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HK

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HK S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International Business School – PowerPoint PPT presentation

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Title: HK


1
HKS VENTURE CAPITAL SYSTEMAND THE
COMMERCIALIZATION OF NEW TECHNOLOGY
  • Kevin Au
  • Chinese University of Hong Kong
  • Steven White
  • China Europe International Business School

2
Objectives
  • describe and assess the performance of Hong
    Kongs venture capital system
  • beyond the strict financial definition of venture
    capital (VC) to address the system of actors and
    institutions that finances the commercialization
    of new technology
  • generate actionable recommendations to improve
    its efficiency and effectiveness in increasing
    the positive role of new technology in Hong Kong
    industry

3
Agenda
  • Startup process financing
  • Venture capital system
  • General situation of the HK VC industry
  • Institutional framework for an evolutionary
    analysis
  • VC Cycle, investment process, VC system
  • West coast vs East coast VCs in the US
  • Evolution of HKs VC industry
  • Other key actors angels, stock market,
    institutional investors
  • Inhibitors to VCs support to Commercialization
  • Suggestions for the medium term

4
Financing of New Firms
up to US0.1M
up to US1.0M
US1 - 3M
US3M and up
Expansion
Early stage
Start-up
Pre-start
  • With great idea, you need finance for additional
    research or produce a prototypes
  • With profits and well established business
    operation, funding is required for new product
    development and exploring new markets
  • No sales yet, you need finance for working
    capital such as,
  • salary, development testing
  • Having a few sales, finance is required for
    marketing and operations, in order to make the
    business fly

5
Cheaper sources of capital, such as bank
financing, are usually not available for most
early-stage ventures, which may be too small or
young to qualify for traditional loans
6
Flow of Funds in a VC cycle
7
Venture Capital Pool
8
Number of VC Firms
9
Investment Stage of VC Funds
10
Disbursement of VC Funds Local or Overseas
11
General situation of VC Industry
  • have the largest pool of venture capital
  • Most of them not interested in investing in
    early stage
  • A lot of funds being parked in HK for investments
    outside Hong Kong
  • Especially mainland China in recent years

12
Venture Capital Process
13
(No Transcript)
14
West Coast vs East Coast VCs
  • West coast VCs are dreamers and want to see how
    technology can change the world, whereas East
    Coast VCs only treat venture investment as
    another asset class.
  • Udayan Gupta, Author of Done Deals

15
Larry Sonsini, of the law firm Wilson, Sonsini,
Goodrich Rosati
  • The West Coast model of venture capitalism has
    always been a very intense business partnership
    with the entrepreneurs.
  • The providing of capital was one function of the
    venture capitalist. Being actively involved in
    developing the business model, managing the
    enterprise, and recruiting management
  • They thought of more than investing money. They
    thought about mentoring, training, and providing
    business solutions. The goal was not only to make
    a successful investment but also to be a part of
    building a successful venture.

16
Morton Collins, founder of DSV Partners in 1968
  • The East Coast, the financial center of the
    world, has traditionally been fixated on
    financial engineering. There, with a priority
    placed on the structuring of deals, has often
    mattered less what a company did or what would be
    involved in ensuring its long-term success than
    whether the deal would provide tax benefits and
    financial returns.
  • On the West Coast, by contrast, the driving
    spirit has been innovation in science and
    technology. Technologists and investors, many of
    whom are refugees from the East, have long
    gathered around the campuses of Stanford
    University and Cal Tech to create a new economy
    and a new entrepreneurial culture (p. 293).

17
Reasons of the differences
  • Early East Coast firms were set up as Small
    Business Investment Corporations
  • Following governmental guidelines but not
    technology
  • General partners are bankers and accountants, not
    operational managers
  • New York Boston are financial centres, so lots
    of money from insurance firms and pension funds
  • Expect regular disbursement low risk, not
    particularly fond of technology

18
Evolution of HKs VC System
  • Tying evolving institutions to VC development
  • Four stages
  • Prior to 1970s
  • 1970s to mid 1990s
  • Mid-1990s to 2001
  • 2001 to present

19
Prior to 1970s
  • Traders mentality
  • Favoring arbitrage
  • Refugee mentality
  • Short-term oriented
  • Colonial government (British were guilty!!)
  • Positive non-interventionism
  • Supporting indirectly logistics, construction,
    trading and financial industries
  • Successful lobbying from these industries

