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Recent Example

One recent success was Iatopia.com (ICL), a young Hong Kong company founded in May 2006 by Dr. Lee Shu Tak Raymond, formerly an associate professor at the Department of Computing of Hong Kong Polytechnic University. An inventor, scholar and systems consultant, Dr. Lee possesses more than 18 years of systems consulting and R&D experiences in Web 3.0 intelligent agent technology, artificial intelligence, internet and mobile technology and E-commerce.

ICL made an impressive head start in the e-publication business, servicing and partnering with more than 50 leading magazines, including Newsweek, MIT Technology Review, ESPN magazines and Ming Pao Weekly Magazine. The business model features: (1) delivery of interactive and multi-media based reading, searching and web-channel viewing experience to registered viewers, (2) service offerings to publishers ranging from simple e-content hosting, management of content, archive and registered viewers profile to maintenance of a full-fledged virtual communities and (3) generation of advertising and precision target marketing revenue from a host of branded advertisers.

As site traffic increased (with over 2.5M cpm recorded as of August 2008), ICL saw the apparent needs for extra server equipment and manpower and additional funding from sources other than the founders. From mid-2008 to early-2009, with help with two smart angels (who are professionals and seasoned investors), Dr. Lee managed to, although slightly slowed by the financial turmoil, raise two rounds of angel funding totaling HK$10,000,000 (around US$1.28million), based on a pre-money valuation of the Company at HK$25,000,000 (around US$3.2million).

In August 2009, Media Chinese International Limited, a strategic partner of ICL, entered into an agreement to subscribe for three convertible notes in ICL for a total amount of HK$4,500,000 (around US$577,000). Upon full conversion, Media Chinese will become the second largest shareholder of ICL. Media Chinese is dually listed in Hong Kong and Malaysia, and has a media products portfolio comprising 5 newspapers with total daily circulation of more than 1 million and more than 30 magazine titles around the world.
 

Conclusion

As seen above, this  friendly environment, combined with its proximity to and close relationship with China, recent government policies favoring innovation and technology and the emergence of VC industry, have further made Hong Kong fertile soil to start and grow emerging businesses and by extension a rich venue for angel investment opportunities.

The practice and general awareness of angel investment, however, is still only limited to a relatively small portion of the business and investment communities. Angel financing has a long way to go before it can enjoy the type of popularity it has in California.

To improve on the current state of affairs and to elevate angel financing to the next level, much more work needs to be done. Seasoned angels need to make more effort to institute more organizational format and forums to angel activities in Hong Kong by establishing more angel networks, angel clubs and angel funds. The government, through the relevant quasi-government organizations, may want to consider making more missionary efforts to raise the awareness of angel investment among the business and investment communities.
 

Venture Capital
A strong venture capital presence to provide follow-on financing for post-angel companies is important to the development and growth of angel financing. In this light, Hong Kong is blessed as a key VC hub in Asia, with 294 venture capital firms operating in the territory as of first half of 2008. It has a strong lead in raising funds, raising US$16 billion in 2007 and about US$8 billion in the first half of 2008.

Before the 1990s, Hong Kong did not have much of a venture capital industry. Financing of new businesses relied largely on one's own savings or pooling of resources from the immediate family members or close friends. In the late 1980s, the first venture capital companies began to emerge in Hong Kong. This marked the first time when newly established companies without self-funding resources were able to seek equity financing from unrelated third parties.

The Internet boom in the late 1990s and the China factor attracted even more foreign venture capital firms to Hong Kong and also spurred the growth of some home-grown VC funds. Today, Hong Kong probably remains the largest VC hub in Asia, having weathered ebbs and flows, including the blow from the dotcom bust and an increasing trend for those VCs focusing on mainland China to locate their operational bases to Beijing or Shanghai.

In terms of size and depth, Hong Kong's venture capital industry pales compared to Silicon Valley. The industry also has perhaps paid too much attention to later stage companies to the neglect of early stage companies. With more quality angel financed companies coming on scene in Hong Kong, a shift of emphasis hopefully will gradually occur to catch up to the needs of early stage companies.

Capital Markets
For years, Hong Kong has been a significant world-class investment banking center servicing IPOs of local and PRC companies both on its own stock exchange and overseas bourses including the NASDAQ. Since the mid-1990s, we have witnessed a spate of listings on the NASDAQ or the Hong Kong Stock Exchange of PRC focused Internet or technology companies, many of which were managed primarily out of Hong Kong.

The first wave from mid- to late-1990s included the listing of Sina.com, Sohu, and Netease on the NASDAQ, followed in more recent years by Baidu, C-Trip, Tencent (operator of QQ) and Alibaba, etc. on the NASDAQ or in Hong Kong. These listings provided the ultimate exit for their founders and investors and a road map and prized goal for countless other striving startups and entrepreneurs.

Angel Profiles

A recent article on Hong Kong’s VC industry has an interesting analysis of angel investors in Hong Kong. It put them into five categories :

• Sophisticated – the “true” and knowledgeable angel investment practitioners;
• Businessmen – knowledgeable but less intense investors in start-ups doing deals as an alternative investment form;
• Corporate – manufacturers seeking tech startups to extend their product lines or services;
• Incidental – highly wealthy individuals investing to prove themselves or kill time; and
• Traditional entrepreneurs – traditionally minded bosses who will invest only if they are in control, not the founders who came up with the original ideas.

