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A recent report from the benchmarking company Compass suggests Hong Kong has a unique ability to accelerate into a startup hub

There is an open secret in the financial hub of Hong Kong — the city’s competitive advantage is no longer being a launch pad into the Chinese consumer market.

Unlike years ago, the Chinese market is relatively accessible today, and for any company willing to take a shot at the Chinese Dream, the best bet is just to set up shop in China.

Rather, for a startup economy, Hong Kong is an opportunity to grow up in an international cosmopolitan city, located mere miles away from the hardware manufacturing capital of the world. The Pearl River Delta overtook Tokyo last year to become the world’s most populated mega city, according to the world bank, and it has a heart for hardware.

Foxconn and Tencent are its most famous residents, but a quick poke around the news and it seems Guangzhou and Shenzhen are leading the charge in VR technology and drone manufacturing.

To give an idea of Hong Kong’s proximity; neighbourhoods like Yuen Long (big enough to justify a light rail) and Sheung Shui are much closer to Shenzhen — proper than they are to the centre of their own city.

So why has the startup scene been stuck at the starting line for years?

Well, if we are to believe a new report from Compass, the red light might finally be turning green — if the Pearl of the Orient can be realistic about what the startup economy can expect.

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A significant takeaway from the January 13 annual policy address given by Hong Kong Chief Executive CY Leung was the city’s government had taken off the warm-ups and decided to dive head first into the startup economy. It pledged hundreds of millions of dollars to University grants, infrastructure development and a sexy little US$258 million matching fund to tempt private investors.

“However, in order to capture those opportunities, Hong Kong needs to invest in programmes that help its tech entrepreneurs catch up to global know-how and close its talent and angel funding gaps,” said the Compass report.

The Ecosystem Lifecycle Model and why Hong Kong has not arrived

The report uses four-phased Ecosystem Lifecycle Model to classify the ecosystems of notable cities. The phases are emergence, activation, integration and maturity.

Emergence is when an ecosystem first begins to show signs a startup ecosystem might be possible. Melbourne (Australia) was cited by the company as a good example.

Activation means the foundation has been built, or is stable enough to justify further investment and may enter a phase dubbed ‘Catch Up Growth’. This is where Compass has placed Hong Kong.

Integration is when the ecosystem starts to see success stories via buyouts, listings or the occasional unicorn. The example used by Compass is Bangalore.

Finally, we have ‘maturity’, which means relative growth rate has tapered off, but the macroeconomic impact is essential to the city’s or country’s overall success. Singapore is classified as a mature ecosystem.

Also Read: Singapore carpooling app RYDE expanding to Hong Kong

A sluggish culture for innovation is why Hong Kong is stuck in the ‘activation’ phase, according to the World Economic Forum (WEF) 2015-2016 global competitiveness report.

“Innovation is the weakest aspect of the economy’s performance (27th, with a relatively low score of 4.4), and the business community consistently cites the capacity to innovate as their biggest concern.”

But the WEF did highlight the city as an avid and rapid adopter of IT technology. If you build it, they will come.

A stagnant angel investor community

The average age of a Hong Kong entrepreneur is very young at just over 30 (Singapore’s average is 35 and Silicon Valley is the oldest major hub with an average age of 36). The age gap is the result of hesitant startup culture just now getting into the scene; meaning the city is devoid of veteran serial entrepreneurs.

And thus, also lacking in angel investors.

The Compass report used an interesting statistic to drive home this point: Percentage of startups receiving funding as compared to Silicon Valley.

So for every 100 Silicon Valley startups to receive seed funding, about 30 do so in Hong Kong. Around 12 per cent get Series A and 10 per cent of of  startups are lucky enough to see a Series B. In Singapore, those numbers are 75 per cent, 60 per cent and about 46 per cent, respectively.

Also Read: After expanding to Hong Kong, CustomerMatrix raises US$10.5M Series B

However, Compass says this problem is not unique to ‘activation’ ecosystems like Hong Kong and cites the city’s global investment know-how as reason for optimism.

To justify that statement, the median Series A round in Hong Kong is US$5.5 million, whilst in Singapore the median is US$2 million. Series B is US$9.5 million for Hong Kong and US$7.3 million in Singapore.

So while the amount of funds is significantly lower, the expected investment will be of higher financial value.

Talent, experience and a gender gap.

Hong Kong is a city with good education and a multitude of well-paying, stable jobs to snap up the best developers. For example, Google has a huge presence in Hong Kong because it is as close to China as the company can get.

“Hong Kong startups also have difficulty compensating for the local talent gap through immigration by attracting foreign technical talent from mainland China and elsewhere,” the report said.

Simply put, Mainland Chinese talent can find a multitude of opportunities at home. Around 28 per cent of startup employees in Hong Kong have previous experience, as compared with 42 per cent in Singapore.

“Being an early-stage ecosystem at the activation phase, it is not surprising that Hong Kong has a low level of startup experience, significantly lower than Singapore,” the report says.

Finally, while the percentage of women founders is depressingly low across the board (Singapore is at 19 per cent and Silicon Valley is 24 per cent), Hong Kong registers an embarrassing 6 per cent female founder rate.

A gender gap of this extreme makes it challenging to fund a diverse range of companies which could, given a few hits, eventually lead the community.

But the headline says Hong Kong is taking off? What did I just read?

The Compass report used a mountain evidence to paint a picture of a flawed economy with serious issues. And while the problems are accurate, the reality is the Compass report is quite optimistic.

The city is eons behind Singapore, Beijing, Shanghai, or Guangzhou (and essentially any other developed Asian startup scene), but it is a rich and capitalistic, with a long history in the world of business and an ability to grow very fast if it so chooses.

As of the last few months, Hong Kong appears to have chosen to invest.

The report explains,

“Its potential is just starting to be realised, as shown by its recent growth, which matches the fifth fastest growing ecosystem among the top 20. There is no doubt that concerted efforts by its stakeholders can address its key challenges and further accelerate the growth of its tech startup ecosystem along with producing globally leading startups and unicorns.”

Hong Kong has finally started to get on board with the startup economy, and while the Pearl won’t compete with the big boys, the city is not going away anytime soon.

 Photo Courtesy of RomanYa/Shutterstock

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