in USA, 25% in Europe and 25% in Asia, with a growing share in China. Mostly B2B these days including health tech, enterprise and industrial.

Bay — Brinc started in 2014 and has completed 43 investments, planning on 120 by the end of next year. We help with manufacturing, growth, P.O. financing. We have an Eastern to Western approach. We don’t have a US presence but we have offices in HK, Guangzhou, Barcelona, Bahrain, Tel Aviv and Poland.

Henry —we are an early stage VC fund focused on underlying technologies, with a product development studio in Shenzhen for engineering, prototyping and mass production.

Ben — everyone seems pretty hands-on. What do teams tend to have and lack?

Henry — for us often times it’s a PhD with 10 years of research. For instance this smart watch is powered by body heat. It works as long as you don’t die. The tech was 10 years of development and we helped make a first product to demonstrate it.

Bay — everyone underestimate marketing, time and costs. Tech doesn’t make a business so we look at what is needed to be successful in distribution. Business founders usually do the best. We don’t think ‘Build it and they will come’ never was and never will be true.

Duncan — B2B founders know their industry and product software, but often need help with the hardware. You need skills in structural engineering, mechanical engineering, mechanical design, industrial design, film making, editing… normally startups get money from investors and spend it on consultants. Instead we have 25 full time staff with deep skills in those areas and plug them into teams that need them.

Ben — what are your latest investment topics. Much A.I. lately?

Henry — we are into fundamental science and deep tech that can apply to multiple industries. A recent one is analyzing gas chemicals using a bacteria. There are many potential industry applications from oil and gas to health care.

Bay — consumer, health and wellness (how to feel human), drones & robotics (how to move), AgTech (what we eat). There are massive challenges in the developing world, we try to solve them.

Duncan — I talked about lots of projects in the trends presentation, but to focus on China, many Chinese teams are rather system integrators than deep tech. They are so quick and can make use of the Shenzhen ecosystem. If they combine this speed with good listening skills, they look at us as a way to become global companies.

Ben — do all companies need Shenzhen?

Duncan — have to.

Bay—there is also Guangzhou. The Li & Fung map is still quite accurate. There will be an increase in clustering.

Ben — is hardware always costly?

Duncan — one company called Orenda makes a coffee machine that can control the taste and learn your preferences. They shipped $2M of products with only $100k of funding from HAX and about $200k from Kickstarter. With only three people just out of school…

Orenda shipped $2M worth of products with only $100k investment

Bay — Soundbrenner shipped 50,000 units with no massive institutional investment. There is not enough capital for all hardware companies, but I think there is no need for massive amounts of capital to do it.

Henry — a lot of the deep tech guys never went to Shenzhen and learn they can draw on government funding. We focus on B2B and encourage them to talk to a lot of customers.

Ben — How about the Greater Bay Area?
Shenzhen’s GDP has reportedly overtook HK in 2017

Bay — I write a column for Forbes “This Week in China Tech” and clearly the GBA is not there. I’m waiting for the train that will link HK and Shenzhen in 15 minutes. Beyond that, it’s still hard to convince people to make their first trip. Even if all the media is telling you that you have to be here, the vast majority of people still haven’t made their first trip.

Duncan — I first came in 2005. I remember dusty roads, carts and machine shops. Some say ‘why live in HK, SZ is much better’. HK is familiar, feels historic, has so much culture. SZ is a bustling innovative crazy LED mess that is super exciting especially for Chinese people. In the mainland people think of SZ rather than HK.

Bay — if you’re a foreign founder and not in the factory, the internet in mainland is a nightmare.

Henry — GBA is a sexy term. SZ has changed a lot: Tencent, Huawei, DJI are leading the world.

Ben — tech investment in HK is still very immature in HK compared to mainland.

Henry — there are so many pre-IPOs in HK that late stage investors are quite spoiled, and not keen on taking risks on early stage.

Which is the bigger Bay?

AUDIENCE Q&A

Q — What’s the number one cause of failure?

Duncan — founders falling out.

Bay — aside from break-ups, if founders don’t want to believe our experience they can run into walls. You can try but you don’t get many chances in hardware.

Henry — you don’t always need hardware if you can avoid it, do so.

Ben — those who don’t spend lots of time on the ground run into trouble.

Q: Anson (KPMG) — What’s your buzzword? And how about GBA?

Duncan — My buzzword is anything that is NOT blockchain. For GBA, I also see lots of mainland people coming here, I hope people in HK will accept them.

Bay — My buzzword is ‘Data’. HK has more to play than ever before.

Henry — Mine is ‘Research’, for HK academics and students.

Anson — the R&D budget in HK is 0.7%. Carrie Lam wants to double it to 1.5%, still far from 2% in mainland China and about 4% for Shenzhen.

Ben — mine is ‘decentralization’ of resources: R&D, prototyping, production, customers, funding could be all in different locations. Founders need to look for the best ones and get stamps on their passport.

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