20
1970s to mid 1990s
  • Background
  • British trading firms dominated
  • Booming stock market
  • First VC firm Inter-Asia Venture Management
  • transfer strategy
  • 1981 ARRAL Partners
  • succeeded against skepticism
  • Listed HK Teawood in NASDAQ, 1984
  • 1988 US150M APAC Fund launched
  • Grew industrial firms benefited in the China and
    Asia boom
  • Invested almost all in late stage ventures
  • 1987 HK Venture Capital Association founded

21
Mid-1990s to 2001
  • 1994 US1.7B Asia Infra-Structure Fund by AIG
  • Tech Boom then Bust
  • Entering many new VC firms, local overseas
  • Large PEs after the Asia Crisis
  • Government VC Applied Research Fund
  • Corporate VCs
  • Short-term risk averse didnt know technology

22
2001 to present
  • Dismal investment
  • New firms had little technology
  • New VCs had little operational background
  • Lacking qualified startup management teams
  • Overdue government intervention
  • Not all was lost
  • Some success
  • New opportunities threats
  • Rapid development of China HKs economy and
    financial markets

23
Summary
  • Lots of money but not channeled to tech ventures
  • there is not a cohesive financial arrangement,
    and entrepreneurs, academics, politicians and
    civil servants lack the appropriate skills to
    differentiate good ventures from bad. They have
    to mature in their decision-making to accept risk
    and how return is generated.
  • By the time Chinas stock markets become mature
    and the RMB circulates more widely, Hong Kong as
    a base for venture funds will be lost forever.

24
Key actors and resource flows
25
VC-Backed IPO 2000-07
26
Inhibitors to VCs Supporting the
Commercialization of New Tech
  • Government Culture
  • Short-term oriented, low-tech
  • VC and PE firms
  • we are out to make money
  • Focused late stage, large size, low risk ventures
  • Lacking operational experience
  • New ventures
  • traditional owners expect control
  • Younger generations

27
Inhibitors to VCscontinued
  • Stock market
  • Welcome the listing of large firms
  • Technology level of firms not a focus
  • Banks Endowment funds
  • Lending by laterals
  • Investment confined by the HK version of the
    prudent man rule
  • Angels Angel Networks
  • Lack knowledge in tech ventures
  • Not organized to share risk and knowledge

28
Suggestions for the Medium term
  • 1. Stimulate more VC funds with long-time horizon
    and technology interest
  • Channel government reserve and pension funds by
    lifting the prudent man rule
  • 2. Develop professional qualifications for
    investment advisors on VC/PE industries
  • Stimulate angel investment
  • Training, guidebooks, templates
  • Accredited investor possibly tax breaks for
    investing in technology ventures

29
Suggestionscontinues
  • 4. Diversify the backgrounds of the general
    partners
  • VC firms hiring general special partners are
    more likely to receive endowment, pension
    government investments
  • 5. Find new IPO exit for VC/PE invested in
    technology firms
  • setting up a new board with perhaps the main
    board or the SME board in Shenzhen Stock Exchange

30
  • The society is innovative and entrepreneurial.
    The Science Park is great in innovationBut there
    is not a cohesive financial arrangement, and
    entrepreneurs, academics, politicians and civil
    servants lack the appropriate skills to
    differentiate good ventures from bad. They have
    to mature in their decision-making to accept risk
    and how return is generated.
  • from a foreign, early-stage VC in HK

31
References
  • Au, K., Baark, E., Chua, B. L., Thomas, H.
    (2005). Innovation policy and high growth
    startups. Hong Kong CUHK Centre for
    Entrepreneurship.
  • Gupta, U. (2000). Done deals Venture capitalists
    tell their stories. Boston Harvard Business
    School Press.
  • Metrick, Andrew (2007) Venture Capital and the
    Finance of Innovation. John Wiley Sons, Inc.,
    Hoboken, NJ
  • Murmann, J. P. (2003). Knowledge and competitive
    advantage The coevolution of firms, technology,
    and national institutions. Cambridge Cambridge
    University Press.
  • White, S., Gao, J., and Zhang, W. (2005).
    Financing new ventures in China System
    antecedents and institutionalization. Research
    Policy, 34 894-913.

32
Private Equity, VC Hedge Funds
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