Hong Kong Start-Up Survey: Strengths and Weaknesses of the Ecosystem

Promoting innovation and technology and creating a favourable business environment for local start-up companies is one of the focuses of government policies in Hong Kong. Efforts to develop innovation and technology are being stepped up in eight major areas - increasing resources for R&D, pooling together technology talent, providing investment funding, providing technological research infrastructure, reviewing existing legislation and regulations, opening up government data, changes to procurement arrangements, and enhancing popular science education.

HKTDC Research conducted a questionnaire survey and in-depth interviews¹ with local start-ups in mid-2020 on the development and performance of the domestic start-up ecosystem. The survey aimed to study, from the angle of local start-ups, whether existing innovation and technology measures can meet market demand. It found that in general start-ups are satisfied with the funding support currently provided by the Hong Kong government. However, it also found that opportunities for raising funds in the private market are few and far between. While respondents recognised the advantage that Hong Kong gives them in terms of accessing overseas markets, they considered the technological ability of the local workforce rather low. Overall, companies in trending industries tend to be more satisfied with the domestic start-up ecosystem than those in other industries.

Challenges Facing Start-Ups

The survey found that the respondents’ start-up funds differed greatly from company to company, ranging from less than HK$1 million to several million Hong Kong dollars. A number disclosed that their income was close to zero in the early stages of starting their business. Since 80% of the surveyed companies had been established for less than five years, many were still in an early stage of development and operating in a period of capital consumption. As a result, “having sufficient sources of funding” was mentioned by a significant proportion of respondents (26%) as the most important factor in the growth of their business.

However, due to the fact that start-ups mainly aim to provide innovative products and solutions and the nature of business varies greatly between different companies, the criteria that are most important to the growth of start-ups also differ between different industries. For instance, companies in new retail (33% of respondents) and innovative services (20%) place special emphasis on building a broad customer base, while those in industries with higher technological requirements, such as biotechnology and healthcare (20%), information technology and hardware manufacturing (16%), and the new economy (15%), find continuous innovation indispensable.

When asked about the difficulties currently faced by Hong Kong start-ups, the respondents said that fierce market competition hindered the growth of their business. Start-ups in all the industries covered in the survey saw this as one of the top three challenges facing them currently. 39% also named winning the trust of customers as a challenge. This is particularly true for companies using innovative technology which involves privacy issues. There is a great deal of concern about this, and local consumers are extra cautious when choosing products and services that use this sort of technology. A good example of a company affected by this concern is local start-up Dayta AI. It makes use of facial detection technology to analyse consumer characteristics and behaviours through the application of AI, in order to help clients improve their marketing strategies. The company’s co-founder and CEO Patrick Tu said that even though the company’s technology meets the privacy standards of many countries around the world, they still find it difficult to dispel the worries of potential clients and as a result, local enterprises are not highly receptive to their products. In addition to these two issues, significant numbers of respondents also said they were hindered by the increasing cost of doing business (37%), not being able to hire the right/talented people (34%), inadequate funding (31%), and the difficulty of finding investors (28%).

Hong Kong’s Start-Up Ecosystem

In order to identify the strengths and weaknesses of Hong Kong as a start-up hub and understand the needs of local start-ups, survey respondents were asked to rate how good Hong Kong is at supporting the domestic start-up ecosystem. A 10-point scale was used to rate various support factors, with 1 representing “very dissatisfied” and 10 representing “very satisfied”. The factors were grouped into three categories - funding and support, market accessibility, and social infrastructure.

Funding and Support

At present, the Innovation and Technology Fund administered by the Innovation and Technology Commission is the main pillar of government support for the development of local innovation and technology. The fund covers several areas, including supporting research and development, promoting the commercialisation of research and development (R&D) results, facilitating technology adoption, and nurturing technology talent. The survey found that the respondents were largely satisfied with the funding provided by the Hong Kong government to start-up companies, giving it an average rating of 6.31. Half of them gave it a score of between 7 and 10. In the interviews, the respondents largely recognised the increased support given by the government to local start-ups in recent years. However, they pointed out that the application procedures for acquiring such support are too complicated and time-consuming and that many start-ups may not have sufficient resources to handle these formalities. The respondents said they hoped the government could streamline the application procedures further and shorten the processing time.

