All you need to know about start up business in Hong Kong

Many of the top listed companies such as Apple, Tesla and Microsoft began as startups. Though starting a startup might be prosperous, 90% fail. What exactly is a startup? How is the startup ecosystem in Hong Kong? Any tips for running a successful startup? Preface has gathered everything you need to know in this article.

What is a Startup?

The term ‘startup’ is obviously one of the hottest business buzzwords. Though people talk about startups all the time, only a few actually understand what it is.

In general, a startup company refers to a newly formed business founded by one or more entrepreneurs. Aiming to bring unique and innovative products or services to the market, many startups are also known as the ‘disruptors’ within their specific industries.

Unlike traditional corporations, startup culture focuses more on the following aspects:

Source: Investopedia, Forbes

Hong Kong’s Startup Ecosystem

As a leading financial centre across the globe, Hong Kong is home to nearly 4,000 startups as of 2021. These startups span a wide range of industries, with financial technology (FinTech), e-commerce/ supply chain management/ logistics technology and professional and consultancy services accounting for the lion’s share.

| Industry | Number | Industry | Number | | FinTech | 472 | Food Technology | 44 | | E-commerce | 432 | Retail Technology | 61 | | Professional Services | 399 | Biotechnology | 69 | | IT & Computer | 372 | Green Technology | 104 | | Design | 280 | Smart City | 113 | | Data Analytics | 257 | Entertainment & Gaming | 130 | | Education & Learning | 218 | Social Innovation | 135 | | Hardware | 184 | Robotics Manufacturing | 62 | | Medical & Health | 145 | Others | 216 |

To boost Hong Kong’s startup ecosystem, the Hong Kong government has always been very supportive to small and medium enterprises – apart from integrating an array of entrepreneurship resources, it also provides startups with access to an extensive investor network.

Source: Start Me Up

Successful Startups in Hong Kong

Thanks to Hong Kong’s closely-knit community, some startups have managed to achieve market valuations of over $1 billion and become top listed unicorns. Examples include:

Source：Smash, Fintech News, Unwire, Pitchbook, Fintech HK

How to start a business in Hong Kong? (Step by step guide)

1. Business ideas/plan

Organisation is key to success.

At the very first stage of your business, you might have many ideas and strategies waiting to implement. But before getting your hands dirty, you should better begin with writing down your thoughts to avoid being overwhelmed.

Differ from traditional companies, you can keep your business plan lean as startup is all about cost-effective solutions.

A high-level focus business plan should include the following elements:

2. Company Registration

Upon completion of the business plan, you might feel more confident and professional.

However, the preparation work doesn’t end here, you still need to obtain your Hong Kong business registration certificate.

Business registration is essential to legal business operations and tax payment, fortunately, the process is straightforward with minimal requirements. If any, you can also hire an agency to file the application for you to make the process even simpler. On average, it only takes 5 to 7 working days to register a new company.

3. Funding

Cash is definitely king for startups. Therefore, funding your business is always one of the first and most vital financial decisions to make.

There are multiple types of startup funding options, such as bank loans, venture capital, angel investors, crowdfunding and more, each suits different business needs. For instance, crowdfunding is ideal for startups at an early-stage with no viable products, whereas bank loans are for people who are looking for more long-term funding options.

To increase chances of getting your startups funded, it is highly recommended to have a presentable business plan ready. This way, you can explain to the lenders exactly what your business is selling, what you plan on charging, how you’ll make money, and many other important factors they might take into account.

4. Building a team

Having the right team in place is crucial to a successful startup. According to Harvard Business Review, 60% of startups fail because of a problematic team.

It is therefore of utmost importance to recruit team members with shared entrepreneurial passion and shared strategic vision, as well as in-depth industry knowledge.

Upon team formation, the next step is to quickly get the new hires involved in the day-to-day running of your business and put your ideas into action.

Source: Cogs、Founder Institute、GuideMeHongKong、Bplans

How are Startups funded?

