2023 was a tough year for early-stage founders and VC funds around the globe, and HK is no exception. HK has been in an even trickier position than other cities, given its highly outward-facing economy and connectivity with China, when the sentiment of global investment in China turned so sharply after the huge bull runs in the country for the past 20+ years.

While the fundamentals of HK have shaken and shifted, 2023 was a year where much of the foundational work of building an innovation scene was done. Here are my two cents on what to expect in Hong Kong for 2024 in the early-stage startup scene, organised by opportunities and challenges:

Opportunities

RAISe+ Scheme: First batch of university startups carrying unique IPs to be unveiled

An HK government-led program with an allocation of HK$10 (US$1.28) billion, the RAISe+ scheme will, on a matching basis, fund 100 high-potential research teams in 8 universities. Each team can get up to HK$100 (US$12.84) million in non-dilutive funding.

From the $ sign — this is the biggest funding scheme available for university-originated startups in HK. The scheme was a core focus for many knowledge transfer offices in HK universities in 2023, where professors and their fellow researchers/project leads were busy writing proposals while university staff jiggled with all the letters of intent from investors/industry partners and requirements set forth by ITC. The first batch is expected to be announced within Q1 2024 after screening.

We met some of these projects with interesting underlying IPs. How the universities, professors, project leads, and investors handle the rest of the difficult parts of starting a venture – hiring, fundraising, productisation, fundraising, and more — would be the next set of questions to be answered.

HK remains the go-to hub for GBA startups going global

We spent quite some time in 2023 meeting China-based early-stage startups related to advanced manufacturing (semiconductor, new material, ESG material), industry 4.0 (robotics, automation, innovations in traditional industries), and cross-border e-commerce.

Also Read: How AI will shape the future: A look ahead to 2024 and beyond

Chinese founders shared their firsthand experience facing the lowered spending power of local corporations and consumers. As a result, many of them have taken their products abroad, selling at a higher price point than what they could ask for in China. Over time, China has built up top-of-class manufacturing and operating know-how and trained skilled labour that is unreplaceable by other geographies (read: Will China Continue to Grow? by Weijian Shan).

China startups that possess unique R&D and manufacturing know-how and operate in non-sensitive industries will still utilise Hong Kong as the hub for initial funding and landing their first batch of overseas customers.

Lots of dry powder waiting to deploy in HK

In 2023, local and global GPs secured fresh funding to be deployed specifically to companies with a HK nexus, thanks to the setup of the Hong Kong Growth Portfolio. Last year, many of them were setting up their team and understanding the ecosystem in HK. On the other side, CVCs and universities are increasingly active in either direct investment or fund investment in HK as well. There is pressure to deploy for these investors, which should help to drive more deal activity in 2024 in HK.

Having said all this, the HK startup ecosystem is faced with some fundamental challenges:

Challenges

Opex: Cost of operating and funding gap between Seed → B

While GPs are loaded with cash, there is a lack of startups with a valuation range of US$200 million – $500 million that can digest a round of US$20 million – US$100 million in HK. On the other side, there has been a funding gap that remains unfilled for startups looking for Series A/+ lead investors.

Rent and labour costs continue to be the two biggest headaches for HK-based startups – needs no further elaboration.

Also Read: The quiet giants of 2024: Celebrating the success of ‘boring’ businesses

Talent: Lack of startup operators and operator-turn-founders

While there has been strong growth in the number of startups in HK over the past decade, the ecosystem of operators who are willing to take the risk and be the first employees of a fresh HK startup is still nascent. We are still building the flywheel where early employees of successful startups become founders or operators for another early-stage venture. Not to mention the challenge of the tech brain drain in the city since 2020.

Exit pathway: Billion-dollar question for both VCs and startups

With many corporates cutting their spending, the incentive for larger players to acquire startups has decreased, especially when M&A activity has already been low in the region. Coupled with a stagnant IPO market, HK startups are faced with an even tougher market compared to other comparable startups in other regions.

What are your thoughts about the startup scene in 2024?

—

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic

Join our e27 Telegram group, FB community, or like the e27 Facebook page

Image credit: Canva

The post 2024 Hong Kong innovation scene: Where are we headed? appeared first on e27.