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Hong Kong’s Startup Scene Grows Up

By Josh Steime for Forbes. Josh is the CEO of MWI, a digital marketing agency with offices in the U.S. and Hong Kong.

When I arrived in Hong Kong in the summer of 2013 to open the first international office for my digital marketing agency, there was a small handful of startups in the city. Only a few were serious, while many were small websites or apps without a market outside Hong Kong’s relatively small market of 7 million individuals.

The angel investment deals were small. If someone raised $250,000 USD it was major news. It was easy to get networked into the startup scene, meet all the players, and feel like you had your finger on the pulse of entrepreneurship. No longer. Hong Kong’s startup scene is growing up.

It’s not just that Elon Musk visited Hong Kong this week as part of the Hong Kong government’s StartmeupHK program (watch video of Musk’s interview here), or that the government recently announced a HK$2 billion ($256.7M USD) Innovation and Technology Venture Fund, or that when Paddy Cosgrave and his Web Summit crew created the startup focused RISE Conference in Hong Kong in 2015 it attracted over 5,000 attendees, or that Alibaba has poured $130M into its Hong Kong investment program for startups that build on its platforms. For me, the most telling sign of the growth and maturation of Hong Kong’s startup scene is the sheer proliferation of startups, cowork spaces, and accelerators, which I can no longer keep up with.

Angel investors, venture capitalists, and wannabes have flocked to Hong Kong as investment opportunities have increased. Every day in Hong Kong seems to witness the opening of a new cowork space, and every evening it feels as though there are 10 startup launch parties or other startup related events. “In 2010 when we started Nest.VC it was the first private incubator/early stage venture firm in Hong Kong and there were zero coworking spaces,” says Simon Squibb, Founder and CEO at Nest.VC. “Now there are over 50 coworking spaces!” Nest.VC has made 53 investments since it was founded. The firm recently launched a 12-week smart city accelerator program in partnership withInfiniti Motor, and this week announced Metta, an invitation-only membership club to connect the city’s entrepreneurs with multinational companies and capital.

 The evidence of growth in Hong Kong’s startup ecosystem isn’t just anecdotal–the data support what Squibb and I have seen firsthand. Worldwide, Hong Kong is the 5th fastest growing startup ecosystem and the 25th largest overall, according to the Global Startup Ecosystem Ranking 2015 study released last July by the San Francisco based research firm Compass. InvestHK, Hong Kong’s economic development authority, reported in August, 2015 that there were 1,558 startups in Hong Kong, up 46% from 2014. A sampling of funding deals include CompareAsiaGroup ($40M), EasyVan ($10M), GoGoVan($10), Boxful ($6.6M), Grana ($5M), Klook ($5M), Spacious ($3M),Bindo ($2M), and Lamplight Analytics ($1.49M).

What’s Hot in Hong Kong?

Fintech and IoT are what’s hot in Hong Kong, which shouldn’t surprise anyone who knows the city. Hong Kong is one of the few world financial centers that can be mentioned alongside New York and London. It’s also next door to the largest collection of manufacturing talent in the world.

 “Fintech companies in Asia raised $3.5B in investment during 2015,” said Janos Barberis, Founder of FinTech HK, a directory for the fintech community in Hong Kong. “We have 8 companies in the Hong Kong fintech accelerator SuperCharger, the later stage ones of which have raised between US$5 million and US$150 million.” Hong Kong based fintech startup WeLab raised $160M by itself earlier this month. You can learn more about the Hong Kong fintech scene in this video.“IoT has made its way into the global startup consciousness and Hong Kong and Shenzhen are near instant associations,” said Bay McLaughlin, COO & Co-Founder of Brinc.io, an IoT Accelerator based in Hong Kong. “When we started Brinc a year and a half ago, Hong Kong still felt like it was just getting started. Today, it feels like the startup scene is on fire! For IoT, we have ten current investments in and out of our PMQ headquarters in Sheung Wan, which has slowly become the IoT epicenter for foreign startups in Hong Kong.” McLaughlin stated that he’s seen many global investors as well as entrepreneurs from U.S. accelerators like 500 Startups and yCombinator setting up offices in the Sheung Wan district of  Hong Kong, also home to startup cowork spaces like Paperclip and The Garage Society [Full disclosure, a client of my agency] and international startups in expansion like FoodPanda and Uber.

