Investment Bank Defectors Fuel Startup Scene in Hong KongLulu Yilun Chen
On the fringes of Hong Kong’s Central financial district, 11 stories above the warren of streets stocked with Chinese medicine, shark fins and hairy crabs, a technology startup scene is brewing.
Former Goldman Sachs Group Inc. banker James Giancotti sits in his 10 square meter (100 square foot) office overlooking the harbor and listens to wannabe entrepreneurs pitch ideas for crowd funding -- where companies seek relatively small sums of money from a large pool of investors, typically through the Internet. He vetted 78 in the last four months of 2013, and attracted more than 900 potential backers.
Giancotti is part of a fledgling community that includes bankers looking to exit the financial industry and entrepreneurs seeking opportunities in Asia’s fast-growing economies. After years attempting to promote designated technology hubs from the top down, the local government has also begun to facilitate the grassroots movement as Hong Kong seeks to catch the global wave of startups.
“There are a lot people in the finance industry who sort of just had enough, and people are moving on to be entrepreneurs,” said Giancotti, 37, a former Goldman analyst. “In the past three or four years, there’s been a massive push to have startups here in Hong Kong.”
Christian Mischler, who worked as an inhouse consultant at Credit Suisse Group AG, co-founded Hotel Quickly Ltd. in Hong Kong in December, 2012. The company raised HK$9 million ($1.2 million) in August from seven main investors and by December had attracted 200,000 users, who can find last-minute rooms using the mobile app.
“There were a lot of negative points of view towards the banks and the outlook for the future wasn’t very bright,” the 31-year-old Swiss national said of his decision to leave banking. “A big part of my peers turned to entrepreneurship, because with that there was still a lot of upside potential, especially now with emerging technology.”
Proximity to Asian markets, high penetration rates of mobile gadgets, good communications infrastructure and low taxes are among Hong Kong’s key draws, according to InvestHK, a government agency that offers free support services to companies seeking to expand.
Hong Kong keeps its tax regime simple: companies pay a maximum 16.5 percent on profit; employees 15 percent on salaries; and the city doesn’t tax sales or capital gains. Singapore’s maximum corporate income tax is 17 percent. Value added tax, known as goods and services tax in Singapore, is 7 percent. In Shanghai and Beijing, VAT is usually 17 percent, while locally registered companies pay 25 percent on capital gains, said Danny Po, a partner at Deloitte LLP in Hong Kong.
“This whole movement of startup entrepreneurs coming to Hong Kong is bottom-up, it’s people coming to Hong Kong through word of mouth, and recognizing the opportunities here,” said Simon Galpin, InvestHK’s director-general of investment promotion. “Economies in Europe, in North America have been quite flat; and the pull factor is the evident fact that economies in Asia, not only China, but also Southeast Asia, continue to grow at a much faster rate.”
Of more than 332 businesses the agency aided up to November last year, about 16 percent were startups, said Antoine So, a spokesman. That compares with 11 percent in 2010.
Among the entrepreneurs are expatriates who quit their jobs and start businesses after being told to relocate, Galpin said. Banks are cutting positions in Asia and scaling back expenses for many employees as corporate-finance activities in the region decline.
Jonathan Lilley, 31, a Credit Suisse trader in Hong Kong for about three years, co-founded equity crowd-funding platform Colony 88 Ltd. in May. It is working with three tech startups in Hong Kong to source financing, one of which raised $800,000 by December.
“A lot of these people leaving banks and finance may live in Hong Kong, so for practical reasons you’re not going to uproot your family,” said Lilley. “It’s a great place to be, you’ve got easy access to most of Asia.”
To be sure, Hong Kong remains a laggard in the global entrepreneurial race, according to a ranking published by Startup Genome. Singapore and Bangalore were the only Asian hubs to make the top 20, which was dominated by more-established centers led by Silicon Valley and Tel Aviv.
The Internet Professional Association, a grouping of information technology professionals, says Hong Kong’s government isn’t proactive enough in developing the IT industry and a mindset intolerant of failure has damped entrepreneurship.
“Innovation is not like a vending machine where you put HK$10 in and get a Coke out,” said Witman Hung, the group’s chairman. “It’s more like a slot machine: sometimes you lose everything, and sometimes you get the jackpot.”
Spending on IT research and development accounts for 0.7 percent of Hong Kong’s gross domestic product, compared with 2.3 percent in Singapore and 2.45 percent in Taiwan, according to the group.
High costs and the lack of depth in talent provided by the presence of technology giants such as Google Inc. and Apple Inc. in California are also hurdles.
“The rent is too high, and if you don’t have a lot of technologists or engineers, you’re unlikely to have a lot of startups that develop technology,” said J.P. Gan, a Shanghai-based partner at Qiming Venture Partners, which manages four funds with more than $1.1 billion in assets.
Giancotti said he hopes the influx of talent and low-rent shared workspaces emerging in places like Sheung Wan could change that.
Tucked away in the district about a mile from Goldman’s Asia headquarters, Giancotti operates Bigcolors Ltd., a crowd-funding business that helps people with ideas attract investments of as much as $100,000 in return for a stake in their ventures.
Kiss Hugs, a social-media dating service, raised $25,000 by selling a 5 percent stake through the company; Toystructor, which builds 3D printers for toys, has secured 8 percent of the $100,000 it’s now seeking.
Giancotti, an Australian, founded Bigcolors in June, after about six years in Hong Kong with Goldman and JPMorgan Chase & Co.
“A lot of the bankers are leaving to do something different,” he said. “A lot of them are coming to us and saying ‘I want to invest in one of these startups, because one of them might be successful and that might be my ticket out of banking.’”