Hong Kong Start-Up Survey: Ecosystem Overview

With start-ups being hailed as engines of economic growth, economies around the world are sparing no effort to nurture unicorn companies in a bid to propel the development of the new economy. According to the Annual Startup Survey conducted by Invest Hong Kong (InvestHK), the last few years have seen a consistent healthy increase in the number of start-ups in the territory. Between 2018 and 2020, the number of local start-ups rose 28% to 3,360, employing 10,688 people. They span a wide range of sectors, with financial technology (fintech), e-commerce/supply chain management/logistics technology, and professional and consultancy services accounting for the lion’s share.

While Hong Kong’s start-up ecosystem continues to grow, its overall performance still has room for improvement. Two recent global start-up ecosystem reports, released by start-up research institutes Startup Genome and StartupBlink, rank Hong Kong below other Asian cities such as Beijing, Shanghai, Tokyo, Singapore, Seoul and Bangalore.

Respondents in the survey noted that the Hong Kong government had started to prioritise innovation and technology and provide all kinds of support to local start-ups. They were also happy to see the entrepreneurship culture growing stronger. The survey found that the local start-up ecosystem is characterised by a large number of young and highly educated entrepreneurs. Some of the respondents took part in entrepreneurship competitions when they were studying in university. Others started their own business before graduation.

In Hong Kong, different stakeholders in the local start-up ecosystem have different roles and functions. For instance, the two leading start-up incubators, Hong Kong Cyberport and Hong Kong Science and Technology Parks Corporation (HKSTP), provide funding and other support; local universities give academic support to the trade; the entrepreneur community organises exchange activities to help start-ups build business networks; and public organisations such as InvestHK and Hong Kong Trade Development Council (HKTDC) promote local innovation and technology achievements abroad.

Government Policies

Governments play a key role in the development of a start-up ecosystem. According to the Global Startup Ecosystem Report 2020 published by Startup Genome, one of the advantages Beijing’s start-up ecosystem enjoys is government support, which helps start-ups attract private capital and lowers their cost of borrowing. The development of Beijing’s Zhongguancun Science Park, which has attracted some 9,000 science and technology companies, is particularly impressive. Meanwhile, Singapore’s StartupSG is responsible for integrating various entrepreneurship resources and providing support to all stakeholders (including entrepreneurs, incubators and investors) in the local start-up ecosystem. Moreover, the Monetary Authority of Singapore proactively provides early-stage funding to fintech start-ups and launched the Financial Sector Technology and Innovation Scheme 2.0 in 2020. The scheme plans to inject an additional S$250 million (US$190 million) into the local fintech sector in the coming three years in an attempt to elevate Singapore into fourth place in the global fintech ecosystem.

Hong Kong start-ups responding to the survey also recognised the importance of the role played by the government, and were hopeful that the SAR government can continue to create a favourable business environment for them. They were critical of the government’s outdated and inflexible work procedures and regulations, and pointed out that when start-ups pursue innovation, they can very often find themselves breaching the ecology of traditional industries and even breaking existing laws. For instance, one of the surveyed companies which developed indoor farming in an industrial building was served an order for making an unauthorised change in use of an industrial building.

Some respondents also complained that when they make recommendations or policy suggestions about innovative technology products to the government, they often have to wait a very long time for an official reply simply because there was no precedent. Because of this, local start-ups often have to spend a lot of time and resources dealing with various government departments. This is unhelpful because innovative technology must respond quickly to market demand. Striking the right balance between policy innovation and supervision will directly affect the long-term development of the local start-up ecosystem.

Although Hong Kong has first-rate education facilities and training resources, the degree of satisfaction among start-ups about local technology talent remains low. 34% of respondents in the survey said that recruiting the necessary talent is one of the top three challenges they face. Some respondents found that local university graduates were unwilling to give up stable jobs to join start-ups; while others pointed out that, because Hong Kong has been putting far more effort into nurturing business talent than pursuing technological advancement, the supply of technology talent falls far short of demand. However, in recent years the government has placed more emphasis on STEM (science, technology, engineering and mathematics) education, and in 2020 launched the STEM Internship Scheme aimed at encouraging STEM students to gain experience in innovation and technology-related work. This scheme is expected to help raise the local labour force’s level of technological ability.

The high cost of local talent has increased the burden on start-ups. The survey found that staff salary is a major expense item for start-ups, accounting on average for 40% of operating expenses. The cost of human resources in Hong Kong is higher than in mainland cities in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). According to the Shenzhen Statistical Yearbook 2020, the average annual wage of employees engaged in scientific research and technological services in Shenzhen was RMB178,000 in 2019 - about RMB15,000 a month (US$2,150 calculated at the average exchange rate for the year). In contrast, figures released by Hong Kong’s Census and Statistics Department show that the median monthly salary of people engaged in professional, scientific and technological activities in Hong Kong that year stood at HK$24,000 (about US$3,100). Although the two sets of data used different compilation methods and statistical concepts, making it difficult for a direct comparison to be made, it still reflects to some extent the difference in wage levels between Shenzhen and Hong Kong.

In a bid to reduce the burden on businesses and encourage local R&D activities, the Innovation and Technology Bureau launched a five-year Technology Talent Scheme in 2018 on a pilot basis, offering subsidies to companies employing and training innovation and technology talent. Although this scheme has been in operation for a few years now, the survey still found that a large proportion of start-ups had relocated their technology R&D activities to mainland GBA cities for cost and technology level reasons. This reflects the gap between the existing measures designed to nurture technology talent and local market demand. In view of the fact that talent is indispensable in the long-term development of the start-up ecosystem, Hong Kong should strengthen local talent training while attracting foreign experts, in an effort to enhance the technology level and competitiveness of the local labour force and overcome the current talent drain.

