A GREAT PLACE FOR INNOVATION

Hong Kong is an ideal platform to do business in the region and the city’s ecosystem provides a great environment for start-ups to develop, test and launch their products. In particular, its robust legal system as well as certification and IP protection regulations give it an edge in heavily regulated areas such as data technology, biotechnology and fintech.

01 – The HK Startup ecosystem

If we look at the startup ecosystem, we see it is growing. In a survey carried out by InvestHK and presented at its flagship event StartmeUp Festival, we see it now boasts more than 4,000 startups, up by 34% since 2019. In terms of founders, the survey shows that HK is quite diverse. We see that 26% of founders come from abroad, most of them from Mainland but also many of them from western countries. Also in this survey, we see at least 16 categories for startups and the first thing we notice is that FinTech and eCommerce stand out. Together they take more than a quarter of the total. Another interesting statistic is that there are two and a half times more Biotech startups than Smart City ones despite HK’s strong real estate sector. This points to strong incentives for biotech and other deep tech in the city.

In terms of unicorns, the city has produced 18 to date including: Lalamove (logistics), Klook (Tourism) or WeLab (FinTech). Sensetime (AI) also reached unicorn status and in their case they went on to IPO at the Hong Kong Stock Exchange. Interestingly, DJI the famous drone manufacturer was actually founded in HK and afterwards moved to Shenzhen to leverage the production capabilities there, an early example of Greater Bay Area synergies. We also have cases of foreign unicorns leveraging the advantages of Hong Kong and China to expand into the region. A good example of a Swiss unicorn success story is Climeworks, which offers carbon removal solutions and has built the world’s largest carbon capture plant. They source components from China and they are already in talks with a prominent Chinese renewable energy company to explore potential collaborations for plants in Mainland. They are also in discussions with HK investors, offering them exposure to projects with budgets between 2bn USD to 3bn USD.

In terms of large-scale ecosystem events, the most relevant one in the first part of the year is Jumpstarter organised by Alibaba Entrepreneurs Fund. It is a first-of-its-kind startup event focused exclusively on showcasing quality startups and providing high-impact networking opportunities, helping to transform HK into a leading hub for global innovation and technology.

02 – Tech Rankings

When evaluating HK as an ecosystem we see it has an outstanding performance in some respects coupled with weaker results in other parts, or in other words, it’s still in the making.

According to Startup Genome HK is 2nd top emerging ecosystem globally. Also, HK has 5 universities among the top global 100 ranking (no other city has this). And in terms of I&T HK plus Shenzhen and Guangzhou are the 2nd most advanced cluster in the world. So there are some clear strengths, but going deeper, we also see weaknesses.

If we look at the funding landscape, HK is in the Top 5 as a centre for IPO but earlier in the funding journey there is still a gap between Seed and Series B. Similarly, HK outperforms within Greater China in average venture capital deal size and high-technology exports but then ranks lower than other cities in I&T rankings. And in terms of R&D Local Universities rank 3rd globally for most-cited and impactful AI research, but when it comes to real world applications, there is more work to do.

So, it’s a mix and match and in general terms, HK still ranks below its traditional peers. This explains why local authorities are working on giving the city a renewed momentum. This will open up a variety of opportunities:

OPPORTUNITIES

01 – Public Funding Schemes

Currently, there are 19 different funding schemes under the Innovation and Technology Fund (ITF), these stand out:

Technology Start-up Support Scheme for Universities (TSSSU)

Under TSSSU and TSSSU+, annual funding of up to 2M USD is provided to each of the local universities to encourage entrepreneurship. Each start‑up can receive up to approximately 200,000 USD a year for no more than three years.

Innovation and Technology Venture Fund (ITVF)

A 250M USD fund to co‑invest in local start‑ups together with VCs on a matching basis to help bring “smart money” into HK. The focus is on supply chain, e‑commerce, fintech, biotech and AI. These stand out:

Research, Academic and Industry Sectors Scheme (RAISe+ Scheme).

It has been allocated 1.3Bn USD to provide matching funds to support a minimum of 100 research teams from 8 universities giving them up to 13M USD in non-dilutive funding. It covers health and medical sciences, new materials, new energy, AI, robotics, electronics, etc.

02 – New infrastructure

Another area of focus is providing the necessary research infrastructure:

– There is a plan to develop two Research Clusters at the Science Park. One for healthcare (Health@InnoHK) and one for AI and robotics (AIR@InnoHK). To date, 29 related research laboratories have been established within these clusters, with the Government now exploring the establishment of a third cluster.

– Also, at the HKSTP an Expansion Programme was recently announced. It will cover an area of 13,000m2.

– Again at HKSTP, three existing industrial estates have been re-designated as “INNOPARKs”: The Medical Accessory Resilience Supplies (MARS) Centre will focus on medical and precision manufacturing; The Advanced Manufacturing Centre (AMC) will provide smart production facilities; and the Microelectronics Centre is designed for new-generation micro-electronics.

– The Data Technology Hub will focus on services related to data transfer operations and global telecommunications at the InnoPark data centres.

– The Cyberport 5 expansion, will provide an area of about 66,000m2 for co‑working spaces, offices, etc. and is expected to be completed by the end of 2025. And the Cyberport AI Supercomputing Centre is currently being built and has been designed to address the growing need for enhanced computing power and facilitate R&D.

