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Hong Kong and Shanghai, in the search of the Asian hub for startups

When I was in Singapore, ready to go to Hong Kong few investors told me: “in Hong Kong you will have much more time to for sight-seeing, there isn’t that much up there in the early stage sector”.

Actually at the end the landscape resulted to be not that bad. It was more difficult to identify and meet the key players than in Singapore but I had seven meetings in four working days and attended the local Startup Weekend. The ecosystem is younger then Singapore’s. Everything started approximately two and a half years ago. There are fewer professional investors, accelerators and startuppers but already 35 co-working spaces, both for startups and freelances, flourished in such a short time despite the high cost of real estate and Hong Kong, in theory, has a great potential.

But where can you find the players? Here there is not a master address like in Singapore but, if you stop in one of the many Starbucks in the various shopping malls in town you probably have the greater chances to meet one of them.

I had my first meeting in Starbucks at Alexandra Palace with Chipper Boulas from Firestrartr (European early stage investor with a base here). And while he was waiting for me he had the chance to say hi to Melissa Guzy, (founder of Arbor Ventures, Asian based VC fund, who provided me with lots of contacts throughout Asia), that was sitting at a table next to us. So Chipper, myself and Giuseppe Folonari (former IAG analyst and H-farm investment manager, now living in Hong Kong) had our meeting and we talked about the ecosystem here. At a certain point a guy stands up from another table and comes to us with some business cards in his hands. He was Simon Squibb, the founder of Nest, one of the most renowned accelerator in town: ”I heard you were talking about the early stage ecosystem here so I thought it was the case to introduce myself, nice to meet you!”. Are we all here??

So, from one Starbucks to another I was able to get a good glance of what is going on here, by the way meeting rooms probably do not exist in Hong Kong.

Hong Kong has the big chance to become the gateway to China for the early stage market and also the chance to be a hub in South East Asia but there are some concerns. It started more recently and the market is consequently less mature on both the entrepreneur and investor sides (less good quality opportunities and less professional players). The Government is starting to stimulate the ecosystem but is far away from the type of measures Singapore’s has implemented. For example there is an interesting 300,000 HK$ grant scheme by Cyberport, for companies who are selected for the big international acceleration programs as 500 Startups or Y Combinator. Taxation is quite attractive with low corporate tax (16,5%) and personal tax (max 15%) and no tax on capital gain. Nevertheless China seams to be doing its own things by itself, not very interested to internationalization nor to welcome foreign companies and is looking strait forward to the US and its IPO market, while Singapore at the moment seams to be more mature to position itself as the hub of the area.

Will Hong Kong be able to grasp this great opportunity? If I had to make a high risk high return bet I would do it for Hong Kong. A foreign player with experience, can come here and have the opportunity to position itself in the first row, having the chance to be rapidly a key player in the ecosystem. But the risk is high. Hong Kong risks to fall in between China and South East Asia, not being able to grasp none of the two markets.

Understanding the position of Hong Kong means understating China and, with this objective in my mind, I moved to Shanghai. Nevertheless trying to understand a complex world like the Chinese market in four days it’s unreal or superficial and I’d like to avoid it. So I will give you my impression, confirmed by many of the people I interviewed in Shanghai, but I think that a deeper analysis is required to better understand China. For this reason I asked to Oscar Ramos, partner of the seed fund DAD Asia, with six years investment experience in China, to write for Startupbusiness a more focused article (the article will be published soon). During my short stay of four days I had eight meetings with funds, angels, accelerators and entrepreneurs.

The market is huge (appox four billlion US$ in 2012) and dominated by the big funds, both Chinese and Americans. The big Silicon Valley VC funds like Sequoia and Kleiner Perkins opened here their franchise with local partners. Both the Chinese and American funds got very good results and therefore grew bigger and bigger with several hundreds of millions of dollars under management.

To get to the highest potential deals an investor needs deep pockets, good relationship with the Government and strong network of contacts at the highest levels. It is something accessible to few players, what can be called the Champions League of the VC market in China. The impression is that between these players and seed and small early stage players (i.e. accelerators, angels, angel groups and small seed and VC funds) there are at least a couple of divisions of difference. Likewise the international and the local ecosystems are two different worlds that seems to have few points of interaction, probably only at the bottom of the pyramid in the very early stage and at the top when large international funds invest in promising local entrepreneurs.

There are a lot of programs that call themselves accelerators, but few have real value beyond funding, a shared space to work and peer pressure. China Accelerator is the most famous  and I met the program director Todd Embley. Co-working spaces were illegal up until few years ago but they are recently flourishing all over the major cities following a global trend (although still in a grey area). Angel activity tends not to be structured and investors have to deal with a complicated corporate legislation, trustiness of entrepreneurs and specific market regulations. For an outsider entering this market is very… very complicated. I met several members of Angel Vest, with 80 members that operate between Beijing, Shanghai and Hong Kong, which is one of the few organized angel groups  There are other groups but quite local and difficult to explore unless you access the Chinese community. In fact, some government organizations are promoting angel investment and co-investment together with angels offering the possibility to buy out shares after two years at the original price, independently of the valuation that the company has. Although in the past this option was open to “qualified foreign investors” it is no longer an option.

There is a great rivality between Beijing and Shanghai to be the main hub of the startup ecosystem. In fact the biggest market is Beijing by far. The big money and big deals are made there, where the government and universities are. But Beijing is also said to be more difficult, expensive and dispersive. Shanghai is probably better for bootstrapping and for sure is a less hostile environment for foreigners and foreign companies entering the market.

As anticipated the IPO market looks inevitably strait to US, where the search giant Baidu is already listed, the Chinese Twitter versione like Weibo is listing in these days and the ecommerce giant Alibaba is looking at an IPO in the next months. Also the Merging & Acquisition market is starting to peak up with the bigger players more willing to pay for acquisition of younger operators instead of threatening them off the market with internal build in alternative and/or market obstructionism.

As anticipated, this is a synthetic outlook  about the Chinese startup ecosystem. More details, will follow thanks to Oscar Ramos.

But the last leg of my Asian discovery trip is Tokyo, therefore stay tuned. More stories to come.

Contributor: Lorenzo Franchini, Traveller-in-chief - International Startup Hubs Grand Tour

Lorenzo Franchini is an Italian angel investor and entrepreneur, who co-founded IAG, the main Italian angel group. Last February he left his operative role as MD in IAG and began a long trip around the world for the discovery of the best emerging hub and ecosystem for startups. He will be posting on Startupbusiness about this issue.

(Featured photo: Hong Kong Subìnset,  credits to Mike Behnken)

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Pubblicato il:

20 maggio 2014

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