Hong Kong holds great potential to become a hotbed for startups in the FinTech and Internet of Things space, but a lack of technical talent and a culture of negativity towards entrepreneurialism is holding it back, according to a new report released by Compass (formerly known as Startup Genome.)

The unique ecosystem of Hong Kong, which is simultaneously beholden by a communist federal government yet has consistently ranked as the most free economic zone in the world, is a sharp contrast with the eco-systems seen in Canada’s top-ranking cities. According to Compass, Toronto, Montreal, and Vancouver, which are on the organization’s top 20 list for global startup ecosystems, have all reached a mature level of ecosystem, but their growth has been slowed by a lack of international ties. Hong Kong, which is less mature as an ecosystem, is known for its international trade expertise and sits right next to a global manufacturing hub in Shenzhen, China.

Compass, which offers online businesses a solution for automated management reports and benchmarking, is releasing a series of reports examining startup ecosystems that each represent one of the four stages of growth. Hong Kong is the second such case study and is in the “activation stage” of a growing startup ecosystem, says JF Gauthier, CFO and head of business development for Compass. The first study it released, last October, examined Waterloo, Ont. as an ecosystem at the “emergence” stage.

“Canada caught up to the startup revolution in the ’90s,” Gauthier says. “While Hong Kong is a bigger city with more money, it’s just not a software industry, it’s a service-driven industry.”

Whereas “entrepreneur” is more accepted as a career path in Canada, and engineers are seen as a hot commodity, in Hong Kong technical careers are looked down upon. Top performers in academics choose to go into professional service careers in banking or law.

Hong Kong’s startup ecosystem is valued at between $2.8-$3.5 billion, much lower than Montreal or Vancouver despite their lower populations, the report notes. The startups that have exited (sold or IPO’d) in Hong Kong have done so at a low value, with none exceeding $1 billion. There’s also a gap at the seed funding stage, with few angel investors showing interest in the city.

But in other ways, Hong Kong is showing signals that it could develop into a startup ecosystem on par with those in North America and Europe. It’s the fifth-fastest growing startup ecosystem in the world, and its historical strength is as a global financial centre and international trading hub. Add its proximity to neighbouring Shenzhen’s manufacturing capacity and you’ve got a recipe for success.

“It has a competitive advantage compared to every other city in the world for IoT,” Gauthier says. “You have the hardware prototyping, manufacturing, and then you have the international trade relations.”

Anecdotally, Gauthier met a developer with Square, the San Francisco-based firm that makes credit-card readers you can use with a smartphone, who travelled to Hong Kong 28 times in 12 months. It was necessary to set up the supply chain for the firm’s latest product, a reader that includes support for NFC tap and pay methods like Apple Pay.

Just as Silicon Valley grew quickly because Facebook and Twitter helped build momentum around social networking, Hong Kong could see success with just a couple of companies doing the same thing in FinTech or IoT, Gauthier says. “You want to place a bet on fast-growing subsectors.”

The Compass report concludes with recommendations for Hong Kong, which might be read as a recipe to grow a startup ecosystem just about anywhere. Short-term priorities include:

  • Increase global know-how among entrepreneurs. Bringing global accelerators or making partnerships with accelerator programs elsewhere could help inject some entrepreneurial talent into Hong Kong’s professional culture.
  • Improve the availability of top technical talent. Sponsoring a work visa for young graduates in fields such as software engineering and then promoting immigration in countries with that talent could help bridge the skills gap in the short term.
  • Grow the angel investment community. The government could start a public-private fund that would match angel investments in tech startup firms with an equal investment.
  • Develop and execute sub-sector strategies. Commit budget to specific areas of tech that are already performing well.

 

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