3 – Talent programs

Local Universities hold good positions in the Times Higher Education Rankings in science and engineering subjects, and they have seen greater R&D expenditure and more R&D personnel. Also, many multinational companies seeking to enter China decide to keep their employees in HK, where they find it easier to retain them long term. In order to make it easier to expatriate talent to HK and to train local staff, the city has launched a variety of schemes to provide easier visas to skilled workers, training to the existing workforce and subsidies for R&D positions.

4 – The Greater Bay Area Initiative and the Northern Metropolis

The key to the relationship with Mainland China is the GBA (Greater Bay Area) initiative, an effort to integrate a group of 11 cities in the south of China that includes HK but also Shenzhen and Guangzhou. Over the years, China has developed state-of-the-art manufacturing and a level of operating know-how and skilled professionals that is simply irreplaceable despite the geopolitical pressures over supply chains. However, the synergies with Hong Kong and Macao have barely been developed. The next phase is about leveraging these synergies and is already under way:

“Nine out of ten startups or technology companies from other parts of the world that come to Hong Kong do so as it’s a stepping stone to the Greater Bay Area” – Albert Wong Hak-Keung, CEO, HKSTP

Interestingly, a recent trend is that Chinese firms have been taking their products abroad seeking to adapt to lower demand back home and they have been leveraging HK as a base to tackle international markets. So this deeper integration also implies a wider role for HK, including a more preeminent participation in other key initiatives like the Belt and Road.

The most representative project of this new paradigm is the Northern Metropolis, a 28 billion USD project at the border between HK and Shenzhen. It encapsulates all the new tech-based themes and seeks to revolutionise the city’s economy and its relationship with its neighbours. At the centre of it will be the “HK-Shenzhen Innovation and Technology Park” (HSITP), 17 times larger than the HK Science Park. Additional nearby areas will complete the Northern Metropolis and together they will form an “I&T Co-operation Zone” of around 540 hectares right on the border of the two cities.

These initiatives are projected to boost HK’s standing both within China and internationally. According to the PolyU Innovation & Technology Index Hong Kong ranks 7th in I&T in Greater China but is expected to rank 3rd by 2032 if the city realises its vision. Similarly, these projects are expected to boost HK’s standing internationally as these synergies provide HK an edge to race past traditional competitors such as Singapore. On this subject, Nvidia’s CEO pointed out:

“China can beat AI rivals with Greater Bay Area edge” – Jensen Huang, CEO, Nvidia

5 – Regulatory Changes

The Government has also been implementing regulatory changes. Two stand out:

Amendments to CEPA:

HK has a “Free Trade Agreement” with Mainland China to get preferential access to the Chinese market. Under a recent amendment, HK firms will now be permitted to apply HK law and conduct arbitration in HK when investing In Mainland. The amendment also eases certain restrictions on testing and certification, turning the city into a “one-stop” for these services. 

Changes in IPO regulations

Thanks to newly introduced listing rules in 2018 and 2022, the Hong Kong Stock Exchange (HKSE) can now accommodate IPOs for BioTech and other technology firms that would, in the past, have been unable to meet the stringent financial eligibility tests. And in fact, thanks to these changes HK is now Asia’s largest and the world’s second-largest fundraising hub for biotech companies.

06 – Venture Capital

Thanks to the setup of the Hong Kong Growth Portfolio, local and global GPs secured funding to be deployed to startups with a HK nexus. After some time spent in preparation, there is now pressure to deploy these funds and we can expect greater investment activity in the coming future.

However, there are still a variety of challenges:

CHALLENGES

1 – International relations and Sensitive Technologies

Geopolitics and the rivalry between the US and China are making it more complicated to operate in certain areas such as semiconductors and other sensitive technologies.

2 – Operating costs and talent shortages

HK is an expensive city, rent and labour costs remain the two main problems for startups. Also, traditionally, students have favoured careers in stable and well-paid occupations. The drive towards tech, engineering or entrepreneurship is relatively recent and for some roles the supply of talent is insufficient. Also, the city has had some tough years that caused a brain drain that is still being corrected. As a result, the ecosystem still has a certain lack of specialised labour as well as of startup operators and operator-turned-founders.

3 – Implementation

The key to how effective the support schemes really will be lies in how well these plans are implemented. To be effective, the application process to receive support must be as simple as possible, keeping administrative work to a minimum. Also, the success of the initiatives relies on how well the universities, project leads and investors carry out their venture building efforts.

5 – VC funding and Exits

Another issue is the funding gap for startups looking for lead investors in Series A or beyond, this gap still needs to be closed. Also, in recent years M&A activity has dropped, same with the IPO market. As a result, local startups are facing difficulties when seeking to be acquired or go public.

CONCLUSION

This next phase of development of Hong Kong offers a wide range of opportunities, especially in fields such as FinTech, BioTech, Big Data and AI & Robotics. There are also challenges but the mood in the city is optimistic for the medium term. Most importantly, Hong Kong has always been very welcoming to foreigners but now even more so as the local government sees foreign participation in these initiatives as a key component for success. This means European tech firms setting up in Hong Kong are likely to enjoy a very warm welcome to the city.