Hong Kong Investment Network - Angel Investment in Hong Kong
Angel investment in Hong Kong may be on the verge of an exciting transition from being an occasional engagement of a wealthy few to a more widespread, organized form of start-up financing involving many more people with the wherewithal to invest.
In a broad sense, angel investment might have been a part of local economic life for decades. Most such activities, however, tend to be of an informal and spotty nature; well-to-do individuals would fund an occasional new venture of a favorite nephew or a close friend that has the potential to become a business success.
Better organized angel investment activities of the type prevalent in the West, however, have been slow and hard to blossom. The causes are probably manifold. One factor may be the profusion of investment alternatives available in this business boomtown, which distracts the attention of would-be angel investors. Another factor may be the traditional Chinese mindset to want majority control in any business one finances. The tendency to grow business within family circles also dampens efforts to support any outside business.
The tide may be changing though. During the last decade or two, thanks partly to the Internet led start-up movement, angel investment are becoming familiar to Hong Kong. This coincides with two other significant trends that encourage entrepreneurial pursuits: the tremendous business opportunities unleashed by rapid economic development in mainland China and a change of attitude by the government on its policy toward technology and innovation.
These trends point to stepped-up entrepreneurial activities and an increased demand among the local start-up community for more organized angel funding. We may now be reaching an inflection point, with angel financing poised to elevate to a much more active and visible level in the coming years.
I. Business Environment
Ranked as the world's freest economy by the Wall Street Journal and Heritage Foundation's Index of Economic Freedom for 16 consecutive years, Hong Kong has long been a favorable setting for entrepreneurialism and business formation. Many small companies grew into sizable operations and a considerable number became listed conglomerates. The most celebrated example is perhaps Cheung Kong (Holdings) Limited, empire of Hong Kong business legend Li Ka-shing, which started as a modest assembling operation of plastic products.
In face of the recent global economic turmoil, Hong Kong has been among the first few economies to show signs of recovery. Business formation continued to be on a rising trend. In 2008, a total of 97,985 private companies were incorporated, which shows a slight drop from 100,041 in 2007 but still exceeds 81,432 recorded in 2006.
Hong Kong's inherent business strength has received a further boost in recent decades by its close relationship with an opening mainland China. Hong Kong is an enclave with a population of merely seven million. Before mainland China opened up, most Hong Kong businesses had limited access to the mainland market and were only able to target the international markets. China's reform and open-door policies that began in the late 1970's and intensified throughout the ensuing years opened up an enormous new market to Hong Kong.
China joined the World Trade Organization ("WTO") in 2001 and became an official member state in 2006. This made it possible for foreign, including Hong Kong, companies to crack open numerous market sectors in China. What is more, as a special favor to Hong Kong, the Chinese government and the Hong Kong government signed the Closer Economic Partnership Arrangement ("CEPA") in 2003. In 2009, Supplement VI of CEPA has already been signed, providing Hong Kong businesses with even more preferential treatments and policies in terms of duty free trade in goods, trade in services and sector access for investment in China.
The Arrangement for the Avoidance of Double Taxation on Income and Prevention of Fiscal Evasion between China and Hong Kong, which came into effect on April 1, 2007, allows Hong Kong companies and individuals to enjoy reduced tax rates on such passive income as interest payments, dividends, royalties and capital gains. The reduction in tax rates under this Arrangement is favorable compared with other countries with double tax treaties with China. It has also further strengthened Hong Kong's position as the gateway for foreign investments into Mainland China.
Hong Kong and China also signed the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned in July, 2006. The Arrangement became effective for Hong Kong on August 1, 2008. This made it possible for Hong Kong and Chinese parties to economic contractual disputes to have their disputes resolved by Hong Kong courts.
These developments have thrown open to the Hong Kong business community a huge market of 1.3 billion people. As the Chinese saying goes: "pavilions that are near the water first get the moon" (meaning the mere proximity to a source of wealth or influence gives a decided advantage), thanks to its proximity to China, Hong Kong is indeed running into a golden opportunity of a lifetime.
II. Start-up Scene
Hong Kong has perhaps one of the most heterogeneous and interesting mix of start-ups in the world in terms of founder makeup, location of operational base and target markets. Founders of a Hong Kong start-up, 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 start-up" 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 start-ups could also vary widely from the local market, to China, Southeast Asian region or other overseas markets.