Hong Kong’s Startup Opportunity

Today, Yue-Chim Richard Wong and Kwok-Chuen Kwok of theUniversity of Hong Kong, in collaboration with Rachel Chan of Hong Kong based consultancy InnoFoco, released the report Hong Kong as a Startup Hub: Mavens, Connectors, and Salesmen, which details challenges and opportunities for the city when it comes to entrepreneurship. While pointing out that due to Hong Kong’s size, it cannot scale and should not try to compete with Silicon Valley, it can take advantage of its strategic position in Asia and small internal market to be a test bed of sorts for global startups. To put things bluntly–Hong Kong is too small a market for startups to become major players unless they go global. This size disadvantage can be turned to an advantage if Hong Kong startups are motivated to go global ahead of foreign competitors who may be too focused on the larger markets they enjoy.

Below, I’ve detailed other challenges and opportunities or advantages I’ve seen firsthand during my experience opening an office in Hong Kong and my involvement in the local startup scene.

Challenges

Like any other city, Hong Kong’s startup ecosystem has its own unique set of challenges.

 Risk Averse Culture. In Hong Kong, safety and stability trump self expression, innovation, and creativity. For years the question for youth to answer has been “Why would you want to join a risky startup when you could invest in real estate and double your money every year?” The world of high finance has also offered similarly lucrative opportunities. However, both the real estate and financial markets show marked signs of strain. In addition, young people in Hong Kong are finding themselves unfulfilled by careers that require years of work and submission to corporate norms, so culture may place less of a restraining role in the future than it has in the past.

Education. Hong Kong’s education system is not conducive to breeding entrepreneurs. An emphasis on rote memorization, respect for authority, and obeying rules produces plenty of people who know how to follow instructions, and few who know what instructions to give. That may serve the interests of government and large corporations, but startups need students who think differently, challenge authority, and break rules to create new, better ones.

“Hong Kong needs not just more tech talents, but also designers, product development and marketing specialists as well as professionals who understand technology and innovation and are experts in commercialization,” says Chan. Some entrepreneurs, like Michelle Sun of First Code Academy, are teaching kids in Hong Kong to become the coders of tomorrow. Programs like those offered byGeneral Assembly or BSD Academy teach design and digital marketing in addition to programming. Hong Kong needs more programs and offerings like these, as well as more parents pushing their kids to learn to code, design products, and imagine without boundaries.

Immigration. Hong Kong has a talent shortage that cannot be solved in the short term through education or training which means that for now, many startups need to hire from outside Hong Kong. Hong Kong’s immigration policy, however, makes this difficult. “The immigration department in Hong Kong usually requires that employees hired from outside Hong Kong have a 3- or 4-year degree and a minimum of 2 years post-graduation work experience in order to obtain a work visa,” says Stephen Barnes, Co-Founder of the Hong Kong Visa Centre. “It can also take up to 2 months or more to obtain a work visa for a foreign employee, although sometimes visas come through in as little as 4 weeks.”

These are major obstacles for startups. Sometimes the best designers or programmers don’t have a university degree or even any professional certification. And the right fit for the job may not have years of professional experience. Startups in Hong Kong need a streamlined immigration system that grants work visas within days or a few weeks–not months, without any requirements with regards to education or work experience. Startups, not governments, know best what kind of talent they need to hire. Startups will hire locally where possible, because it’s a lot easier than hiring from outside, but when there is a need to hire from outside, the government should facilitate rather than impede this growth. Without this, talent goes elsewhere, companies are less likely to start up in Hong Kong, and the entire economy is held back as a result.

