By John Lo, Partner, Corporate, King & Wood, Hong Kong
Editor's note – This series of articles explains the opportunities for business angel investment in Hong Kong. Part 1 Introduction – introduces angel investment in Hong Kong. Part 2 discusses the startup scene in Hong Kong, Part 3 outlines the profiles of business angels and networks, Part 4 describes financial infrastructure, Part 5 covers Government technology policies, Part 6 presents recent examples of success stories in the tech sector.
Hong Kong has perhaps one of the most heterogeneous and interesting mix of startups in the world in terms of founder makeup, location of operational base and target markets. Founders of a Hong Kong startup, for example, could be made up of individuals from a wide variety of personal backgrounds, including locals, returnees mostly from North America, foreign expats, and PRC residents and returnees, especially those hailing from the Pearl River Delta. While a "Hong Kong startup" may be taken to mean the use of a Hong Kong incorporated operating or holding company, depending on the background or special strength of its founders, its actual seat of management or key operational base could be in Hong Kong, in China, or sometimes even the U.S. The initial targeted market of startups could also vary widely from the local market, to China, Southeast Asian region or other overseas markets.
Startups tend to concentrate in business areas offering the greatest potential for business growth, from those relating to TMT (technologies, media and telecom) on the one hand to those targeting the huge China market, in particular the consumer market, on the other or areas where the two overlaps. Specific industry areas of the startups are extremely wide ranging, from retail business to language instruction, cartoon production, fast food, semiconductor, E-commerce, outdoor media, health supplements, and on and on.
Accordingly, business angels in Hong Kong have an abundance of choices in investment targets.
The quintessential angel financing model probably did not emerge in Hong Kong until the 1990s. Before that time, entrepreneurs seeking early-stage funding were largely left to chance or the luck of knowing the "right" people or groups to approach. Knowledge of angel investing practices was largely lacking. Occasionally, founders of a startup might obtain loan or equity money from an unrelated party or a distant relative. However, the lack of a standardized or well-conceived practice for structuring the loan or investment often resulted in poorly fitted documentation leaving room for later disputes or unfairly skewed arrangements leaving sour taste among the parties.
As the Silicon Valley tech success rippled across the Pacific in the 1980s, its effects, including the tech based startup and angel financing approaches to building new businesses, began to be felt in Hong Kong. I recall handling a case as a lawyer in Hong Kong in the mid-90s where an Internet startup in Hong Kong received angel funding in the range of several million US dollars. The financing was syndicated by a well known investment banker to seven or eight local individuals where each invested in several investment units of US$100,000 per unit. The documentation for the investment followed the preferred share model prevalent in California. In most respects, that transaction was not much different from similar deals structured in the US at the time.
Since the 1990s, the concept of angel investment has gradually taken root and started to proliferate in the business circles, especially among the startup and tech sectors, expatriates and returnees, VC and capital markets practitioners, and a younger generation of business executives and professionals.
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