Wednesday, February 26, 2020

Fundraising – What Are The Available Options?

I have started 3 startups and raised funding for two of them. Here is what I learned: Your investors can take over your startup and ruin your future.

Most entrepreneurs have faced the issue of fundraising. On a broader scheme, it can be investments, loans or savings. Yet, the trendy startup ecosystem creates many traps and myths that misguide first-time entrepreneurs. In this article, I am going to share my views on fundraising in Hong Kong.

Fundraising has both good and bad sides. Most startups do not have an answer of when and how to raise funds. I’m going to divide the startup journey into 3 stages:

  • Idea
  • Seed
  • Venture

Idea Stage
As it is phrased, you only have an idea at this stage. This is also the time most first-time startup founders worry about. Hong Kong has a high living standard. Many founders are not confident enough to quit their full-time jobs to pursue their goals.

In a typical form, they may count on savings over their years as employees. Others would raise capital from 3Fs (or FFFs), short for Family, Friends and Fools.

Raising Capital too early can be a problem, too. With more funds than needed, founders tend to spend more than necessary. The first lesson for every founder is to extend the runway to at least 18 months or more. In fact, running out of cash is a typical reason for failed companies.

Seed Stage
This is a stage where startups build their initial product and are ready to launch to the market. The product is usually defined as Minimum Viable Product (MVP).

There are two main reasons to build an MVP:

  1. It ensures the product is not over-built.
  2. It allows you to gather feedback quickly.
  3. It enables growth to the widest market.

Startups need to prove the idea through market adoption. In order to get to one million customers, one must start with the first one. Founders should ensure they have enough capital to provide a long enough runway to takeoff.

Venture Stage
This can also be referred to as the Growth Stage, which aligns with venture capital funds. Many startups raise venture capital to grow their market size and reach. In fact, a more pressing need is to find a sustainable business model.

Most Internet startups make a narrow profit out of every customer. Thus, they need to scale the business to a certain level to break even. Sometimes they need to raise a bigger round of capital to keep the engine rolling.

This is where the problem exists. Some startups raise too much and give away too much control of the company. Sometimes, even the founders get replaced by the investors.

Alternatives to Investments

To support innovation and technology, the Hong Kong Government allocates funding through various channels. The two technology parks, Cyberport and Science Park provide the infrastructure. In addition, there are some other government funding schemes.

Even so, it is quite tricky to apply for these funds. Some of them have prerequisites and others may require you to be at a certain stage of your company. I would like to take the startup I am working on as an example to illustrate.

I work at StaySorted Inc. to develop the Sorted app. It’s a task scheduling app aimed to help users plan their day and make better decisions about their time. It combines powerful gestures and a slim interface to make it quick to schedule tasks. So far, Sorted has appeared on TechCrunch, SCMP, and LifeHacker. It has also been featured by Apple multiple times. Up to this point, StaySorted is a self-funded company. Our plan is to raise capital for its growth.

Micro Fund
We first considered the Cyberport Creative Micro Fund (CCMF). Cyberport encourages innovation and creativity by granting HKD$100K to startup ideas. The fund is suitable for Idea Stage companies who can spend 6 months of time on proof of concept. In our case, since we launched our product one year earlier, we are not eligible to apply for this.

Startup Competitions
An interesting alternative and a fast way to create a proof of concept is to participate in hackathons. There are AngelHack and Startup Weekend programs running throughout the year. Winners have the chance to enter their corresponding accelerator programs. For instance, the AngelHack winner can attend its HACKcelerator program. At the end of 3 months, they would fly to San Francisco to present in the Global Demo Day.

Incubation Programs
There are two main technology incubators available in Hong Kong with Cyberport and Science Park. The Hong Kong Design Centre is also an option for design-related startups. The Hong Kong Government is behind all 3 of these programs.

Both Cyberport and Science Park provide spaces. Although they are improving, they lack experience in supporting the community. Successful applicants usually get free office, some financial assistance and that’s it. In terms of financial support, Cyberport provides up to HKD$530K at this stage (including other follow-on funding that can be obtained by being an Incubatee). Thus, we are looking to apply to the next batch.