The start-ups were less satisfied with the non-monetary support provided by the government, giving it an average score of 6.1. Many complained that the local community has quite conservative views about innovation and technology, which makes it difficult for start-ups to win the trust of potential customers in the early stages of their development. They would like the government to take a leading role in adopting local innovation and technology products and services - a move which could help to boost the confidence of the local community in these products, promote the application of innovation and technology, and raise the profile of start-up companies.

Respondents said that, compared with the support available from the government, support from the private sector for the local start-up ecosystem is inadequate. They gave the availability of private funding and non-monetary support from private organisations average scores of 5.99 and 6.05 respectively, the lowest ratings given to any of the support factors. Many respondents specifically mentioned that it is extremely difficult to find angel investors in the local market. There are two main reasons for this. Firstly, investors are not generally engaged in trending industries or technology industries (such as financial technology or biotechnology), and secondly, the amount of investment the investor is willing to make is often too high for its scale. As a result, the majority of start-ups have to use personal savings, government funding and bank loans as operating capital before they start to make a profit.

Connection and collaboration between start-ups and academia achieved an average rating of 6.26. The importance of this factor mainly depends on the nature of business of the particular company. For example, Lydia Leung, CEO of local medical device developer Beluntech, said that the company had successfully acquired clinical data for its products by collaborating with the Chinese University of Hong Kong (CUHK). For industries with lower technical requirements, such as new retail and innovative services, collaboration with academia is less important.

Market Accessibility

In terms of market accessibility, local start-ups are most impressed by the advantage Hong Kong has in enabling them to access overseas markets. They gave this factor an average rating of 6.48. Local start-ups can connect with overseas buyers through the Incu-Tech incubation programme run by the Science and Technology Parks and Cyberport. They can also participate in the overseas business missions organised by the HKTDC in order to keep across the latest developments in foreign markets. Because market expansion is important for the development of start-ups, Hong Kong’s advantage in market accessibility gives it a vital foundation in its move to position itself as a start-up hub.

It is, however, worth noting that local start-ups are less satisfied with their access to mainland markets, rating it at 6.29. When asked about the difficulties and barriers facing start-ups looking to expanding into the GBA market, 43% of respondents cited the difference in institutional systems (e.g. legal, tax) between the mainland and Hong Kong, while 39% were concerned about the uncertain market conditions there. According to the opinions expressed by start-ups in the survey, the Hong Kong government should make more efforts to explain to local businesses the differences between the policies of various mainland GBA cities, in order to boost their confidence about venturing into the GBA. (For details on the views of start-ups about the GBA, please see Hong Kong Start-Up Survey: Opportunities and Challenges in the Greater Bay Area.)

The start-ups in the survey agreed that the domestic start-up ecosystem helps them with early-stage customer acquisition, rating it at 6.35. Being an international trading platform, Hong Kong brings together businesses, buyers and traders from all over the world and serves as a springboard for international brands looking to enter the Asian market. For local start-ups, Hong Kong is an ideal base to market-test new products and services. One biotechnology start-up in the survey also pointed out that, for medical and healthcare products, being tagged with the “Made in Hong Kong” label can help win the confidence of overseas customers.

Social Infrastructure

Because start-ups focus on innovation, they attach more importance to intellectual property than traditional businesses do. The survey found that local start-ups are satisfied with the intellectual property protection mechanism in Hong Kong, giving it an average rating of 6.76, the highest score awarded to any of the support factors. Some respondents pointed out that since Hong Kong’s intellectual property documents are bilingual in English and Chinese, they are applicable in both the local and overseas markets. Moreover, the application fee is low and the procedures are simple. At the company interviews, none of the start-ups expressed dissatisfaction with the local intellectual property protection mechanism.

