The article was first published on LinkedIn written by Jimmy NG and edited by Jake Newby and Zinan Zhang.
Insider
Jimmy NG is the Senior Investment Manager at Gobi Partners GBA.
TechNode Insider is an open platform for subject experts to discuss China tech with TechNode’s audience.
2023 was a tough year for early-stage founders and VC funds around the globe, and Hong Kong was no exception. Hong Kong has been in an even trickier position than other cities, given its highly outward-facing economy and connectivity with China, meaning it was naturally impacted by the sentiment of global investment around China turning so sharply after the huge bull runs in the country for the past 20-plus years. While the fundamentals of Hong Kong have shaken and shifted, 2023 was a year where much of the foundational work of building an innovation scene was done.
Here are my two cents on what to expect in Hong Kong for 2024 in the early-stage startup scene, organized by opportunities and challenges:
Opportunities
1. RAISe+ Scheme – first batch of innovative university startups to be unveiled
A HK government-led program with an allocation of HKD 10 billion, the RAISe+ scheme will, on a matching basis, fund 100 high-potential research teams in eight universities. Each team can get up to HKD 100 million in non-dilutive funding. This is the biggest funding scheme available for university-originated startups in HK. The scheme was a core focus for many knowledge transfer offices in HK universities in 2023, where professors and their fellow researchers/project leads were busy writing proposals, while university staff jiggled with all the letters of intent from investors/industry partners and requirements set forth by the Innovation and Technology Commission. The first batch of recipients is expected to be announced within Q1 2024 after screening.
We met some of these projects with interesting underlying IPs. How the universities, professors, project leads, and investors handle the rest of the difficult parts of starting a venture – hiring, fundraising, productization, fundraising, and more – is the next set of questions to be answered.
2. HK remains the go-to hub for Greater Bay Area (GBA) startups going global
We spent quite some time in 2023 meeting China-based early-stage startups related to advanced manufacturing (semiconductors, new materials, ESG materials), industry 4.0 (robotics, automation, innovations in traditional industries), and cross-border e-commerce. Chinese founders shared their firsthand experience facing the lowered spending power of local corporates and consumers. As a result, many of them have taken their products abroad, selling at a higher price point than what they could ask for in China. Over time, China has built up top-of-class manufacturing and operating know-how and trained skilled labor that is irreplaceable by other geographies.
China startups that possess unique R&D and manufacturing know-how and operate in non-sensitive industries will still utilize Hong Kong as the hub for initial funding and landing their first batch of overseas customers.
3. Lots of dry powder waiting to deploy in HK
In 2023, local and global GPs secured fresh funding to be deployed specifically to companies with a Hong Kong nexus, thanks to the setup of the Hong Kong Growth Portfolio. Last year, many of them were setting up their teams and understanding the ecosystem in HK. On the other side, CVCs and universities are increasingly active in either direct investment or fund investment in HK as well. There is pressure to deploy for these investors, which should help to drive more deal activity in 2024.
Having said all this, the HK startup ecosystem is faced with the following fundamental challenges.
Challenges
1. Opex – cost of operating, and funding gap between Seed to Series B
While GPs are loaded with cash, there is a lack of startups with a valuation range of $200 million – $500 million that can digest a round of $20 million – $100 million in HK. On the other side, there has been a funding gap that remains unfilled for startups looking for Series A/+ lead investors.
Rent and labor costs continue to be the two biggest headaches for HK-based startups.
2. Talent — lack of startup operators, and operator-turned-founders
While there has been strong growth in the number of startups in HK over the past decade, the ecosystem of operators who are willing to take the risk and be the first 10 employees of a fresh HK startup is still nascent. We are still building the flywheel where early employees of successful startups become founders or operators for another early-stage venture. Not to mention the challenge of the tech brain drain in the city since 2020.
3. Exit pathway – billion-dollar question for both VC and startups
With many corporates cutting their spending, the incentive for larger players to acquire startups has decreased, especially when M&A activity is already low in the region. Coupled with a stagnant IPO market, HK startups are faced with an even tougher market compared to other comparable startups in other regions.