Startups founders must understand the basic concepts behind fundraising. Basically, there are 4 stages of startup funding:

Self-funding

Self-funding, or boot strapping, is usually the number one source of funding for a new company. Simply put, self-funding means the initial funds to start a business come out of the business owners’ or founders’ pockets.

Seed-capital

As the business continues to grow, founders have to look for new sources of funding except for their own savings, that’s when seed-capital comes in handy.

The amount of seed funding typically ranges from $250,000 to $2 million USD. In exchange for an investment, the founder may need to offer certain benefits such as equity and gift.

Venture

Venture capital generally comes from well-off investors, investment banks, and other financial institutions.

Since the investments are fairly large, startups better have an established reputation or even a tangible product or service to attract these higher-tier investors.

There are 3 rounds of venture capital financing:

Initial Public Offering (IPO)

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public, which is a big step for a startup as it provides the company with access to raising far more money.

In a nutshell, an IPO consists of 2 sections, the former is the pre-promoting period and the latter is the first stock sale. After listing on the stock exchange, the company becomes a publicly-traded company and the shares of the firm can be traded freely in the open market.

Source: Finmark, Forbes

Government Funds For Startups in Hong Kong

Supporting Research & Development

1. Entreprise Support Scheme (ESS)

Launched in 2015, ESS aims to provide funding support for local companies to conduct in-house research and development (R&D) work with a view to encouraging the private sector to invest in R&D.

Funding Size:

Key Features:

Eligibility:

2. Innovation and Technology Support Programme (ITSP) (Platform & Seed)

Launched in November 1999, ITSP aims to support applied research and development (R&D) projects undertaken by R&D Centres or designated local public research institutes.

Funding Size:

Key Features:

Eligibility:

The lead applicant must be an R&D Centre or a designated local public research institute.

3. Research and Development Cash Rebate Scheme (CRS)

Launched in April 2010, CRS aims to encourage more research and development (R&D) investment in the private sector and encourage companies to establish stronger partnerships with local public research institutes.

Funding Size:

40% cash rebate of the companies’ eligible expenditure contributed to ITF projects and Partnership projects as undertaken by designated local public research institutes.

Key Features:

A cash rebate equivalent to 40% of a company’s eligible expenditure in two types of applied R&D projects:

Eligibility:

Supporting Research & Development

1. Patent Application Grant

A cash rebate equivalent to 40% of a company’s eligible expenditure in two types of applied R&D projects:

Funding Size:

$250,000 or 90% of the sum of the total direct costs of patent application (including the cost for patent search-cum-technical assessment), whichever is the lower.

Key Features:

Eligibility:

SME Loan Guarantee/ Export Credit Insurance

1. SME Financing Guarantee Scheme

Launched in January 2021, the SME Financing Guarantee Scheme aims to help local small and medium-sized enterprises and non-listed enterprises to obtain financing from participating lenders for business expansion in the rapidly changing market.

Funding Size:

Key Features:

Eligibility:

Source: Jumpstart, Startmeup.HK

Pros & Cons of Startups

Differ from well-established companies, working at a startup is another experience. Below table has summarised the most discussed pros and cons of startups, especially in the early stages of launching the business:

Source: Investopedia

FAQs

1. Can foreigners start a business in Hong Kong?

With appropriate visas, a foreign entrepreneur has the right to be the individual director and shareholder of a business located in Hong Kong.

Source: BBCIncorp

2. Do startups refer to small-sized companies?

Startups are completely different from small businesses in terms of business growth and revenue.

Startups are very literally created for the purpose of growth, in other words, they are highly focused on top-end revenue and devoted to disrupting the current market or breaking into a whole new market.

Source: Apiumhub

3. What should I consider before working in startups?

Joining a startup can be very tricky given that you might face an uncertain fate. Therefore, you should avoid rushing to a conclusion but take the following things into consideration: