Recent figures have shown that the developing world, spearheaded by India and China, now represents 85% of the world’s population and accounts for 60% of global GPD compared with 33% a few decades ago. In a recent article, the Sydney Morning Herald claimed that Chinese people were among the most positive and optimistic about the future, with a level of confidence bettered only by India, Indonesia and Iceland.
The Australian newspaper based this assumption on a number of facts. According to the Edelman Trust Barometer published earlier this year, 84% of the population trusts the authorities. Another study conducted by nonpartisan US fact-tank the Pew Research Centre a few years ago found that 66% of Chinese citizens expressed confidence in their government – the fifth-highest such expression globally at the time.
Perhaps the Chinese do have reasons to trust their authorities. According to World Bank data, between 1981 and 2013, the country’s poverty headcount ratio – the percentage of people living on less than $1.90 a day – fell from 88.3% to 1.9%, with the economy having grown by an average 9.5% year-on-year. Last year, a further 12.89 million people were lifted out of poverty, according to official figures. Earlier this year, the state announced it aimed to eradicate extreme poverty – currently involving 30.5 million people – across its population of 1.37 billion by 2020.
Meanwhile, China’s GDP per capita has grown from $158 some 40 years ago to an estimated $8,800 now – a number that the government is looking to raise to $30,000 by 2035. According to the International Monetary Fund, the Chinese economy is currently the second-largest worldwide, with a GDP of $14bn, compared with $20.4bn in the US. Since 2011, China’s GDP has been growing an average 7% to 8% each year.
A direct result of China’s economic growth over the past few years has been its growing commitment to the venture capital space. Having laid the first bricks of its venture market in the 1980s, the country has become one of the world’s core VC markets. It recently overtook the US for the first time, with a total of $30.9bn of VC funding compared with $27.2bn in the US in the third quarter of 2018, according to Goldman Sachs.
Consultancy KPMG recently reported that VC investments in China had hit a record high of $40bn last year, a 15% increase from 2016’s $35bn. Of the 10 largest funding rounds recorded in the fourth quarter of 2017 worldwide, half were Chinese, including three deals above $1bn, the report added.
With an economic growth of unprecedented speed and intensity, has China entered a golden age for startup funding, as some economists have declared? This question can be explored through the lens of corporate, government and university venturing.
Corporate venturing
Over the past few years, China has been home to the fastest-growing corporate venture capital market. Between 2012 and 2015, its share of global CVC activity increased from 3.6% to a whopping 32.2%. Over the same period, that of the US fell from 80.8% to 52.2%.
According to KPMG, in the fourth quarter of 2017, Chinese corporate participation in VC deals peaked at 32.3%, representing $11.7bn and ranking far above the global average of 18.7%. Strong investment areas in 2017 included business-to-business enterprise services with around $1.3bn in the fourth quarter alone, autotech, artificial intelligence (AI), augmented reality, blockchain and e-payment services. Last year, $13 trillion of mobile payments were recorded in China, according to national news agency Xinhua.
Over the past three to four years in particular, corporate funding has boomed, with deal numbers jumping from 136 to 230 between 2014 and 2015, and remaining above 200 since, according to GCV Analytics. A respective 233 and 273 deals were recorded in 2016 and 2017. In addition, around 180 deals have so far been recorded this year, paving the way for a potential record.
Last year China ranked second for both deal value and volume, with 264 transactions worth around $37bn, still far behind US figures of 1,120 deals worth $45.3bn.
This year has so far proven to be more favourable, with $50.2bn of investments against $33bn in the US. The latter is, however, still far ahead in deal numbers, with 780 transactions compared with 179 in China. Irene Chu, partner and head of technology for Hong Kong at KPMG China, said: “Chinese investors are focused on rapidly scaling and gaining market shares so that they can quickly dominate the market. This is why we are seeing bigger acquisitions – many driven by China’s biggest tech giants, as they look to take out their competition in different areas.”