The respondents on the whole agreed that, compared with other Asian markets such as mainland China, Taiwan and South-east Asia, Hong Kong seems to be more conservative about the adoption of innovative products and services. However, with the rise in Hong Kong’s entrepreneurial culture in recent years, plus the effects of the Technology Voucher Scheme and Public Sector Trial Scheme launched by the government, the local market is becoming more receptive to innovation and technology. The companies in the survey gave local technology adoption an average rating of 6.49. Nevertheless, it is worth noting that those in different industries gave widely different ratings in this area, with 71% of the biotechnology and healthcare start-ups scoring local technology adoption between 7 and 10, but only 45% of new retail companies and 42% of new services companies giving it the same ratings.

Start-ups are generally satisfied with local professional services support, giving it an average rating of 6.4. Professional services and other commercial and industrial support services are one of the four pillar industries in Hong Kong, contributing over 10% towards the territory’s GDP and employing more than 500,000 people. This workforce provides international standard accounting, legal, and consultancy services to many multinational corporations. However, although they provide a wide range of professional services, their flexibility could be improved. Michael Choi, chief technology officer of Cypress Bio-Tech Co Ltd, said his company planned to set up a laboratory in Hong Kong, where it would keep mosquitoes on which it would conduct tests of its mosquito-repellent products. But they found that the testing services available locally lacked versatility, and were costly and time‑consuming. Eventually they had to turn to overseas options. To give another example of this lack of flexibility, Frank Ho and Walter Cheung, co-founders of Contrendian Limited, pointed out that they had to spend a great deal of time looking for local law firms who would provide them with quotations for a patent application for their investment technology platform.

The technical proficiency of the local workforce was rated rather low by the respondents, who gave it a score of 6.27. Edward Li, founder of local e-commerce company Starlity Limited, said that because Hong Kong has been putting more effort into training business experts than into training technology talent, local technology talent is now in short supply. He added that recruiting talent from abroad involves complicated application procedures. In view of the high cost of Hong Kong talent, some start-ups in the survey said they had relocated their research and development activities to mainland GBA cities.

Overall Level of Satisfaction

All in all, start-ups in Hong Kong are largely satisfied with the domestic start-up ecosystem, giving it an average rating of 6.52. The overall degree of satisfaction is at the upper-middle level. Half of the respondents scored it at between 7 and 10, while only 11% gave it a rating of between 1 and 4. Trending industries such as those related to biotechnology and healthcare, the new economy, and new retail tend to be more satisfied with Hong Kong’s start-up ecosystem, scoring it on average at 6.98, 6.78 and 6.64 respectively. The satisfaction level of non-trending industries is lower. Companies in information technology and hardware manufacturing rated it 6.5 on average, while those in innovative services scored it at 5.99.

Among the various aspects of the domestic start-up ecosystem, the respondents are most satisfied with the social infrastructure, followed by market accessibility, but are in general less satisfied with funding and support. Rather than monetary support, they would prefer to receive more non-monetary support from the government and the private sector, such as marketing and the adoption of local innovative products and services. This non-monetary support can help Hong Kong start-ups tide themselves over during the pandemic and bolster their long-term growth.

¹ See Appendix for background information on the survey.

Appendix

259 Hong Kong-based companies founded during the past eight years responded to the online questionnaire survey conducted by HKTDC Research from June to July 2020. The survey aims at achieving a better understanding of the development trend and performance of the local start-up ecosystem, and collecting views about the opportunities emerging from the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). During the survey, in-depth interviews were held with 25 stakeholders and analyses of key cases were made. The survey covers major sectors of the local start-up ecosystem, including biotechnology and health, information technology and hardware manufacturing, innovative services, the new economy, and new retail.

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