If there is one thing that entrepreneurs in Hong Kong could improve on, it is to have a bolder vision for the company, said a top executive of Alibaba Hong Kong Entrepreneurs Fund (AEF).
“I guess the vision of the startups is very important. Hong Kong is a small market – so it’s important for entrepreneurs in Hong Kong to have a bigger vision. They can go across the border to tap into the mainland market or Southeast Asia market and other parts of the world,” said AEF executive director Cindy Chow.
Launched in 2015 by Chinese internet giant Alibaba Group, AEF is a non-profit initiative to invest in startups and help them tap into global markets through the Alibaba ecosystem. It has two chapters – Hong Kong and Taiwan, with an investment corpus of HK$1 billion ($130 million) and NT$10 billion ($320 million), respectively.
In a conversation with DEALSTREETASIA at Alibaba’s Hong Kong office, Chow said over $40 million of the $130-million Hong Kong fund has been deployed, with over 20 portfolio companies under its belt.
Two of the fund’s portfolio companies are unicorn startups – Hong Kong-based logistics startup GoGoVan and fintech startup WeLab. The former merged with its Chinese peer 58 Suyun in 2017 and raised a $250 million round last July to further its business expansion in China.
WeLab, on the other hand, has secured an online banking licence from the Hong Kong Monetary Authority in April to access the retail banking sector and will be rolling out its services in the next six to nine months. It is said to have delayed its $500-million IPO and may consider raising capital via a new private funding round.
Chow noted that the fund will continue to focus on plugging the Series A and B funding gap in Hong Kong.
“Since we started the fund we’ve seen that funding for Series A and B is where the gap is. Seed and pre-Series A are supported by family offices and individual investors because the check size is relatively small. For our portfolio, it ranges between seed and Series C but over 50 per cent of our investments come in during Series A. That is what we want to do for Hong Kong by focusing on the funding gap,” she said.
The AEF fund is a not-for-profit initiative. Could you explain how that works?
Basically, it means that even though the fund is not a registered NGO (non-governmental organisation) and is run commercially, we pledged that any investment return will be ploughed back to the fund to continue to do programmes and investments that help us to achieve our mission. That said, we’re not an NGO. We have three independent directors on our board who will oversee our governance to make sure we do whatever we have pledged to the public.
How much of the fund has been deployed so far?
We have deployed over $40 million – so we still have a lot of headroom to invest in startups. The total fund size is about $130 million so we have more than half of the fund to be deployed and we’re seeing pretty good performance so far. Hopefully, when we have a liquidating event we will have a good return so that we can grow the fund further.
For the past 3 years, we have gone through more than 3,000 business proposals and if you compare that with the Hong Kong government’s statistics – there were 2,800 startups by the end of 2018. Basically, I can assume most of the startups in Hong Kong we have already gone through their business plans or met some of them.
So far, we have invested in over 20 companies and we do see sectors that are relatively stronger in Hong Kong – like fintech as Hong Kong is the international financial centre, so there’s a lot of good talent and ideas. In addition, Hong Kong is an open economy and a city so it’s important that we’re able to build up a good base or a hub for other companies in other markets that are interested to tap the Asian market and consider Hong Kong as their base. This is important as we’re looking to build an ecosystem here.
Do you see yourself chasing the same deals as local VCs?
Our mission is to invest in startups with a Hong Kong nexus, so that already limits us in terms of pipeline. Because when we talk about Hong Kong nexus – the startup has to be based in Hong Kong or started by someone from Hong Kong, or other people that use Hong Kong as a base for their company. We can also reach out to companies with a majority of their founders from Hong Kong.
Last year, we invested into a company which was originally based in Silicon Valley but most of their founders are from Hong Kong – the important thing is that they’re also interested to look at the Asian markets. So basically our mandate limits our pipeline as compared to other VCs, very few of them limit themselves to only invest in Hong Kong startups.
We’re looking to strengthen our pipeline so last year we set up an AI accelerator/incubator in the Hong Kong Science Park to incubate earlier stage startups with an AI focus. So that is also an initiative to help the local AI industry and at the same time, it helps us to curate our investment pipeline. We can’t invest in all of the deals that we come across so we do co-invest with other VCs as well.