A major deal closed earlier this year turned out to be a game-changer for the country’s performance. Ant Financial, the online payment subsidiary of internet company Alibaba, raised a $14bn series-C round in June that brought its valuation to $150bn and made it the world’s largest unicorn. It was the largest amount raised by a private company in a single round, and was backed by a consortium of foreign and local investors, including Singapore’s sovereign wealth funds GIC and Temasek, Sequoia Capital China, Warburg Pincus, Canada Pension Plan Investment Board, Silver Lake and General Atlantic.
Of the current top 20 internet companies worldwide, 11 are from North America and the remainder from China. The latter include three behemoths – Baidu, Alibaba and Tencent, commonly referred to as “Bat” – whose cumulated market value amounts to just over $1 trillion – $82bn, $509bn and $483bn respectively. Other Chinese companies on the list include Ant Financial, Xiaomi, whose market value stood at $75bn in May 2018, Didi Chuxing with $56bn, JD.com with $55bn, and Meituan-Dianping and Toutiao with $30bn each.
Two of these companies have also gathered six of the 10 largest funding rounds raised by China-based companies since 2011. The online local products and services platform Meituan-Dianping thus successively received $3.3bn and $4bn in funding, having recently made its $4.2bn IPO with a market capitalisation of $52bn. Meanwhile, Didi Chuxing, number-one peer of US ride-sharing app Uber, attracted successive funding rounds of $3bn, $4bn and $5.5bn, and most recently $7.3bn. Uber’s Chinese counterpart is now rumoured to be planning its IPO with a projected market cap of up to $80bn.
An IPO surge seems to have hit the country. In June, electronics producer Xiaomi finalised its IPO with a valuation of $54bn, short of its original $100bn target; news content platform Toutiao could also be eyeing one with a targeted valuation of $45bn, according to industry insiders.
“As valuations continue to soar in the private market, more companies are looking to go public earlier than before,” Goldman Sachs managing director Heath Terry told Business Insider. He added: “While corporate venture capital has been a major driver of growth in venture as an asset class globally, nowhere has that been more evident than in Asia, where Alibaba, Baidu, JD.com and Tencent have followed the lead of SoftBank, creating massive ecosystems of venture investments under their umbrellas. Nearly every major private company in China now has at least one of those five companies as an investor, and the level of influence these ecosystems have in steering the development of new technologies and business models is unprecedented.”
According to GCV Analytics, investments made by the Bat companies in Chinese businesses have accounted for as much as 46% of the total amount raised so far this year – $25.6bn of a total $55.5bn. Their transactions also accounted for 29% of the 221 deals closed to date. Last year, Bat’s investments represented 18% in terms of deal numbers and 35% of value at $15bn.
In a recent article, Bloomberg listed Bat’s common and individual investments in Chinese startups across a wide range of sectors. Altogether, the listed Bat-backed companies – which exclusively included businesses worth $1bn or more – had a cumulated valuation of $180bn. The five largest of these were Didi Chuxing, Meituan-Dianping, e-commerce platform Pinduoduo valued at $21bn, food delivery company Ele.me worth $9.5bn, and online insurance group Zhong An Insurance, valued at $6.5bn.
While there are obvious benefits from such colossal investments, the fact that China’s venture market, if not its economy as a whole, is so dependent on a handful of seemingly almighty private companies might have its drawbacks.
In a recent report, Bloomberg spoke of the struggle experienced by local startups in “escaping the shadows of Alibaba and Tencent”, saying Bat-backed deals often felt like a “trap” to them. And while there are now more Chinese than US tech companies going public thanks to their support, this all comes at a price.
The report went on: “A review of IPO filings by Chinese companies [showed] they can give Alibaba and Tencent inordinate voting power through board seats and veto rights, come laden with conflicts of interest over hiring, M&A and other strategic decisions, and deepen the startups’ dependence on traffic from the larger companies to life-and-death proportions.”
For example, Tencent was recently granted more voting rights and more power over portfolio company Nio, a smart electric vehicle developer that floated with a $6.4bn valuation.
