Why it is difficult for startups to raise funds locally?
Up to the year 2023, Hong Kong’s start-up ecosystem is thriving. In 2023, the number of start-ups in Hong Kong grew to more than 4,200 with some 16,453 people employed in such businesses. Biotechnology, artificial intelligence (AI), smart city and financial technologies (fintech) have been identified as the four key areas for Hong Kong’s innovation and technology (I&T) industry. The city’s expenditure on research and development has almost doubled in absolute terms from a decade ago. However, the stagnant initial public offerings and geopolitical tensions have created a challenging venture capital environment in Hong Kong, resulting in a domino effect, forcing companies and investors to look elsewhere for opportunities.
So there never have shortage of tech inventors and innovators in the city, but it is hard to commercialize their products. And even successful commercialized tech companies are doing very little to do more to help struggling start-ups and create much-needed ecosystems. There are no shortage of tech entrepreneurs with brilliant ideas, but investors are slow to put money into projects.
There are a few key reasons why it can be difficult for startups to raise funds to commercialize:
* Limited access to venture capital and angel investors:
Many of the largest and most active venture capital firms and angel investor networks tend to be concentrated in major global tech hubs in U.S. like Silicon Valley, New York, and Boston. Startups located outside of these hubs, Hong Kong, have less direct access to these funding sources.
* Smaller and shrinking local investor pools:
The pool of active local investors, whether angel investors or venture capitalists, is often smaller in regions outside of the major tech centers. This reduces the number of potential funding sources for startups.
Although the number of startups are climbing up from a decade ago, Hong Kong still has a limited venture capitalist ecosystem, which results in limited access to venture capital, which also is originated from lack of a strong market momentum in encouraging more potential investors. Due to these reasons, Hong Kong startups have to face funding problems, eventually leading to business losses or even closure.
Indeed, many of the startups try their own ways to overcome this problem by adopting bootstrapping, which rely on the funds generated through the operations of the startup business and the money saved by limited continuous R&D activities. These startups are trying their best all the times to find other alternative funding sources like angel investors, private investors, and even more relying on government grants to get them alive. However, the success rate of obtaining government fundings is far from expected.
* Lack of startup ecosystem maturity:
Thriving startup ecosystems take time to develop. Regions without a well-established history of successful startups, lack of promising exits for investors, and slump of active investors may struggle to attract the same level of funding and support for new ventures.
* Geographic bias:
Due to internal economy downturn and various external risks and challenges, the Investors, especially larger VC firms, may be hesitant to invest in startups located far from their own offices, as a large portion of these overseas investors may have exited or only maintain a minimum office space in Hong Kong. It will be more challenging to provide hands-on support and oversight from a distance.
* Perceived risk:
Investors may view the Hong Kong as less established startup regions as riskier investments, due to factors like access to talent, industry expertise, and exit opportunities.
Other unfavorable factors:
– Talent Acquisition and Retention
– High Cost of Living and Operating Expenses
– Market Competition
– Stringent Regulations and Compliance
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Why should you consider listing on Nasdaq?
The main considerations are the key differences between a Hong Kong IPO and a Nasdaq IPO:
* Listing Requirements:
- The Hong Kong Stock Exchange (HKEX) has specific listing requirements such as a minimum market capitalization, track record, and financial criteria that companies must meet to list in Hong Kong.
- NASDAQ: The NASDAQ exchange has its own set of listing requirements differ from the HKEX requirements. NASDAQ listing rules focus on factors like minimum share price, minimum number of shareholders, and financial metrics.
* Regulatory Environment:
- The IPO process and listing requirements in Hong Kong are governed by the Securities and Futures Ordinance and regulated by the Securities and Futures Commission (SFC).
- The IPO process and listing requirements in the United States, including NASDAQ, are regulated by the Securities and Exchange Commission (SEC).
* Investor Base:
- The investor base in Hong Kong is primarily composed of local and regional Asian investors, with a significant presence of institutional investors from mainland China. The investor focus is less variety but more on traditional equity and fixed income investment, less willing to pour into higher risky and higher return venture.
- The NASDAQ exchange attracts a more diverse global investor base, including a large number of institutional and retail investors from the United States and internationally.
* Industry Focus:
- The HKEX has a strong focus on industries such as financials, real estate, traditional industry sectors, and companies with China-related business operations.
- The NASDAQ exchange is known for its concentration of emerging technology, biotechnology, and other high-growth companies.
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When is the best time to list (in Nasdaq Capital Market)?
For most of the startup with their dream to launch the successive fundraising, here is some hints of the best conditions for a startup to list on the Nasdaq Capital Market:
* Company Size and Maturity:
- The Nasdaq Capital Market is generally suitable for smaller, less-established companies compared to the Nasdaq Global Select or Nasdaq Global Market.
- Typically, startups with a market capitalization between $50 million to $300 million are well-suited for the Nasdaq Capital Market.
* Financial Requirements:
- Minimum share price: $4 per share
- Minimum market value of publicly held shares: $15 million
- Minimum stockholders’ equity: $5 million
- Minimum number of round lot shareholders: 300
* Operating History:
- The Nasdaq Capital Market has less stringent operating history requirements compared to the other Nasdaq tiers.
- Companies must have been operating for at least one year, with audited financial statements for the most recent fiscal year.
* Growth Potential:
- Startups listing on the Nasdaq Capital Market should demonstrate strong growth prospects and the potential to meet the listing requirements of the higher Nasdaq tiers in the future.
* Corporate Governance:
- The startup must have a board of directors with a majority of independent directors and an audit committee with at least three independent directors.
- The company should also have established internal controls and corporate governance practices.
* Underwriting and IPO Process:
- Startups typically work with an investment bank or securities firm as the lead underwriter to manage the IPO process and ensure compliance with Nasdaq’s listing requirements.
- The underwriter plays a crucial role in pricing the IPO, generating investor demand, and supporting the stock’s liquidity after the listing.
* Post-IPO Requirements:
- Once listed on the Nasdaq Capital Market, the startup must continue to meet the exchange’s ongoing listing requirements, such as maintaining a minimum share price, minimum number of shareholders, and timely financial reporting.
By meeting these conditions, startups can gain a higher successful rate to access to the Nasdaq Capital Market, which provides them with a lower entry barrier, while still benefiting from the Nasdaq’s reputation, visibility, and potential for future growth.
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