Banking System. In the U.S. one can set up a bank account in a matter of minutes, all online. I can access my U.S. bank account and perform any activity imaginable quickly and easily using my phone, from anywhere in the world. Years ago I could already deposit checks simply by taking a photo of it on my phone.

By contrast, in Hong Kong I had to show up in person at a branch to open an account. Opening an account with HSBC is notoriously difficult for anyone, but especially Americans. In order to access any features on my account through online banking, for which the app is effectively useless, I have to carry a security device with me and input codes from it almost every time I want to do anything. On top of the general hassle of banking in Hong Kong, this month HSBC told me they would be shutting down my account due to not receiving certain paperwork, which I had already submitted twice. Many entrepreneurs have arrived in Hong Kong ready to do business, only to discover they can’t open a bank account or that it is a struggle to perform basic banking tasks on a daily basis. Mentioning the local banking system while in the company of entrepreneurs in Hong Kong is sure to elicit groans of sympathy from every direction.

China. Always looming is the spectre of China. It seems to be the general feeling that while working in the shadow of China one can be successful, but that being too successful will attract the wrong kind of attention. Others are troubled by China’s record on human rights issues and its response to the Occupy Hong Kong protests in 2014. For entrepreneurs in Hong Kong who want to execute their dreams without thinking about limits, China’s policies may have a dampening effect.

Advantages

Why is Hong Kong’s startup scene growing so fast? Here are a few advantages the city offers.

Location. Even in this Internet-connected world, geography still matters. If you’re doing business in China but not ready to open an office on the mainland then being in Taiwan or Singapore is not the same as being in Hong Kong, which is less than an hour’s train ride from the manufacturing hub of Shenzhen. Shenzhen is a surprisingly modern city with its own vibrant startup scene including hardware accelerators like HAX, which houses 100 early stage hardware startups including teams from Stanford, MIT, and Berkeley.

Roughly half the world’s population lives within a 5-hour flight of Hong Kong. The city’s central location makes it easy to test a startup idea here, then quickly expand to China, India, Japan, Korea, Taiwan, and the rest of Asia-Pac.

Low taxes. With a top corporate tax rate of 16.5%, no capital gains tax, and low personal tax rates, entrepreneurs keep more of what they earn if they do business in Hong Kong vs. most other countries, with the exception of U.S. citizens who are taxed globally no matter where they live. I’d like to see the implementation of management guru Peter Drucker’s tax plan, which advocated no taxes on startups for the first few years, but I’ll settle for lower taxes rather than higher ones any day.

Easy to open a business. At this week’s Startup Grind event in Hong Kong I interviewed Chris Reed of Black Marketing who does business primarily in Singapore, but has expanded to Hong Kong as well. He contrasted the ease of incorporating a business in Hong Kong, which he described as taking “a few minutes” to doing the same over a period of weeks in Singapore.

Economic freedom? Rankings for economic freedom indexes, like university rankings, are easily manipulated and shouldn’t be taken too seriously–at best they are relative measures. However, while neither Hong Kong nor any other world city can claim to truly embrace a free market economy, in relative terms Hong Kong is less restrictive than most, and startups will find it fairly easy to deal with local regulations and restrictions.

Who Will Drive Hong Kong’s Startup Scene Forward?

The dangers of government efforts to lead startup ecosystems are detailed in Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It by Josh Lerner. As venture capitalist and best selling author Brad Feld convincingly explains in Startup Communities: Building an Entrepreneurial Ecosystem in Your City, the ultimate strength of a startup ecosystem relies on entrepreneurs. Governments can reduce regulations and taxes. Lenders can create programs focused on the unique needs of startups. Last year, MIT announced it would build an innovation center in Hong Kong. But if the community is to be successful, entrepreneurs must lead. If all stakeholders in the Hong Kong startup community can help it to build on its strengths and overcome its challenges, a few years from now the results may be even more impressive than those from the past three.

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