HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese...
-
Upload
sharyl-mckenzie -
Category
Documents
-
view
217 -
download
0
Transcript of HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese...
![Page 1: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/1.jpg)
HK’S VENTURE CAPITAL SYSTEMAND
THE COMMERCIALIZATION OF NEW
TECHNOLOGY
Kevin AuChinese University of Hong Kong
Steven WhiteChina Europe International Business School
![Page 2: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/2.jpg)
Objectives
• describe and assess the performance of Hong Kong’s venture capital system – beyond the strict financial definition of venture
capital (VC) to address the system of actors and institutions that finances the commercialization of new technology
• generate actionable recommendations to improve its efficiency and effectiveness in increasing the positive role of new technology in Hong Kong industry
![Page 3: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/3.jpg)
Agenda
• Startup process & financing• Venture capital system
– General situation of the HK VC industry– Institutional framework for an evolutionary analysis
• VC Cycle, investment process, VC system• “West coast” vs “East coast” VCs in the US
• Evolution of HK’s VC industry– Other key actors: angels, stock market, institutional
investors
• Inhibitors to VC’s support to Commercialization– Suggestions for the medium term
![Page 4: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/4.jpg)
Financing of New Firms
•With great idea, you need finance for additional research or produce a prototypes
•With great idea, you need finance for additional research or produce a prototypes
Expansion Expansion Expansion Expansion Early stageEarly stage Early stageEarly stage Start-upStart-up Start-upStart-up Pre-startPre-startPre-startPre-start
•No sales yet, you need finance for working capital such as,
salary, development & testing
•No sales yet, you need finance for working capital such as,
salary, development & testing
•Having a few sales, finance is required for marketing and operations, in order to make the business fly
•Having a few sales, finance is required for marketing and operations, in order to make the business fly
•With profits and well established business operation, funding is required for new product development and exploring new markets
•With profits and well established business operation, funding is required for new product development and exploring new markets
up to US$0.1Mup to US$0.1M up to US$1.0Mup to US$1.0M US$1 - 3MUS$1 - 3M US$3M and upUS$3M and up
![Page 5: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/5.jpg)
Cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures, which may be too small or young to qualify for traditional loans
![Page 6: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/6.jpg)
Flow of Funds in a VC cycleVC funds managed
by general partners (and sometimes with special partners)
(VCs or GPs)Portfolio companies
(startups, established companies, buyouts)
Exits: IPO or trade sale (of portfolio companies)
Limited partners
(Investors or LPs)
![Page 7: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/7.jpg)
Venture Capital Pool
![Page 8: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/8.jpg)
Number of VC Firms
![Page 9: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/9.jpg)
Investment Stage of VC FundsDisbursement by Financing Stage in Hong Kong
(in $)
29%
4%
32%
17%
17%1%
Startup
Seed
Expansion
Messanine
Buyout
Turnaround
Disbursement by Financing Stage in China (in $)
54%
0%
41%
5%
0%
0%
StartupSeedExpansionMessanineBuyoutTurnaroundDisbursement by Financing Stage in Singapore (in $)
22%
1%
66%
4%7% 0%
StartupSeedExpansion
MessanineBuyout
Turnaround
![Page 10: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/10.jpg)
Disbursement of VC Funds –Local or Overseas
1,132
8,744
411
3,169
136102
509
1,668
650
30,073
13,417
2,776
0%
20%
40%
60%
80%
100%
HK China Singapore All Asia
countriesNon-Asian CompaniesOther Asian CompaniesLocal Companies
![Page 11: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/11.jpg)
General situation of VC Industry
• have the largest pool of venture capital • Most of them not interested in investing in early
stage• A lot of funds being parked in HK for
investments outside Hong Kong– Especially mainland China in recent years
![Page 12: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/12.jpg)
Venture Capital Process
![Page 13: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/13.jpg)
![Page 14: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/14.jpg)
“West Coast” vs “East Coast” VCs
• West coast VCs are dreamers and want to see how technology can change the world, whereas East Coast VCs only treat venture investment as another asset class.
Udayan Gupta, Author of Done Deals
![Page 15: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/15.jpg)
Larry Sonsini, of the law firm Wilson, Sonsini, Goodrich & Rosati
• “The West Coast model of venture capitalism has always been a very intense business partnership with the entrepreneurs.
• The providing of capital was one function of the venture capitalist. Being actively involved in developing the business model, managing the enterprise, and recruiting management
• They thought of more than investing money. They thought about mentoring, training, and providing business solutions. The goal was not only to make a successful investment but also to be a part of building a successful venture.”
![Page 16: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/16.jpg)
Morton Collins, founder of DSV Partners in 1968
• “The East Coast, the financial center of the world, has traditionally been fixated on financial engineering. There, with a priority placed on the structuring of deals, has often mattered less what a company did or what would be involved in ensuring its long-term success than whether the deal would provide tax benefits and financial returns.
• On the West Coast, by contrast, the driving spirit has been innovation in science and technology. Technologists and investors, many of whom are refugees from the East, have long gathered around the campuses of Stanford University and Cal Tech to create a new economy and a new entrepreneurial culture (p. 293).”
