Special Feature
Assessing Hong Kong’s Start-up Ecosystem
Assessing Hong Kong’s Start-up Ecosystem<br/>評估香港初創生態系統

Building a dynamic entrepreneurial ecosystem in Hong Kong is vital to the city’s long-term prosperity.

 A vibrant start-up culture not only benefits the city’s economy and overall attractiveness but also facilitates its transition from traditional industries to the new economy. 

While Hong Kong’s entrepreneur landscape has made progress in some areas, future growth may be constrained if support is not better targeted to the changing needs of the city’s start-ups, a recent study by KPMG China and Alibaba Hong Kong Entrepreneurs Fund has found.

The KPMG/Alibaba study, now in its second year, surveyed Hong Kong-based entrepreneurs and university students enrolled in local degree programs. The study measured ten factors – including community support, financial ambition, start-up skills, risk acceptance, access to capital and support infrastructure – to evaluate the present state and future outlook of the start-up ecosystem.                                                                                            

The findings show that a higher proportion of entrepreneurs surveyed (70%) agreed Hong Kong is a dynamic and vibrant start-up location this year compared with last year (56%). However, notable differences exist in how entrepreneurs at different venture stages rate the start-up landscape. For example, a greater percentage of early stage entrepreneurs (86%) agreed that Hong Kong’s start-up ecosystem is vibrant, compared to 59% of growth stage entrepreneurs.

 

More targeted support for emerging innovation sectors is needed to ensure the future vibrancy of the start-up landscape

Since 2017, the Hong Kong SAR Government has been focusing its Innovation and Technology (I&T) investment in four priority sectors: artificial intelligence, biotechnology, fintech and smart city. To spur innovation in these sectors, the Government has been investing in major new research and development (R&D) facilities, supporting funding schemes for start-ups and reforming the tax code to further boost R&D. Additionally, recent changes to the listing regime for companies in emerging sectors have helped unlock capital to support new economy start-ups and broaden their funding options.

In the context of these developments, the KPMG/Alibaba study compares how entrepreneurs rated Hong Kong’s position as an innovation hub for these key sectors. The findings showed that more than two-thirds of entrepreneurs polled (67%) agreed Hong Kong is well-positioned as a fintech innovation hub, while less than half agree the same for the other three focus sectors.

Hong Kong’s relatively strong position as a fintech innovation hub is unsurprising given the city’s well-established and dynamic financial services industry. However, for the other focus sectors, long term investments and concerted efforts are needed to sustain their development and growth in the city.

 

Entrepreneurs are increasingly embracing formal sources of funding, but more education for founders is needed in how to access funding

Entrepreneurs say they plan to increase their use of formal sources of funding such as business angels, private equity and venture capital (VC) over the next three years. However, they are still heavily reliant on informal funding, with 70% surveyed currently using their own personal savings. 

The most common reasons entrepreneurs gave for not using formal funding sources include the perception that they are not needed or that their businesses would not qualify to receive funding. This points to gaps in awareness of how to access formal funding - suggesting that more education is needed to help entrepreneurs better understand these funding channels.  Furthermore, it means that founders must better align their business models with VC fund managers’ expectations for scalability and a path to profitability.

 

Support services should be better tailored to start-ups moving from early stage to growth stage

The study also found that entrepreneurs are increasing their use of support services, such as co-working spaces, pitching competitions and mentoring, compared with a year ago. However, early stage start-ups tended to rate these services as more effective compared to growth stage and mature stage. For example, the results showed that hackathons, incubators and accelerators were seen as more beneficial by early stage start-ups compared to businesses in other stages. This suggests a need for differentiated services that are more targeted to post-prototype companies.  

 

Gaps in community support for entrepreneurs need to be addressed 

The findings reflect that community support will be a critical part of encouraging people to become entrepreneurs. Only 21% of entrepreneurs and 16% of students surveyed agreed that parents in Hong Kong are happy to encourage their children to start a company. This suggests that a further mindset change among the public is needed to encourage wider acceptance of entrepreneurship as a career option.

 

Next steps

The study findings emphasise that policy changes alone are not sufficient to fully drive Hong Kong’s transformation into a dynamic and vibrant start-up ecosystem. The journey will require entrepreneurs, corporates, academics, and the general public to fully embrace change and take a greater stake in the city’s future. This especially means investing in the development of local talent while doing more to foster an entrepreneurial mindset among the next generation of would-be founders. 

To enable Hong Kong to cultivate a strong sense of purpose and improve its innovation capabilities and entrepreneurial landscape, we have the following recommendations: 

•    Both Government and the business community should expand offerings to better support growth stage and mature stage start-ups

•    Founders should prioritise sourcing formal funding by elevating their financial ambition, accelerating global market entry and engaging mentors throughout the lifecycle

•    International private equity and venture capital firms should utilise changes to profit tax exemptions announced for Hong Kong, and the Government should continue to promote these exemptions as well as the other benefits Hong Kong offers as a regional fund management centre

•    All stakeholders should further focus on enabling open data, technology transfer and commercialisation of research in the priority sectors to support Hong Kong’s digital transformation

•    Hong Kong should better leverage the Greater Bay Area as a logical and accessible talent pool

•    As founders build technology start-ups, they should ensure they are also building a people business that enables growth

•    Government agencies, corporates and other industry players should better educate the wider community on the irreplaceable value of start-ups
 

To read the full report, please visit: 
https://home.kpmg/cn/en/home/insights/2019/07/transforming-hong-kong-through-entrepreneurship.html 

 

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