China's Hong Kong Special Administrative Region (SAR) has launched an Innovation and Technology Venture Fund (ITVF) of 2 billion Hong Kong dollars (USD 256 million) to encourage investment from venture capital (VC) funds in local innovation and technology startups.
The fund is open for application from venture capital funds until January 15, 2018 and a briefing session will be held on October 3.
To facilitate monitoring and administration of the ITVF, a company named “The Innovation and Technology Venture Fund Corporation” (ITVFC) has been set up to serve as a special-purpose vehicle (SPV) to co-invest with the partner VC funds in local Innovation and technology (I&T) startups at an overall matching investment ratio of approximately 1 to 2. ITVFC will be a passive investor, making direct investment in the startups concurrently with the partner VC funds upon invitation of the latter.
A dedicated team will be set up in the Innovation and Technology Commission (ITC) to serve as the Secretariat of the SPV to launch the ITVF. An Advisory Panel comprising veterans in the business and investment sectors, professionals and academics will be appointed to provide independent advice on the selection of partner VC funds and operations of the ITVF at the strategic policy level. However, this Advisory Panel will not make any investment decisions on individual deals.
The applicant funds will be evaluated on the basis of the background and experience of the investment team, investment track record in I&T enterprises, business network and value-added services that can be provided, etc. The fund managers of the selected partner VC funds would be responsible for identifying and conducting commercial and legal due diligence on the potential investee companies. The fund managers, in addition to looking after the investment from a business perspective, should also play a role in assisting the investees to grow and expand their business.
The co-investment scheme is targeted at startups which are at series A or B stages. Startups which are looking for seed funding or pre-series A funding are unlikely to be selected.
The main purpose of the ITVF is not to generate monetary returns for the government but to stimulate private investments in local I&T startups and to increase deal flow.
Any VC fund, whether it is incorporated in Hong Kong or overseas and whether it is a newly established or an existing fund, can apply for selection as a Co-investment Partner (CP), as long as it has an investment focus in I&T startups; has an investment coverage including Hong Kong; has a minimum remaining committed capital of HK$120 million as at the date of application; and has a remaining fund life of at least five years to co-invest with the ITVFC.
Current start-up funding landscape in Hong Kong and rationale for the fund
A document submitted to the Finance Committee of the Legislative Council provides the rationale for setting up the fund. It notes that I&T startups in Hong Kong are generally encountering difficulties in obtaining sufficient private investment in the growth stage and there is a need to encourage more private organisations, VC funds and angel investors to invest in I&T in order to create a vibrant start-up ecosystem.
There is adequate funding support for I&T startups at the pre-seed to seed stages. For example, under the Technology Start-up Support Scheme for Universities (TSSSU) of the ITC’s Innovation and Technology Fund (ITF), each start-up can be funded for not more than three years, with a maximum annual funding of HK$1.2 million. The funding can serve as seed money and be used for setting up and operating I&T startups, carrying out R&D as well as promotion and marketing.
The Cyberport Creative Micro Fund provides funding of HK100,000 each for companies to develop innovative ICT-related prototypes. Various university funding schemes also provide seed-stage funding to staff/students to commercialise research results through setting up I&T startups. This fund is managed by the Hong Kong Cyberport Management Company Limited, which is wholly owned by the Hong Kong SAR Government.
The Cyberport Macro Fund (CMF), set up with an initial size of HK$200M, provides seed to Series A stage funding to Cyberport digital entrepreneurs. In addition, the ITF’s Enterprise Support Scheme (ESS) is also providing funding to I&T enterprises directly, with the government matching public funding with private investment in R&D by I&T enterprises on a project basis up to a ceiling of HK$10 million.
To bridge this gap in funding for growth stage ventures, the ITVF is being set up. Hong Kong's Secretary for Innovation and Technology Nicholas Yang said the ITVF will help fill the funding gap for local technology startups, saying that, "We are confident that having this new fund will be conducive to developing a more vibrant Hong Kong innovation and technology ecosystem.”