According to Bloomberg, over the past two years, around a dozen Chinese companies – including Meituan-Dianping and Pinduoduo – have flagged the two behemoths as risk factors in their IPOs, having written in their filings that “failure to maintain our relationship with Tencent could materially and adversely affect our business”. The power of Bat to decide which companies succeed or fail in China’s consumer and corporate markets, Bloomberg concluded, had become “both outsized and unprecedented”.
An industry expert who wished to remain anonymous commented: “Bat definitely have a critical driving force in the venture community, but their overbearing presence and influence can act as a double-edged sword. Entrepreneurs may often be afraid to start a new internet business in China, as they fear their actions and development might be limited, or that they will end up being invested or acquired by Bat anyway.” The source also noted that China’s venture landscape consisted of many other top-tier VCs that should not be forgotten or ignored.
Among the top 10 corporate investors in the region since 2011, half are Chinese. These include Tencent with 137 deals, Chinese investment holding company Legend Holdings with 96, Alibaba with 78, Baidu with 44, and e-commerce platform JD.com with 33. Other top corporate investors in the region have been mostly US-based, including chip maker Intel Capital with 41 transactions, telecoms equipment maker Qualcomm (35) and Pennsylvania-based investment and trading services provider Susquehanna International Group (32). Japanese conglomerate SoftBank and German mass-media company Bertelsmann complete the list, with 33 and 43 deals respectively.
Chinese corporates moreover seem to be fairly in control of their domestic market. Of the top investors in the region since 2011, two thirds were Asian, only two of which – SoftBank and Taiwan-based precision industry group Hon Hai, better known as Foxconn – were non-Chinese. According to GCV Analytics, in 2016, 86.4% of investments in Chinese companies were backed by Chinese-only investors, while the US recorded 47.5% of domestic-only deals for the same period. In 2015, these figures amounted to 78.8% and 63.6% respectively.
Duncan Turner, general partner at New Jersey-based VC firm SOSV and managing director of HAX Accelerator, which focuses on Shenzhen and San Francisco-based hardware startups, said: “In many ways, China has already overtaken the US. I would say the biggest divide between both markets exists in the deep tech space, where China still lacks some of the experience and know-how needed to develop new technology in specialist areas such as semiconductors, for instance.”
But even in that respect, he has started to notice some changes: “I feel consumer hardware in particular has got to a point where the ‘Made in China, designed in China’ has become a strong element,” he said. “Chinese consumers used to be more focused on western products, but a number of strong national brands of the likes of Xiaomi have since emerged and are leading the way for others. From an emotional perspective, consumers are very brand-savvy here, and so they have a growing wish to purchase things that have been made and conceived here. China as a nation is booming, and there is now a lot of pride in being Chinese.”
Turner said considerable investment in infrastructure was another factor. In 2002 a $4.50bn road construction project was launched, supported by central and local government. Turner said: “China is equipped with a rail infrastructure and road network that surpass any others in the world, which gives it the ability to have huge control over its logistics and supply chains. This, combined with an expanding middle class and fast technological progress, may very well help China become the world’s strongest economy.”
Need for speed
As Jeffrey Li, co-managing partner at Tencent Investment and general manager of Tencent M&A once told GCV: “In China, speed in everything.” Chibo Tang, managing director at Shanghai-based VC firm Gobi Partners, which manages the Alibaba Hong Kong Entrepreneurs Fund, agreed. “The environment in China is so competitive that it goes through peaks in values and big cycles much faster than anywhere else in the world,” he said.
And as Chinese investors start to feel the limits of their domestic market, some of them are itching to explore new paths. Alvin Graylin, China regional president for Taiwan-based smartphone and virtual reality equipment maker HTC, and president of the Virtual Reality Venture Capital Alliance, said: “In the past, Chinese investors were more focused on the local market, but given its stage of maturity, they now need to expand beyond China to find additional growth potential and discover new content and solutions that they can bring into the country.”
