Hong Kong has continued to make good progress in its journey to becoming a dynamic and vibrant start-up location during the past year, despite the disruption created by the Covid-19 pandemic. The latest “Transforming Hong Kong Through Entrepreneurship” study uncovers how the pandemic has highlighted the valuable role entrepreneurs play in the economy, as well as their agility to respond to changing market conditions and adapt their products and services to meet new needs.

Based on interviews with key leaders in government, industry and academia, as well as a survey of entrepreneurs, corporate executives and students, the 2020 report builds on the two previous studies to assess how Hong Kong’s start-up ecosystem is developing, and to identify gaps in support and potential solutions to challenges. The study also provides analysis of venture capital funding obtained by Hong Kong start-ups to uncover trends in this important area. 

The study comes at a time when corporates and start-ups alike face unprecedented challenges brought by the Covid-19 pandemic. Hong Kong’s GDP declined by 9% in the second quarter of 2020, following a fall of 9.1% in the first quarter of the year. Conditions are expected to remain challenging as economies worldwide continue to grapple with the fallout of the pandemic, including rising unemployment, extensive travel restrictions and lower consumer spending. Even so, our survey suggests a high degree of resilience among Hong Kong start-ups, with entrepreneurs polled more likely to cite the city’s high costs (70%) compared to the economic outlook (54%) as a key challenge to doing business.

Covid-19 has highlighted the irreplaceable value of Hong Kong entrepreneurs

The study suggests a significant number of start-ups and corporates have had to adjust their operating models in the post-pandemic economy. However, start-ups appear to be more agile and flexible in adapting their business models in response to changing demand and market needs, enabling them to take advantage of emerging opportunities:

• 34% of entrepreneurs have seen increased demand for their products and services amid the pandemic, compared to 19% of corporates
• Approximately 50% of entrepreneurs polled say their organizations are collaborating to develop new products and services or are assisting the government in its pandemic response
•  A majority of entrepreneurs and corporate executives surveyed agree start-ups are instrumental to develop new ideas, keep society dynamic and future-ready, provide opportunities for young people, and create job growth and upward mobility

The pandemic has made purpose top of mind for organizations

The COVID-19 pandemic has highlighted how an impact-driven approach can create value while benefitting society:

• While start-ups have traditionally had a strong sense of purpose, the pandemic is contributing to a mindset shift among corporates, leading to collaboration opportunities for start-ups
• An increased number of social and corporate incubation programs are specifically supporting impact and purpose-focused start-ups
• Encouraging the pursuit of purpose and fostering an entrepreneurial mindset across organizations and society more generally is critical for the continued development of Hong Kong’s ecosystem
• More success stories are needed to encourage the acceptance of entrepreneurship as a career path, with less than one-third (32%) of students in our survey agreeing that Hong Kong has sufficient entrepreneur role models

Hong Kong’s venture capital landscape is maturing, with increased government support also having a positive impact

In the 2019/2020 financial year ending 31 March 2020, the number of venture capital (VC) deals increased to its highest level on record:

• A total of 140 private venture capital deals were conducted with HK$10.89 billion invested during the 12 months, with a median deal size above HK$10 million for the third consecutive year
• Hong Kong start-ups continued to attract mega deals, with such deals attracting HK$3.29 billion in FY 19/20
• Late-stage venture capital deals accounted for 61% of all private venture capital funding during FY 19/20 – a further sign of maturity in the VC landscape
• Government VC funding, grants, and incubation programmes in FY 19/20 increased roughly 83% year-on-year to HK$8.27 billion, representing 43% of total investments and funding received by start-ups in Hong Kong 
• A majority of entrepreneurs polled are still relying on informal funding sources. Among those not using government funding, 35% mentioned cumbersome application processes as a key barrier, suggesting the need for further streamlining 

Fintech continues to dominate start-up scene with other sectors requiring greater support

• 76% of entrepreneurs and 61% of corporates polled agree Hong Kong is a fintech hub, but less than half believe Hong Kong is an innovation hub for smart city, artificial intelligence, robotics and biotechnology
• Among entrepreneurs surveyed, 82% have local operations in Hong Kong, while 31% operate within the nine Mainland China cities in the GBA and 26% operate in Southeast Asia. However, on average, 61% of their revenues currently come from the Hong Kong market, compared with 7% from Mainland China GBA cities,10% from Southeast Asia, 5% from other Mainland China cities and 17% from other global markets
• 41% of entrepreneurs polled say they plan to expand into Mainland China GBA cities in the next three years, while 40% plan to expand in Southeast Asia. To facilitate such expansion, understanding of the local market conditions, regulatory environments and available support are critical to success

Aligning start-up and corporate expectations and outcomes critical to successful partnerships

• 67% of corporates surveyed have partnered or collaborated with start-ups
• Both start-ups and corporates see significant benefits to collaborating, with 73% of entrepreneurs polled saying it increases their access to a scalable customer base. At the same time, 65% of corporates think collaborating with start-ups helps keep them up to speed with the latest innovation and market developments
• The study suggests such collaboration has room for improvement, with 57% of start-ups polled mentioning corporates’ bureaucratic processes and red tape as a primary risk. Meanwhile, 66% of corporates mention expectation and outcome misalignment as a risk when working with start-ups

Viable career paths critical to encourage more students to study STEAM subjects

• Two-thirds of entrepreneurs in the study say inspiring more young people to get interested in science, technology, engineering, arts and mathematics (STEAM) subjects is a key development area
• 44% of students surveyed believe entrepreneurship is well-respected career path, while 40 percent believe it is feasible and sustainable 
• Long-term policies and strategies to diversify Hong Kong’s industries and make them more technology focused would boost job opportunities for young people and generate more interest for them to pursue STEAM-related career paths

Next steps

To enable Hong Kong to improve its entrepreneurial ecosystem, we have compiled a list of suggested actions for start-ups, corporates, the public sector and students in the following categories:

• Capturing opportunities for start-ups to grow and scale in Asia-Pacific
• Fully optimising Hong Kong’s technology transfer ecosystem
• Facilitating meaningful collaboration between start-ups, corporates and Government
• Implementing innovative policies that further support the start-up landscape

This is an extract from the third edition of “Transforming Hong Kong Through Entrepreneurship” from KPMG and the Alibaba Hong Kong Entrepreneurs Fund. You can read the full report here:  https://home.kpmg/cn/en/home/insights/2020/12/transforming-hong-kong-through-entrepreneurship.html