Title: HK
1HKS VENTURE CAPITAL SYSTEMAND THE
COMMERCIALIZATION OF NEW TECHNOLOGY
- Kevin Au
- Chinese University of Hong Kong
- Steven White
- China Europe International Business School
2Objectives
- 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
3Agenda
- 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
4Financing 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
5Cheaper 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
6Flow of Funds in a VC cycle
7Venture Capital Pool
8Number of VC Firms
9Investment Stage of VC Funds
10Disbursement of VC Funds Local or Overseas
11General 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
12Venture Capital Process
13(No Transcript)
14West 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
15Larry 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.
16Morton 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).
17Reasons 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
18Evolution 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
19Prior 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
201970s 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
21Mid-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
222001 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
23Summary
- 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.
24Key actors and resource flows
25VC-Backed IPO 2000-07
26Inhibitors 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
27Inhibitors 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
28Suggestions 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
29Suggestionscontinues
- 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
31References
- 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.
32Private Equity, VC Hedge Funds