Be aware that the two tracks from Cyberport and Science Park are mutually exclusive. If you start with one, you should expect to stay with it in your company journey.

Incubators and accelerators are getting close nowadays. In fact, accelerators are more growth-focused by its name.

In Hong Kong, accelerators are usually run by private sectors. In fact, most of them are run by corporates, such as AIA, Infiniti and Swire. These accelerators are different from most accelerators in the world. They provide NO capital support, but claim to introduce you to networks of people.

There are others which provide investment and take equity in exchange. Some of them include Betatron, Brinc and Zeroth.AI. This type of accelerator is typically more preferable. They are run by serial entrepreneurs and investors, who can provide advices to the startups.

Picking the right accelerator can help to build a strong foundation for the company. To us, the problem is that none of these have a productivity focus or track, which our product focuses on. Thus, we are not sure about joining any of them.

Looking Outside
As a minor note, we can jump out of Hong Kong, and look into other options. According to an interview with Y Combinator Co-Founder Jessica Livingston, there are more than 2000 accelerators around the world. Some of these are more famous, such as Y Combinator and 500 Startups. Others are closer to us, like Chinaccelerator.

On a side note, if a startup were a Cyberport incubatee, they can also gain financial support for entering one of these certified accelerators. This is important if you are building a product for the global landscape.

Government Funding Schemes
For funding schemes in Hong Kong, the government tries to support more of the community and set up a long list of schemes. These schemes are conducted by several government bodies, such as the TID (Trade and Industrial Department), ITC (Innovation and Technology Commission) and HKPC (Hong Kong Productivity Council).

Here are a few which are suitable for startups to apply. For others, please refer to the links at the end of this article in the Resources section.

Patent Application Grant
This will be the most useful one if your startup has intellectual property and wishes to apply for a patent. It provides up to HKD$250K in registering the patent around the world.

We received our patent for the multi-select gesture in our mobile app. The process took nearly two years, but it is worth it.

SME Export Marketing Fund
This fund aims to encourage SMEs to expand their markets outside of Hong Kong. The funding covers joining conferences overseas, or running advertisements on electronic platforms. This includes keyword search on search engines or ads on social media.

As an app developer, our main channel to reach customers is through the Internet. Thus, this scheme appeals to us. Companies can apply any time during the year, and can receive up to $HKD50K a time or up to HKD$200K in total.

Enterprise Support Scheme (ESS)
The objective of this scheme is to support research and development (R&D). The scheme is on a one-to-one matching basis and up to a $10 million limit. Applicants, however, need to pay up to half of the funding in order to get this support.

This scheme is suitable for companies aiming to own their intellectual property rights generated in the project. However, this is not that suitable for startups for two reasons:

  1. It requires project-based application
  2. It requires the company to have enough capital to share the cost

In general term, startups are focused on building a sustainable business model. Generating a project idea for such a scheme is contradictory. Thus, we do not consider this as our immediate option.

Technology Voucher Program (TVP)
If the ESS is too big, the TVP is an alternative. The idea is to help SMEs with technology project development like building IT systems. In fact, I would say this is a way for startups to sustain.

Imagine that a startup takes months, if not years, to create income from their own products. Meanwhile, if they want to sustain, they can work on outsourced projects for short-term income. If their clients get the support from TVP, it lowers the barrier of initiating projects. TVP will reimburse 2/3 of the project cost with an upper limit of HKD$300K.

For our case, we are a self-funded company with more than 18 months of runway. We would rather focus on product development, so this is not an option for us either.

As a quick summary, most funding schemes here have some conditions in common. They are project-based, you need to write proposals, and go through a screening and interview processes. Once approved, the company usually bears part of the cost and is paid through reimbursement. They also need to submit progress reports. Startups should consider whether it is the best use of time for the resources provided.

Remember, startups focus on growth. The main goal is to find sustainable and scalable business models. Most funding schemes indeed only support short-term projects. Despite this, the main benefit of taking these government funds is that they are “free” money.

I hope this article provides a good overview on alternative options for fundraising. 


About the Author
Harry Ng is the COO of Sorted is a task scheduling app with powerful gestures and beautiful UI.

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