Entrepreneurs and corporate executives highlight the irreplaceable value of start-ups in Hong Kong amid the coronavirus pandemic, agreeing that they are instrumental to developing new ideas, keeping society future-ready and creating job growth, according to a joint survey by KPMG and Alibaba Hong Kong Entrepreneurs Fund (“AEF”).
 
The report, titled Transforming Hong Kong Through Entrepreneurship: Third Edition, assesses the state of development of Hong Kong’s entrepreneurial ecosystem in the context of the ongoing pandemic and identifies further areas for improvement. 134 Hong Kong-based entrepreneurs and executives at start-ups, 200 Hong Kong-based corporate executives and 866 Hong Kong-based university students were surveyed.
 
Despite the disruptions caused by the global pandemic, the number of private venture capital (VC) deals in the 2019/2020 financial year (“FY2019/2020”, from 1 April 2019 to 31 March 2020) increased to its highest level on record, amounting to 140 deals with HKD10.89 billion invested. Hong Kong start-ups also continued to attract mega deals, with such deals attracting HKD3.29 billion in FY2019/2020, accounting for nearly one-third of the total capital invested. During the same period, total government funding nearly doubled, jumping from HKD4.47 billion in FY2018/19 to HKD8.27 billion in FY2019/2020, with more than 540 start-ups benefitting from government VC funding, grants and incubation programmes. 
 
Cindy Chow, Executive Director of AEF, says: “To build on the efforts that both the public and private sectors have been making over the last few years to support the entrepreneurial ecosystem in Hong Kong, it is very important to continue to support growth-stage start-ups.  In particular, we need to attract more investors who are interested in providing beyond Series A venture capital funding and supporting start-ups to expand to the Greater Bay Area.  We should also think about different ways of financing, including venture debt, which is still not very common in Hong Kong.”
 
According to the survey, 34% of entrepreneurs surveyed have seen increased demand for their products and services as a result of COVID-19, compared to 19% of corporates, suggesting that start-ups’ comparable adaptability and flexibility has enabled opportunities. Among entrepreneurs we polled, ‘purpose’ plays a key part in how start-ups define themselves, with nearly two-thirds (63%) of respondents considering the role of their business to be finding solutions that address societal needs.
 
Irene Chu, Partner, Head of New Economy & Life Sciences, Hong Kong for KPMG China, says: “While fintech continues to dominate Hong Kong’s entrepreneur scene, we believe other priority innovation sectors, including biotechnology, smart city, artificial intelligence and robotics could be better supported. More attention should also be given to developing a more robust technology transfer infrastructure to help commercialise Hong Kong’s strong academic research capabilities. Government regulation also has a key role to play in creating optimal conditions for Hong Kong start-ups to thrive.”
 
Sector-focused analysis shows that fintech, smart city, and artificial intelligence-focused start-ups attracted more than half of private VC and government funding in Hong Kong in the past three years. Biotechnology, also named by the government as a priority I&T sector, has been able to attract a significant portion of government funding over the past seven years. The predominance of fintech is also reflected in the survey findings, with 70% of entrepreneurs and 61% of corporates agreeing that Hong Kong is a fintech innovation hub. However, less than half of the respondents agree that Hong Kong is an innovation hub for smart city, AI, robotics and biotechnology, highlighting that further support is needed for these priority areas.
 
Start-ups recognise that in order to be investible, they need to scale up outside of Hong Kong. Among Hong Kong-based entrepreneurs polled, 82% say their companies have local operations in Hong Kong, 31% operate within the nine mainland China cities in the GBA and 26% operate in Southeast Asia.  Among start-ups not currently operating in the latter two markets, 41% say they plan to expand into mainland China GBA cities in the next three years, while 40% plan to expand into Southeast Asia. Product localisation and understanding the nuances of target markets are critical for start-ups as they develop their cross-border expansion plans. Choosing the right partners and funding sources and obtaining the necessary support to navigate policy and regulatory complexity are also important considerations.
 
The findings suggest that both start-ups and corporates see significant benefits from collaborating with each other. Nearly three-quarters (73%) of entrepreneurs surveyed say partnering with corporates increases their access to a scalable customer base, while 66% say it helps them build credentials for future sales and 42% say it gives them access to key decision makers. 65% of corporates think collaborating with start-ups helps them keep up to speed with the latest innovation and market developments, and more than half (56%) say it helps them discover new revenue streams and business lines, with 55% citing access to more innovative suppliers and business partners as an advantage.
 
There is also alignment between the type of support corporates and start-ups say they need and the assistance they can provide for each other. 65% of corporates say they need digital and technology capabilities - a leading area of service that technology start-ups can provide. Meanwhile, start-ups polled say financial support and exposure to clients are the two main areas of support they need. This alignment illustrates the benefits that cross-collaboration brings to both sides. The post-COVID-19 economy has further highlighted the benefits of collaboration as corporates need to increase their agility and respond to changing market conditions and start-ups look to scale.
 
Inspiring more young people to be interested in Science, Technology, Engineering, Arts and Mathematics (STEAM) careers is seen as an important aspect of building up Hong Kong’s start-up ecosystem and developing a future-ready talent pool, with over 60% percent of entrepreneurs, corporates and students citing it as a key development area. However, support for STEAM education is only part of the solution – changing public perceptions on entrepreneurship and creating a sufficient amount of STEAM-related jobs are also important aspects of building Hong Kong’s future talent pool and creating the right conditions for start-ups to thrive.