The Hong Kong Startup Ecosystem

As a major business hub in the traditional economy HK punches well above its weight. As a startup ecosystem it's raising fast but still in the making. Today we explore this

Nov 23, 2024

In the previous series we looked at why HK is such a special place to do business: part 01, 02, 03. We now start another series on tech ecosystems in Asia and around the world and what makes them thrive, starting with HK. First, the facts:

01 – The HK ecosystem is growing

Despite the recent shocks, the Hong Kong startup ecosystem is growing:
- More than 4,000 startups (up by 34% since 2019)
- More than 16,400 employees (up by 32% since 2019)
- 132 innovation spaces (up by 43% since 2029)

These data are taken from the StartmeupHK website.

02 – Diverse range of founders, important western presence

In terms of founders, Hong Kong is once again much more diverse than Mainland China and in that respect, it has more resemblance to western tech ecosystems where founders coming from abroad play a major role. InvestHK carried out a study on startup founders:

- A 68% were Hong Kong locals

- A 6% were Hong Kong returnees

- A 26% were non-locals.

Of those, Mainland China had the largest share (21.6%) but the UK wasn’t far behind (16.6%). The US, France and Australia complete the top 5. Its interesting that Singapore makes it to number 9, which means a fair amount of Singaporeans come to HK to launch a startup but Japanese are not there (despite Japan being in the top 3 for regional HQ).

03 – A wide range of verticals with Fintech and eCommerce at the top

This survey identifies at least 16 categories and the first thing we see is that FinTech and eCommerce stand out. Together they take more than a quarter of the total. This reflects their weight in the traditional economy, but then other sectors are over or underrepresented Vs their traditional role. There are two and a half times more Biotech startups than Smart City ones despite HK’s strong real estate sector.

So, we see the new economy leverages on the old but takes its own shape. That also means those underrepresented sectors have potential for fast growth once the right conditions emerge, for example in PropTech & Smart Cities.

04 – Rankings

When it comes to measuring the performance of a tech ecosystem, rankings can be a bit tricky because we often deal with concepts that are less quantifiable than the traditional economy. For example, its easy to determine which airport is number 1 by cargo (spoiler alert, its HK). Its less easy to determine which is “the most dynamic ecosystem”. That’s one of the reasons why Hong Kong’s position in rankings can seem a bit confusing and requires some explanation. Let’s look at 2 different rankings first:

STARTUP GENOME: If we check HK’s position in the Startup Genome Global Startup Ecosystem Ranking 2024, the result is surprising, it doesn’t make it to the Top20 while traditional peers like New York, London, Singapore or Shanghai do make it. This is unusual, unheard of in the traditional economy.

GLOBAL INNOVATION INDEX: However, if we check the Intellectual Property Organisation’s Global Innovation Index 2024 that ranks the most innovative economies in the world and unveils the world's top innovation clusters turns out that Hong Kong is part of the 2^nd most advanced cluster, together with Shenzhen and Guangzhou and ranks even ahead of Silicon Valley.

How can this be? First, because these rankings are measuring different things and different geographies. But apart from this, it’s fair to say that although the HK ecosystem is growing and maturing and has some pretty robust strengths, it still has some catch up to do with its traditional peers. This is due to several reasons we will explore now (btw, you’ll notice that the concepts explored in previous posts (01, 02, 03) come in handy to contextualise).

05 – A different animal
Remember the post about how peculiar HK is? Being “a different animal” affects rankings. We come back to the concept that HK is much more than just a city, it’s a node in broader networks. If you measure it strictly as a city (the node alone) it gives you one result (somewhat lagging Vs its peers), if you see it as part of a broader network, such as the Greater Bay Area (GBA), then the result is very different (part of the number 2 tech hub in the world). This is part of the explanation.

06 – Laissez faire economy and Innovator’s dilemma

Another point is that you could argue that:

In some ways Hong Kong is like a very successful corporate, so comfortable in its traditional success that it started innovating with some delay because it simply didn’t feel the pressure to do it any earlier.

This is relevant because the city’s economic formula has traditionally been based on a “laissez faire”, non-interventionist government that shies away from industrial policy and a traditionalist business class that favours tried and tested investments such as real estate over “unnecessarily risky ones” such as startups. This formula has been too successful to simply be discarded, however, these ingredients are not ideal for the emergence of a vibrant early-stage landscape, something more is needed. As we will see in future posts, vibrant tech ecosystems like Silicon Valley were created among other things through industrial policy and very deliberate decisions by authorities regarding regulation and taxation. Another key component was a risk-taking business community and a large market to expand into.

07 - A developing ecosystem
Another important point is that HK has an outstanding performance in some respects coupled with weaker results in other parts, or in other words, its still in the making. For example, look at the funding landscape: Angel investment and early stage VC funding is weaker than it should be but then as a centre for IPO Hong Kong is in the Top 5 and many years it makes it to number 1. In terms of R&D local Universities rank 3rd globally for most-cited and impactful AI research, but when it comes to real world applications, there is more work to do in bringing them to the market.

So we see a lot of underlying strengths that will not become fully visible untill the different elements in the ecosystem align in a more coherent way and start flowing more seamlessly.

There are several pockets of world class potential that do not materialise yet into effects that the rankings can pick up but that doesn’t mean they are not there.

08 – Reasons to be bullish - Top 2 emerging ecosystem

If I had to summarise my opinion on the ecosystem, I wouldn’t focus on it being a couple of years behind in some respects, I think that’s not the key. In fact, even despite starting later than others and despite the recent shocks, the ecosystem is growing at a good rate and is already catching up and converging with its peers. For example, take this other ranking from Startup Genome:

Hong Kong is number 2 among the top emerging ecosystems
and is the number 1 emerging ecosystem in Asia.

So there is solid good work being done already on the part of the whole ecosystem, a lot of it quite recent and will only be fully visible in the next couple of months or years. What’s important about these efforts and the new measures unveiled at the Policy Address is to what extent they can make Hong Kong not only catch up but actually surpass competitors and I believe there is a very good chance Hong Kong will do exactly that.

NEXT: To really understand this process, we first need to get a broader perspective into what is takes to build a successful tech ecosystem. Next week we will start with the example of Silicon Valley.

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