Financing startups in Hong Kong is a serious problem. According to a survey conducted by the Chinese University of Hong Kong, nearly 90 percent of startups relied on themselves as the major source of seed capital; banks accounted for just 6 percent. This reminds me of the exact situation 20 years ago when I started my business; I also had to exhaust my savings which put me in very difficult circumstances.
I am very excited about the JOBS (Jumpstart Our Business Startups) Act which was implemented three years ago in the United States to let startups raise funds from the public (also called “equity crowdfunding”). Last year, the act also relaxed qualifications of investors from professional investors to the public with certain assets, and increased the opportunities for startup financing. Unfortunately, Hong Kong has yet to introduce similar legislation. That is why I have repeatedly raised this discussion in the past.
When people complained about a stagnant Hong Kong, most people are not aware that a revolution has been here for some time already! Hong Kong Exchanges and Clearing (HKEx) revealed earlier this year that it plans to set up a private market for startups in the fourth quarter. The planned central information platform aims to provide registration of shareholders and their equity sharing in unlisted companies and to facilitate investors’ access to information.
The platform is expected to be blockchain technology to track and consolidate all private investors’ participating activities, so there is an accurate record of all shareholders’ entitlement which forms “an irreversible record of ownership of share transfer records”, according to HKEx Chief Executive Charles Li.
Why blockchain? The technology, introduced in 2008, is a method for recording data through a digital ledger of transactions, agreements, contracts between two parties efficiently and in a verifiable and permanent way. Its high security and privacy is based on distributing storage of the ledger across hundreds or even thousands of computers around the world which makes it harder for hackers to succeed. What’s more, once updated, the ledger cannot be converted back, only added to, and it is updated for everyone in the network at the same time. The records are protected from deletion, tampering, and revision. In short, it is a one-way process.
As there is no transfer of sharing from one shareholder to another in the proposed private market by HKEx, its transactions need not be regulated.
Li expected the HKEx platform to play a role in connecting the unlisted startup companies with investors and in helping to create a “startup ecosystem”. The platform is an incubator which let startups grow and eventually become listed companies.
Reuters pointed out that this is expected to operate like the NASDAQ-style private market in the US in helping privately held companies and their shareholders manage equity and liquidity. The US platform along with its acquired SharesPost and SecondMarket had helped financing startups such that young companies, in addition to raising funds to support daily operations and business expansion, can also award stock options to attract talents, who see the share options as a potentially rich payday when the startup is eventually listed on the stock market or taken over through acquisition.
Startups like Facebook were members of the US platform before the social media giant went public. Currently, Uber and Airbnb are on its platform for which transactions have exceeded US$4.5 billion since 2013, attracting many international investors, including Hong Kong magnate Li Ka-shing.
The best way to encourage startup financing is to introduce legislation similar to the JOBS Act which allows public participation in fund-raising. This can be supplemented by promotional measures such as tax exemption. The private market initiated by HKEx is also a good start.
Recently Chan Ka-keung, secretary for financial services and the treasury, talked about the role of Hong Kong in the Guangdong-Hong Kong-Macao Greater Bay Area. He put forward the establishment of a financing platform and such products as an equity trading platform for unlisted enterprises, which is in line with the financing platform idea HKEx initiated.
Hong Kong is just an hour’s travel from Shenzhen — “China’s Silicon Valley”. Therefore, now is the perfect time for Hong Kong’s financial service industry to grab a leadership role in pushing forward HKEx’s proposed private market. As we are handicapped by too many hurdles, such as high land prices, rents and living costs which scare away talents, we should strive to compensate for our shortcomings creatively. And setting up a financing platform to help incubate innovative startups is a step in that direction.
Information technology brings more entrepreneurial opportunities to the public, and creates many quality jobs and positions. It is like the stage of Citizen Co-creation mentioned in Smart City 3.0. Therefore, I hope that we can make full use of the advantages of Hong Kong to generate new ideas in addressing the difficulties through creating a smart international crowdfunding platform.
The author is an honorary professor of the Department of Computer Science at the University of Hong Kong.