This trend, added Graylin, was likely to continue as the local investment environment became more fiercely competitive, making investment opportunities overseas increasingly attractive.
The Financial Times recently reported that between January and May 2018, Chinese VCs had, for instance, poured $2.4bn of investment into Silicon Valley startups – nearly twice as much as the previous year. “I think all Chinese investors and startups, both new and established, are now looking at cross-border opportunities,” said Gobi’s Tang. “New companies are facing a saturated market where finding your own niche is increasingly hard, while longstanding businesses are thinking of ways to establish their footprint outside China.”
This, according to Tang, had given birth to new trends and business models, as entrepreneurs were starting to think of how they could leverage China’s strengths abroad, and how they could import the best foreign technology into the country. “China is already looking beyond its borders,” Tang added, “and this is very much in line with the country’s geopolitical agenda. As the government pushes the Belt and Road Initiative [see below], all the capital and support are going in the same direction – abroad.”
Government
All corporate players are adamant – the role of the Chinese government in establishing and solidifying the country’s ecosystem over the years has been crucial.
Aiming to reduce the scope of its power and move on from a centralised system in which it controls and owns everything, the state’s first commitment to the venture space was the creation of a series of targeted science and technology programs. These were mostly overseen by the Ministry of Science and Technology, the National Natural Science Foundation or the Ministry of Finance.
The first – the Key Technologies R&D Program – was launched in 1982 and was implemented through four successive five-year plans, which are said to have largely contributed to the technical renovation and upgrading of the country’s traditional industries. The State High-Tech Development Plan shortly followed, with the intention of stimulating the development of advanced technologies. In 1998, the National Basic Research Program was created to support research in a number of scientific fields, and in 1986, the Spark Program was established to revitalise rural economy through science and technology. Spark reportedly contributed to the execution of 100,000 projects across 85% of China’s rural areas.
But the most famous to date remains the Torch Program, largely considered to be responsible for kickstarting China’s innovation and startup scene. Managed by the Ministry of Science and Technology, Torch was established in 1998 as a guidance program for developing new and high-tech industries in China. The initiative was also an attempt to increase China’s exchanges with the outside world, encouraging industrial and commercial collaborations with foreign partners. Torch played a major part in enhancing China’s reputation as a tech hub, having opened up new activity fields such as biotech, electronic information, mechanical-electrical technology and energy-saving technology.
Under the Torch initiative, the government also created innovation clusters in the form of science and technology industrial parks. The first, Zhong Guan Cun Science Park in Beijing, is often thought of as Silicon Valley’s Chinese counterpart. By 2015, 53 parks had been set up, hosting a total of 60,000 companies and 8 million employees. According to official figures, three years ago, the parks contributed roughly 7% of the country’s GDP and represented 50% of its total R&D expenditure. Earlier this year, the government announced plans to build a $2.1bn AI-focused technology park in the suburban Beijing district of Mentougou, in keeping with the wider agenda to make China an AI world leader by 2030.
Torch also contributed to the creation of some 30 software parks, and oversees the activity of various entities such as technology business incubators, the seed-focused Innofund, and the Venture Guiding Fund, which is both a fund of funds and a co-investor alongside VCs.
All these initiatives helped China move away from a centralised and state-dependent economic model towards an increasingly open and market-orientated economy. GCV reported last year that while in 2005 private enterprises made up only 5% of the MSCI China stock index by weighted market capitalisation, in 2016, this proportion had risen to 48%, with non-state-owned enterprises (SOEs) now driving wealth creation and economic growth to a much greater extent.
Steve Blank, a Silicon Valley serial entrepreneur who ventured to Asia a few years ago, reported that by the mid-1990s, the founding of domestic VC firms had begun in China with the establishment of local government-financed venture capital firms, followed by university-backed VC firms.
He added: “The perception of venture capital gradually shifted from being a type of government funding to a commercial activity necessary to support the commercialisation of new technology. But it was not until 1998 that corporate-backed VC firms could be established, and that started a wave of VC funds backed by government, corporate and foreign capital.”
These days, some of the most significant government backers are, for instance, banking and financial services group China Development Bank, National SME Development Fund focusing on small and medium-sized enterprises (SMEs), sovereign wealth fund China Investment Corporation, life insurance group China Life Insurance, or investment holding company State Development and Investment Corporation.
SOSV’s Turner said: “A lot of the growth of VC deployment in and out of China – which is faster than anywhere else in the world at the moment – is due to government efforts to encourage entrepreneurship and VC as a means to enable innovation. The series of five-year plans and programs they have been implementing act as great indicators of where the fertile ground is for innovation, and where entrepreneurs and investors alike should focus their efforts.
“For example, if you know that Industry 4.0 is a big national drive, you know that generous funding will likely go into that space both at provincial and state level. This type of stability really sets the ground for great innovation, as people are not taking bets on the marketplace, but on technology instead. It is a great way of diminishing the risk factor in the market.”
Ever since taking office in 2013, President Xi Jinping has been pursuing his “China Dream” – a project aimed at rejuvenating the nation and strengthening its position as a world leader. One of his landmark policies has been the establishment of the Belt and Road Initiative (BRI), which seeks to expand maritime routes and land infrastructure networks connecting China with Asia, Africa and Europe to boost trade and economic growth in and between those regions.
The BRI, which reportedly oversees projects worth $900bn, now involves 70 countries with a cumulated GDP of $21 trillion and a total population of nearly 5 billion – more than half the world.
University venturing
University venturing activities in China began as early as the 1980s, with R&D centres and educational institutions providing the first sources of seed funding for spinoffs. A number of steps by the government contributed to this development. A recent example was the creation in 2011 of the China International Technology Transfer Centre – a government-managed platform in the Zhong Guan Cun Science Park devoted to the promotion of global tech transfers involving universities, research centres, science parks and innovation clusters, as well as public bodies and SMEs.
In 2006, China’s former president, Hu Jintao, had already formulated the idea that the country should switch from a “resources-dependent” to an “innovation-driven” economy. The government then released an ambitious plan looking to expand research in a number of fields including biotech, IT and energy. Intending to establish the country as a world-leading science power by 2050, it set a target for annual R&D expenditures of RMB900bn ($130bn or 2.5% of GDP, compared with 1.25% in 2004) by 2020.
Xu Guanhua, China’s former minister of science and technology, declared at the time: “A big economy is not necessarily a powerful economy – China still lacks capability in innovation, particularly in those strategically important areas.”
The state also planned a reformed National Technology Transfer System by 2025, whereby the national tech market would become more open and unified, and channels of tech transfer among its various players would be expanded.
With that official agenda having been laid out, Chinese university venturing activity has developed over the past few years. It currently exists in a number of forms. An example of these are the national technology transfer centres (NTTCs) – a Chinese version of the west’s university tech transfer offices. Created in 2001, NTTCs are present in a number of institutions, including East China University of Science and Technology, Huazhong Science and Technology University, Shanghai Jiaotong University, Sichuan University, Tsinghua University, and Xi’an Jiaotong University.
Other institutions have adopted different approaches to venture. Hangzhou-based Zhejiang University created a science and technology development and transfer office in the 1980s. It has supported more than 3,000 projects to date, nurturing science and technology partnerships with the government, as well as with foreign and domestic firms.
Beijing University, Fudan University and Tianjin University have also been active in commercialising university-born technologies. Beijing University ranked first among Chinese universities for revenues generated by spinoffs for several years, while Fudan and Tianjin were respectively ranked fourth and fifth in terms of the number of patent applications in the early 2000s.
Other Chinese universities engage in VC through their science and technology parks. Tsinghua University Science Park, commonly known as Tuspark, is said to be the country’s largest and one of the largest worldwide. With at least 30 branches across China and three in Hong Kong, Tuspark was established in 1994. Since 2004, it has been operating under the TusHoldings brand, responsible for the development, construction and management of all Tuspark facilities. Currently managing $5bn of assets and 80 incubators, TusHoldings has helped set up 1,500 businesses to date and holds stakes in 300 private companies.
Through its investment arm Tuspark Ventures, the company also engages in early-stage high-tech funding. Launched in 2001, the VC arm now has $150m of assets under management, having invested in 40 companies, mostly in the telecoms, biotech and cleantech sectors. Tuspark Ventures has raised 13 funds to date and is currently raising a new one targeting RMB100m ($14m), according to a source. Each fund typically makes two to four commitments.
Yiqi Liu, investment manager at Tuspark Ventures, said: “Our organisation receives both university and government support and is also involved in industry clusters. This gives us huge advantages and increases our influence over the market.” Reflecting on what investors at large could be doing better in China, he added: “It seems to me that investors have been a bit blind lately. They have the capital needed, but they do not quite find the right projects to support. The moral is that we need to have a more focused approach. As investors, especially at university level with the resources we have at disposal, we have a duty to capture and lead the trend.”
In 2017, Tuspark launched a program to encourage cross-border collaboration. As a result, the Sino-Israel and Sino-Italy science parks were created last year. A number of joint ventures were also established with various partners around the world, such as Tuspark Newcastle and Tuspark Cambridge – endowed with £200m ($262m) – in the UK, and the $5m InnoSpring seed fund in Silicon Valley.
The Chinese government has been operating a charm offensive with overseas universities in recent years, establishing joint ventures with partner institutions. New York University (NYU) and Shanghai’s East China Normal University were the first to establish a Partnership in the form of the NYU Shanghai joint research university in 2012. North Carolina-based Duke University co-founded Duke Kunshan University with Wuhan University in the Jiangsu province city of Kunshan. In 2013, Australia’s University of New South Wales and Shanghai Jiao Tong University launched the SJTU-UNSW Collaborative Research Fund focusing on biomedical science and engineering, architecture and design, energy and water, and social policy and social sciences. Earlier this year, the two institutions increased the fund’s size for the third time in five years.
Following President Jinping’s visit to the UK in 2015, a £5m UK-China tech transfer fund was also launched, aiming to support UK businesses and spinoffs suitable for international expansion into China. Oxford University’s tech transfer office Oxford University Innovation – which had already established a footprint in the country with its Jinhui International Technology Transfer incubator in 2013 – was appointed as consultant to the fund.
All these initiatives incidentally fit within the plan laid out by the Ministry of Education in 2010, according to which China’s education system as a whole was to be modernised and the country’s elite universities’ level raised to the standard of world-class institutions.
Bo Liu, venture investments principal at Johnson & Johnson Innovation–JJDC, which invests on behalf of healthcare company Johnson & Johnson, said: “I saw a major shift occur in China around 2013-14. There are three essential ingredients to a fully shaped venture ecosystem – entrepreneurial spirit, talented workforce and capital. I believe China now has all three, and these drivers are progressively shaping the economy and people’s minds into the startup culture.”
Conclusion
China has been striving over the past 40 years to grow into a strong, modern and innovative economy that is open to the world. Having understood what it takes to become the leading global power it strives to be, it has been relentless in its efforts to shape and implement measures that will help it hit its goal. And its pace of progression is impressive.
HTC’s Graylin said: “China has been one of the fastest-growing markets globally and will continue to be so for the foreseeable future. Chinese investors will play an increasingly important role in the investment ecosystem globally, as rapid growth and high multiples progressively make global deals feel much more affordable. However, there has been some pressure from local governments to control capital outflow, which means there could be a balancing of the two forces over the coming years.”
Meanwhile, Gobi Partners’ Tang sees China slowly establishing itself as a key leader and frontrunner on the Asian continent. He said: “For the next 10 years, innovation in the region will be very much China-led. You already see that in sectors such as e-commerce, last-mile logistics or gaming. Southeast Asia is basically 10 years behind China in terms of development, meaning that the cycles that played out in China 10 or 15 years ago are likely now to repeat themselves in those countries. At the moment, we are therefore witnessing large rounds being led by those who once succeeded in China and are now looking to place their bets in these emerging ecosystems.”
Commenting on President Xi Jinping’s address at the 19th Communist Party Congress earlier this year, the Hong Kong-based Alibaba-owned newspaper South China Morning Post referred to China’s “renewed efforts to transform itself from the factory floor of the world into a global innovation powerhouse”. These efforts, it seems, have started to pay off.
The Greater Bay Area: Hong Kong and Macau
Last year, the Chinese government announced its intention to roll out the Greater Bay Area (GBA) plan over the next five years, aiming to combine Hong Kong, Macau and the cities of Guangdong’s Pearl River delta to create an integrated economic and business hub able to compete with the San Francisco Bay and the Greater Tokyo areas. As of 2017, the GBA had a total population of 67 million and a combined GDP of $1.34 trillion – 12% of the Chinese economy.
Following GCV’s second Asia Congress earlier this year, two industry experts shared their insights on how far the special administrative regions of Macau and Hong Kong have come in the venture space.
Hong Kong: China’s gateway to the world
Jayne Chan is head of StartmeupHK at InvestHK – the government department responsible for attracting and retaining foreign investment in Hong Kong. StartmeupHK is InvestHK’s initiative aiming to help founders of innovative and scaleable startups from overseas set up or expand in the Hong Kong region.
For decades, Hong Kong has had a functional role for China, acting as a bridge linking it to the rest of the world. From a geographical point of view, it really is in the centre of Asia, attracting foreign and Chinese investors and entrepreneurs.
The local government has always been proactive in promoting innovation as a strong pillar of the region’s economic development. In recent times especially, a range of policies, budget allocations and initiatives have been launched. A significant amount of funding has also gone towards building the infrastructure and spaces necessary for innovation to happen.
Hong Kong is also a great in-between place for international candidates willing to get into China. Accessing the Chinese market straight away can indeed cause a huge cultural shock – everything there is done very differently, with a different composition and a different way of doing business, and an extremely competitive environment. In Hong Kong, people have knowledge of both sides of the equation – that is why it makes a good buffer zone.
The region is also home to an international community. A survey we conduct every year regularly shows us that half of Hong Kong’s startup founders are from overseas. This brings a lot of international expertise to the region and has given birth to a savvy local audience that is used to dealing with people from all around the world. The level of inward and outward foreign direct investment in Hong Kong is incidentally one of the highest worldwide [$104bn in 2017, according to the World Investment Report].
The bilateral exchanges with mainland China are still very much a cornerstone of the region’s economic development. Because of the business-friendly environment that Hong Kong offers, it makes sense for Chinese businesses to set up their offices here. For instance, we offer intellectual property protection, or free access to media that may not be available in China. Our corporate tax is fixed at 16.5% – one of the lowest in the developed world – and has recently been further reduced to 8.25% for the first $2m of profit.
For foreign investors, the privileged relationship that Hong Kong enjoys not just with China but with the Asian continent at large offers a number of advantages too, including preferential tax treatment or free trade.
In spite of all this, the Hong Kong ecosystem can still be considered pretty nascent. Realistically, growth in the venture sector started three or four years ago here, when different clusters started coming together, progressively giving birth to an ecosystem. Because it is so young, it lacks some of the essential components that would make it fully-fledged. One of these components is the corporate venturing side.
Quite a few corporates have set up their headquarters here, but it seems that the focus, especially for local companies, is still very much on property and finance. And even though traditional conglomerates and family offices may have the kind of funds necessary to invest in early-stage technology, they tend to place their capital across a range of different sectors, as opposed to following a defined strategy.
To an extent, investments on behalf of corporates, family offices and conglomerates are already happening in Hong Kong, but getting them to engage into the ecosystem properly will be a hard-fought process.”
Macau: en route to a venture gamble?