![Page 17: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/17.jpg)
Reasons of the differences
• Early East Coast firms were set up as Small Business Investment Corporations– Following governmental guidelines but not
technology
• General partners are bankers and accountants, not operational managers
• New York & Boston are financial centres, so lots of money from insurance firms and pension funds– Expect regular disbursement; low risk, not
particularly fond of technology
![Page 18: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/18.jpg)
Evolution of HK’s VC System
• Tying evolving institutions to VC development
• Four stages– Prior to 1970s– 1970’s to mid 1990’s– Mid-1990s to 2001– 2001 to present
![Page 19: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/19.jpg)
Prior to 1970s
• Trader’s mentality– Favoring arbitrage
• Refugee mentality– Short-term oriented
• Colonial government (British were guilty!!)– Positive non-interventionism– Supporting indirectly logistics, construction,
trading and financial industries • Successful lobbying from these industries
![Page 20: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/20.jpg)
1970’s to mid 1990’s• Background
– British trading firms dominated– Booming stock market
• First VC firm: Inter-Asia Venture Management– “transfer strategy”
• 1981: ARRAL & Partners– succeeded against skepticism– Listed HK Teawood in NASDAQ, 1984
• 1988: US$150M APAC Fund launched– Grew industrial firms benefited in the China and Asia
boom– Invested almost all in late stage ventures
• 1987: HK Venture Capital Association founded
![Page 21: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/21.jpg)
Mid-1990s to 2001
• 1994: US$1.7B Asia Infra-Structure Fund by AIG
• Tech Boom & then Bust– Entering many new VC firms, local &
overseas– Large PEs after the Asia Crisis– Government VC: Applied Research Fund– Corporate VCs
• Short-term; risk averse; didn’t know technology
![Page 22: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/22.jpg)
2001 to present
• Dismal investment– New firms had little technology– New VCs had little operational background– Lacking qualified startup management teams– Overdue government intervention
• Not all was lost– Some success
• New opportunities & threats– Rapid development of China & HK’s economy
and financial markets
![Page 23: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/23.jpg)
Summary
• Lots of money but not channeled to tech ventures
• “…there is not a cohesive financial arrangement, and entrepreneurs, academics, politicians and civil servants lack the appropriate skills to differentiate good ventures from bad. They have to mature in their decision-making to accept risk and how return is generated.”
• “By the time China’s stock markets become mature and the RMB circulates more widely, Hong Kong as a base for venture funds will be lost forever.”
![Page 24: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/24.jpg)
Key actors and resource flows
![Page 25: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/25.jpg)
VC-Backed IPO 2000-07
![Page 26: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/26.jpg)
Inhibitors to VC’s Supporting the Commercialization of New Tech
• Government & Culture– Short-term oriented, low-tech
• VC and PE firms– “we are out to make money”
• Focused late stage, large size, low risk ventures
– Lacking operational experience
• New ventures– traditional owners expect control– Younger generations
![Page 27: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/27.jpg)
Inhibitors to VC’s…continued
• Stock market– Welcome the listing of large firms– Technology level of firms not a focus
• Banks & Endowment funds– Lending by laterals– Investment confined by the HK version of the
“prudent man” rule
• Angels & Angel Networks– Lack knowledge in tech ventures– Not organized to share risk and knowledge
![Page 28: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/28.jpg)
Suggestions for the Medium term
1. Stimulate more VC funds with long-time horizon and technology interest
• Channel government reserve and pension funds by lifting the “prudent man” rule
2. Develop professional qualifications for investment advisors on VC/PE industries
3. Stimulate angel investment Training, guidebooks, & templates “Accredited investor” & possibly tax breaks
for investing in technology ventures
![Page 29: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/29.jpg)
Suggestions…continues
4. Diversify the backgrounds of the general partners – VC firms hiring general & special partners are
more likely to receive endowment, pension & government investments
5. Find new IPO exit for VC/PE invested in technology firms – setting up a new board with perhaps the main
board or the SME board in Shenzhen Stock Exchange
![Page 30: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/30.jpg)
“The society is innovative and entrepreneurial. The Science Park is great in innovation…But there is not a cohesive financial arrangement, and entrepreneurs, academics, politicians and civil servants lack the appropriate skills to differentiate good ventures from bad. They have to mature in their decision-making to accept risk and how return is generated.”
from a foreign, early-stage VC in HK
![Page 31: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/31.jpg)
References
• Au, K., Baark, E., Chua, B. L., & Thomas, H. (2005). Innovation policy and high growth startups. Hong Kong: CUHK Centre for Entrepreneurship.
• Gupta, U. (2000). Done deals: Venture capitalists tell their stories.
Boston: Harvard Business School Press. • Metrick, Andrew (2007) Venture Capital and the Finance of
Innovation. John Wiley & Sons, Inc., Hoboken, NJ• Murmann, J. P. (2003). Knowledge and competitive advantage: The
coevolution of firms, technology, and national institutions. Cambridge: Cambridge University Press.
• White, S., Gao, J., and Zhang, W. (2005). Financing new ventures in China: System antecedents and institutionalization. Research Policy, 34: 894-913.
![Page 32: HK’S VENTURE CAPITAL SYSTEM AND THE COMMERCIALIZATION OF NEW TECHNOLOGY Kevin Au Chinese University of Hong Kong Steven White China Europe International.](https://reader035.fdocuments.us/reader035/viewer/2022062516/56649dd25503460f94ac8371/html5/thumbnails/32.jpg)
Private Equity, VC & Hedge Funds