Start-ups 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 start-ups 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.
III. Developmental History
The quintessential angel financing model probably did not emerge in Hong Kong until the 1990's. 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 start-up 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 1980's, its effects, including the tech based start-up 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 start-up 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 1990’s, the concept of angel investment has gradually taken root and started to proliferate in the business circles, especially among the start-up and tech sectors, expatriates and returnees, VC and capital markets practitioners, and a younger generation of business executives and professionals.
IV. Angel Profile and Network
To a large extent, angel investment in Hong Kong has so far revolved around individual investors rather than institutions. It is useful to examine local angel financing activities by looking at the angel profiles. To date, no systematic research has been conducted regarding the number or makeup of business angels in Hong Kong. General observations indicate that the following groups, not in any order, have been spearheading the efforts: (a) former VC practitioners; (b) individuals who have made money from entrepreneurial activities or as angels; (c) second generation of the leading business families; (d) professionals such as lawyers, doctors and accountants; (e) tech executives and professionals; (f) well-to-do manufacturers who made their initial fortunes with investments in China; and (g) returnees or overseas Chinese with exposure to angel investment elsewhere.
A. Angel Profiles
A recent article on Hong Kong's VC industry has an interesting analysis of angel investors in Hong Kong. It put them into five categories:
• Sophisticated - the "true" and knowledgeable angel investment practitioners;
• Businessmen - knowledgeable but less intense investors in start-ups doing deals as an alternative investment form;
• Corporate - manufacturers seeking tech start-ups to extend their product lines or services;
• Incidental - highly wealthy individuals investing to prove themselves or kill time; and
• Traditional entrepreneurs - traditionally minded bosses who will invest only if they are in control, not the founders who came up with the original ideas.
Outside certain portions of the above circles, the concept of angel financing is only beginning to be understood or practiced widely.
B. Angel Networks
Angels acting in concert or in organized groups is a more effective way to invest. Accordingly, organized angel networks have begun to emerge in recent years. We cite a few better known examples below.
• British Chamber of Commerce Business Angel Program (http://www.britcham.com/baker-tilly-business-angel-programme) was initiated by the British Chamber's IT and SME committees and sponsored by a local audit and business service advisory firm. This program has been running two or three meetings a year, where a number of shortlisted investee companies are given the opportunity to make presentations.
• China Business Angel Network (CBAN) (http://chinabusinessangelnetwork.angelgroups.net/) Hong Kong Chapter is the local chapter of CBAN, an established network of more than 140 angels with chapters in Shenzhen, Shanghai and Beijing. CBAN members enjoy reciprocal membership with Business Angel Network South East Asia (BANSEA) in Singapore.
• Hong Kong Angel Capital Network (www.facebook.com/group.php?gid=4505959039) is created as a joint venture among its members and Dr. Samson Tam, founder of Group Sense Limited and currently a legislator in Hong Kong. Member admission is by invitation or referral only, requiring declaration of not less than HK$20,000,000 of investable fund and investment in at least one project of the Network in a 12-month period.
• Tolo Habour Business Angel Support Group (www.baf.cuhk.edu.hk/research/gem/_new/EN/education/thbasg/index_thbasg.html) is an initiative of the Chinese University of Hong Kong Centre for Entrepreneurship to match companies with good potential with prospective angel investors through the University's alumni network.
C. Angel clubs, Angel funds or investment groups
Going beyond networks, angels might band together to invest collectively as angel clubs, angel funds or investment groups. So far, such efforts in Hong Kong seem far and few in between. A few of the budding ones may include:
• Hong Kong Investment Network is a London-based company that provides a web-based matching service for angel investors seeking investment opportunities and entrepreneurs seeking capital. Entrepreneurs are charged upfront referral fees for the service.
• Black Horse (www.darkhorseinvest.com), a small angel investment group that typically invests US$50,000 to US$1,000,000 in each company and looks to co-invests with other venture funds in Asian companies with capital requirement of US$1,000,000 to US$5,000,000 and a valuation of US$2,000,000 to US$10,000,000. Its industry focus is IT, telecom, education and environmental protection.
• Catalyst Group (www.catalistgroup.com).
URL : http://www.kingandwood.com/article.aspx?id=Angel-Investment-in-Hong-Kong-Part-I-of-II&language=en