Outside certain portions of the above circles, the concept of angel financing is only beginning to be understood or practiced widely.

Angel Networks

Angels acting in concert or in organized groups is a more effective way to invest. Accordingly, organized angel networks have begun to emerge in recent years. We cite a few better known examples below.

• British Chamber of Commerce Business Angel Programme (http://www.britcham.com/baker-tilly-business-angel-programme) was initiated by the British Chamber’s IT and SME committees and sponsored by a local audit and business service advisory firm. This program has been running two or three meetings a year, where a number of shortlisted investee companies are given the opportunity to make presentations.
• China Business Angel Network (CBAN) (http://chinabusinessangelnetwork.angelgroups.net/) Hong Kong Chapter is the local chapter of CBAN, an established network of more than 140 angels with chapters in Shenzhen, Shanghai and Beijing. CBAN members enjoy reciprocal membership with Business Angel Network South East Asia (BANSEA) in Singapore.
• Hong Kong Angel Capital Network (www.facebook.com/group.php?gid=4505959039) is created as a joint venture among its members and Dr. Samson Tam, founder of Group Sense Limited and currently a legislator in Hong Kong. Member admission is by invitation or referral only, requiring declaration of not less than HK$20,000,000 of investable fund and investment in at least one project of the Network in a 12-month period.
• Tolo Habour Business Angel Support Group (www.baf.cuhk.edu.hk/research/gem/_new/EN/education/thbasg/index_thbasg.html) is an initiative of the Chinese University of Hong Kong Centre for Entrepreneurship to match companies with good potential with prospective angel investors through the University’s alumni network.

Angel clubs, Angel funds or investment groups

Going beyond networks, angels might band together to invest collectively as angel clubs, angel funds or investment groups. So far, such efforts in Hong Kong seem far and few in between. A few of the budding ones may include:

• Black Horse (www.darkhorseinvest.com), a small angel investment group that typically invests US$50,000 to US$1,000,000 in each company and looks to co-invests with other venture funds in Asian companies with capital requirement of US$1,000,000 to US$5,000,000 and a valuation of US$2,000,000 to US$10,000,000. Its industry focus is IT, telecom, education and environmental protection.
• Catalyst Group (www.catalistgroup.com)
• Hong Kong Angel Investment Network (www.investmentnetwork.hk) is a London-based investment company. It provides a web-based matching service for angel investors seeking investment opportunities and entrepreneurs seeking capital. Entrepreneurs are charged upfront referral fees for the service

Amounts and Structure of Financing

Based on general observations, the deal size of angel investment in Hong Kong seem to largely fall under the norms elsewhere. Individual investors generally takes one or more units of roughly US$50,000 each, resulting in rounds of financing aggregating roughly between US$0.5 million to US$1.0 million per round.

The funding vehicle and the corporate structure in Hong Kong are often more complex and less uniform than those elsewhere, such as Silicon Valley. This is a reflection of the need to adapt to the varying requirements to operate multi-jurisdictionally. For instance, companies of Hong Kong based founders that operate in the mainland will need to set up a corporate structure not only in Hong Kong but also on the mainland. Typically, ordinary shares are used for the initial rounds. However, following the financing practice of the US, some investments are taking on more sophisticated structures, including the use of preferred shares and convertible notes.
 

Startups tend to concentrate in business areas offering the greatest potential for business growth, from those relating to TMT (technologies, media and telecom) on the one hand to those targeting the huge China market, in particular the consumer market, on the other or areas where the two overlaps. Specific industry areas of the startups are extremely wide ranging, from retail business to language instruction, cartoon production, fast food, semiconductor, E-commerce, outdoor media, health supplements, and on and on.

Accordingly, business angels in Hong Kong have an abundance of choices in investment targets.

Developmental History

The quintessential angel financing model probably did not emerge in Hong Kong until the 1990s. Before that time, entrepreneurs seeking early-stage funding were largely left to chance or the luck of knowing the “right” people or groups to approach. Knowledge of angel investing practices was largely lacking. Occasionally, founders of a startup might obtain loan or equity money from an unrelated party or a distant relative. However, the lack of a standardized or well-conceived practice for structuring the loan or investment often resulted in poorly fitted documentation leaving room for later disputes or unfairly skewed arrangements leaving sour taste among the parties.

As the Silicon Valley tech success rippled across the Pacific in the 1980s, its effects, including the tech based startup and angel financing approaches to building new businesses, began to be felt in Hong Kong. I recall handling a case as a lawyer in Hong Kong in the mid-90s where an Internet startup in Hong Kong received angel funding in the range of several million US dollars. The financing was syndicated by a well known investment banker to seven or eight local individuals where each invested in several investment units of US$100,000 per unit. The documentation for the investment followed the preferred share model prevalent in California. In most respects, that transaction was not much different from similar deals structured in the US at the time.

Since the 1990s, the concept of angel investment has gradually taken root and started to proliferate in the business circles, especially among the startup and tech sectors, expatriates and returnees, VC and capital markets practitioners, and a younger generation of business executives and professionals.