How has the Hong Kong startup landscape evolved over the past few years since the launch of the fund in late 2015?
It has been gaining a lot of traction and become much more robust than when we first started in late 2015. In terms of the funding, I see a lot of big corporates who used to be real estate-focused, are having interest or even dedicated a department or their family offices to look into investments into new technology/ideas.
We are also seeing more corporates interested to support the startup community like our Jumpstarter event. There were over 30 corporates from various industries like banking, logistics and others that sponsored us and had their management to meet the startups – we created over 500 meetings in that 2-day event.
So you can see that corporates are now more proactive to get themselves involved in the ecosystem. I think a lot of corporates are also seeing that technology is going to change a lot of things and they’re eager to learn about what’s out there – whether there are products/services that could help their business to pivot or to grow further.
If there is one thing, what could the startups in Hong Kong do better?
I guess the vision of the startups is very important. Hong Kong is a small market – so it’s important for entrepreneurs in Hong Kong to have a bigger vision. They can go across the border to tap into the mainland market or Southeast Asia market and other parts of the world.
So when we look at startups, besides their products/services, we also very much look into their vision on growing their business out of Hong Kong. We see that a lot of times that entrepreneurs in Hong Kong are still very much focused on the local market. So hopefully we can see more entrepreneurs with a bolder vision.
How does the portfolio companies under AEF fund work with the Alibaba ecosystem?
One of the key things in our investment decision is whether our ecosystem can help startups. So far, we have a number of very prominent cases like the merger of GoGoVan and 58 Suyun in China – a typical example of how we can help a startup to grow. We don’t necessarily have to do M&A every time. We could also do a business collaboration.
So what I always tell the startups is that we’re the ones that will set up the blind dates when I see an opportunity but it’s up to them to work it out – to make sure there are mutual benefits for both parties in order for the collaboration to be sustainable. That’s important because to have someone to open doors [of opportunity] for you is a key. And especially in the Alibaba ecosystem, there are so many businesses in the group and I have to spot those opportunities.
We’re very fortunate to also have another unicorn under us called WeLab. We do see there are quite a number of our startups that are doing quite well, so we’re happy about that and hope these success stories will encourage young people in Hong Kong to aspire to do something different. We’re not asking people to drop out of college to start a company but we want people to be bold enough to step out of their comfort zone.
Where do you think the funding gap is for the startup ecosystem in Hong Kong?
Since we started the fund we’ve seen that funding for Series A and B is where the gap is. Seed and pre-Series A are supported by family offices and individual investors because the check size is relatively small. For startups that are focusing on the consumer market – it’s a cash game, if you don’t have the money to expand the business, you can’t raise the follow-on funding from your investors. I see that this is where startups usually face difficulty. So it’s again, down to whether the entrepreneurs are prepared to go beyond the Hong Kong market. For our portfolio, it ranges between seed and Series C but over 50 per cent of our investments come in during Series A. That is what we want to do for Hong Kong by focusing on the funding gap.
Are you looking at any exit anytime soon?
Traditionally for VCs, the typical holding period is 10+2 and then the first seven years would be investments and then divestments. For our fund, it’s perpetual so we don’t have a term for our fund. The board would suggest that we continue to invest in quality deals and wait for the suitable liquidity event. So far, we haven’t seen any liquidity event yet. But we will try to liquidate when we see that the return is reasonable. We still have more than 50 per cent of the fund yet to be deployed, so we don’t have to rush to exit.
What are some of your learnings from being the executive director of AEF Fund?
My background is finance. Although I was not in the PE/VC field, I worked closely with our investment team in the previous role. The way you review early-stage startups and strategic investments is different. Gobi Partners is our GP for the fund and we work very closely together, where Gobi shares its views on Southeast Asia and mainland China with us. PickUpp and Shopline are setting up an office in Southeast Asia, so I see more and more startups are interested to tap the Southeast Asia market.