A recent report from Macau’s Gaming Inspection and Coordination Bureau showed that the region’s gross gambling revenue had climbed by another 17% in August this year, hitting a mind-blowing M$26.6bn ($3.3bn) after 25 consecutive months of growth.
Earlier this year, the International Monetary Fund ranked the region’s GDP per capita second worldwide, at $122,489 just behind Qatar’s $128,702, adding that the city-state known as “the Las Vegas of the east” was likely to overtake its Middle Eastern contender by 2020.
In a place where, in the words of Blair Zhang, founder and executive chairman of the Hong Kong branch of the Compass Innovation Alliance entrepreneur platform, “nothing is related to innovation, because money comes too easy”, what kind of future can be envisaged for venture?
Aidan Chuang, chief operating officer at Macau-based investment group Marlin Investment, gave his point of view.
There are two key features to remember when one considers Macau as a potential venture market. One is that as a side-effect of the gambling industry, its small population of 630,000 enjoys one of the highest GDP per capita in the world. This means that in theory, there is enough capital to support a venture ecosystem here. Second is the fact that, similarly to Hong Kong, Macau benefits from a special political status, which gives it a certain amount of freedom and independence from mainland China and makes it a relatively international and open place. From these perspectives, I would say Macau has great potential for becoming a venture hotspot.
But of course, there are some challenges too. First and foremost, the overwhelming weight of the casino industry in the local economy [$28bn or 70% of Macau’s GDP in 2017] leaves little space for other sectors to develop. There are other industries, such as tourism – which is often gambling-related anyway – but the rest of the activity remains derisory. This also means that a large part of the workforce [around a fifth, according to recent estimates] is involved in that industry. In addition, casino staff tend to enjoy higher pay and stronger job security than in other sectors, which gives youngsters little incentive to try to engage in other riskier types of activity.
Finally, the small population size means human resources and access to talent are limited. This, coupled with a low level of knowledge-worker immigration, makes the creation of industry clusters very difficult. As a result, potential entrepreneurs are actually more likely to move to the nearby cities of Shenzhen or Hong Kong, where ecosystems already exist, than to stay here.
The reality is that Macau is still in the very early stages of shaping up a startup ecosystem. Especially when it comes to corporate venturing, I would say it is at toddler stage.
However, things are slowly beginning to move. The government has started laying some foundations, having, for example, launched the local incubator Parafuturo de Macau Investment and Development, which recently received a M$12.6m investment from the state-owned Industrial Development and Marketing Fund. Inspired by the Belt and Road Initiative, the city-state is also looking to use its Portuguese heritage to promote cooperation between China and Portuguese-speaking countries. Local young people are starting to take an interest in entrepreneurship too, with initiatives such as the yearly Startup Weekend Macau [modelled on the Techstars startup weekends in the US.
I believe the key to Macau’s success as a venture market will be to understand its strengths, and use them to its own advantage. For example, instead of the trending blockchain or artificial intelligence (AI) technologies, the focus should rather be on the strong sectors of tourism and gambling, trying for instance to introduce smart casino technology in the region. If Macau picks the right industries and the right direction for innovation, developing a venture activity here could become worthwhile and profitable.
Perhaps another thing we are still missing here, is the influence of some role models – some successful startup founders, or some Macau-born unicorns [companies worth at least $1bn] that could inspire young people, and encourage them to go down the entrepreneurial path.”
Last year, Alibaba announced it had entered into a four-year strategic partnership with the government of Macau to support its transformation into a smart city, aiming to use cloud computing technologies to serve local residents and tourists. Six priority areas were fixed for the first phase of the partnership – cloud computing, smart transportation, smart tourism, smart healthcare, smart city governance and talent development.
The agreement marked Alibaba’s first smart city foray into a market outside mainland China, and was set to build on the success of similar past ventures such as the City Brain AI project in the Chinese city of Hangzhou. The internet behemoth said it could consider a future collaboration with Hong Kong, where the government has already been experimenting with the smart city concept in the Kowloon East area for the past two years.