Attracting More Funds from Private Capital

Local start-ups were particularly impressed by the government-financed Incu-Tech start-up incubation programme run by the HKSTP and Cyberport. Under this programme, the two institutions provide financial aid to start-up companies, of between HK$860,000 and HK$6 million to each one in the case of the HKSTP, and HK$500,000 in the case of Cyberport. Many respondents in the survey have received comprehensive support services as part of this programme including financial aid, marketing and business matching. However, the number of companies who have benefitted from it is still a minority. In recent years, as entrepreneurship has become increasingly popular, the demand for entrepreneurship incubation programmes has risen, but it is noticeable that the application success rate has been dropping year by year. According to data released by the Legislative Council Secretariat, the application success rate for the HKSTP’s entrepreneurship programme fell from 48% in 2015/16 to about 30% in 2018/19; while even though Cyberport raised the number of its beneficiaries in 2016, the application success rate in 2018/19 remained low, at just 16%.

As start-ups typically need huge amounts of capital in the early stage of their development, acquiring seed funding is particularly important. Companies ineligible for the incubation programme have to raise venture capital from the private capital market. The survey found, however, that only a small number of local start-ups manage to raise funds successfully from the private market in their initial stage. Some respondents pointed out that since there was an absence of active angel investors in the local market, they had to turn to overseas investors for help. Even if they came across an interested investor, they still might not succeed in securing funding because the investment amount might far exceed the scale of the investor’s company, making it difficult for the investor to achieve its target return. This has aggravated the problems start-ups face in raising funds. As the local entrepreneurship ecosystem gradually starts to boom and diversify, the government should increase its financial support to start-ups accordingly. At the same time, it should also formulate policies aimed at luring international investors and incubators to invest in the local start-up ecosystem.

Flexible Professional Services Support

Many start-ups would prefer to receive more non-financial support from the market. Survey respondents said that the greatest difficulty they currently face is winning the trust of clients. Given that the local community is largely unenthusiastic about innovative technology, it is important that the Hong Kong government and public organisations take the lead in supporting local start-ups. One respondent noted that companies nurtured by the HKSTP and Cyberport were more likely to succeed when applying for banking services. Some start-ups said that when they collaborated with universities in applying for government funding, the examination and approval procedures were generally smoother and faster.

The existing Public Sector Trial Scheme, and efforts to expedite the process of approving the procurement system, should encourage the government and public organisations to take the lead in using local innovative products and services. This could help boost the confidence of society in innovation and technology, which will in turn create more opportunities for local start-ups. Some companies also stand to benefit from the Technology Voucher Programme, which grants subsidies to local businesses and organisations for using technology services and solutions. However, respondents in the survey wanted the government to do more, by further streamlining application procedures and shortening application processing time. They believed this could greatly increase the benefits of the programme.

Professional services currently available on the local market are extensive, ranging from accounting to legal and consultancy services. However, the support provided by local professional services to the innovative products and services of start-ups needs to be more flexible. One example of this is the testing service. Hong Kong has in place an internationally recognised accreditation system, yet the existing testing framework is not always applicable to innovative products. Respondents in the survey said it was not only expensive but also time-consuming, forcing them to seek solutions abroad. Furthermore, the professional services and fundraising opportunities available on the market mainly concentrate on supporting emerging sectors such as fintech, biotechnology and smart city. As to government support in the form of the Innovation and Technology Fund, it mainly serves technology enterprises and offers little help to the diversified development of the start-up ecosystem.

A number of respondents indicated that after graduating from the incubation programme, they could hardly find any long-term support from the market, which directly affects the survival rate of start-ups. As the Innovation and Technology Bureau is the co-ordinating department promoting the development of local innovation and technology, continued efforts should be made by the government to strengthen the functions of the bureau in centralising information and integrating entrepreneurship resources to help remove hurdles for start-ups.

Springboard to Overseas Markets

In view of the small scale of the local market, expansion into overseas markets is the key to success for many start-ups. The respondents recognised Hong Kong’s role as an international trade platform which helps businesses connect with overseas markets. The survey found that some mainland entrepreneurs, who were also aware of Hong Kong’s ideal business environment and market facilitation measures, come here to develop their business and set up headquarters. Local start-ups should therefore make full use of Hong Kong’s advantages to actively expand their business abroad and gain more knowledge about overseas markets by participating in exchange activities. The SAR government and competent organisations must continue to help local companies take part in international exhibitions and promote their innovation and technology achievements abroad. Publicising the success stories of companies to attract international investors, entrepreneurs and other stakeholders to the Hong Kong market can also help drive the growth of the local start-up ecosystem.

In sum, Hong Kong’s start-up ecosystem is taking shape slowly but surely. The average satisfaction score given by the respondents was 6.52 (out of 10) and the overall degree of satisfaction was at upper middle level. The various stakeholders must continue to work with one another, try to understand the needs of local start-ups, and improve Hong Kong’s entrepreneurship environment. However, compared with other Asian regions, Hong Kong’s entrepreneurship culture evidently has room for further enhancement. The best support and encouragement that can be given to start-ups is for different sectors to make greater efforts to use their innovative technology products and services.

Two-thirds (66%) of the respondents said that the Covid-19 pandemic has had a negative impact on their business. But many of them, in response to the changing market environment, have turned to developing virus prevention products and services and adjusted their production schedules. With traditional operating modes under threat, local businesses are actively looking for new opportunities and using technology to find a way through. The coronavirus has undoubtedly dealt a serious blow to the local economy, but at the same time it has accelerated the integration of the old and the new economies. It is hoped that all stakeholders will continue to support the development of the local start-up ecosystem, and that the start-ups themselves will make more efforts to grasp growth opportunities in the post-Covid “new normal” environment.

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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