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MARKETS & INVESTING | Staff Reporter, Hong Kong
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Hong Kong VC and tech deals go bigger as quality focus intensifies

SenseTime and Tinklabs closed billion-dollar funding rounds.

Although the number of venture capital (VC) and technology deals in Hong Kong remained the same in 2018, their combined value jumped 80% from the year-ago period as a “breakout” class of startups in the technology space have been attracting the lion’s share of funding. Artificial intelligence drew in a significant amount of VC activity in 2018, led by the headline-grabbing US$1.2b investment in SenseTime, the largest VC and technology transaction that year. 

VC and technology investments in Hong Kong jumped 81% to US$2.29b in 2018 from US$1.26b in the previous year even as the number of deals was unchanged at 42, according to data from the Hong Kong Venture Capital and Private Equity Association (HKVCA). Of the VC and technology transactions in 2018, the biggest by far was the US$1.2b investment in facial-recognition technology company SenseTime by investors including Alibaba Investment, Temasek, Hopu Capital, Silver Lake and Tiger Global.

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The second-largest was the US$300m investment in Tink Labs by an undisclosed group of investment funds and strategic investors that values the Hong Kong-based developer of smartphones for hotel room guests at about US$1.5b. Meanwhile, online logistics platform GoGoVan attracted US$250m from InnoVision Capital, Hongrun Capital and the Russia-China Investment Fund, among other investors, in what marked as the third-biggest VC and technology transaction in 2018.

The technology, media and telecom accounted for a dominant 89% of all VC and technology deals by volume in 2018, according to HKVCA, with the healthcare, consumer & retail and business services splitting the remainder at 6%, 3% and 2%, respectively. The technology sector will continue to to draw in VC funds looking to compete for higher-quality targets in 2019, according to analysts.

“You are starting to see a very interesting development in the emergence of breakout companies coming out of Hong Kong. I would say these are still isolated incidents; they haven’t created a cluster effect yet. But I think quite soon in other entrepreneurial clusters you will start to see some breakout examples,” said Denis Tse, chair, research committee of HKVCA and founding managing partner of private equity manager Asia-IO Holdings

Aside from SenseTime, Tse reckoned another notable deal involved travel tech platform Klook, which attracted US$200m in new funding in August 2018. There is also buzz surrounding virtual reality startup Sandbox VR, which in late January 2019 raised a US$68m Series A investment round led by US-based VC firm Andreessen Horowitz -- a “very rare” occurrence as the latter does not usually invest in a Hong Kong-based company, according to Tse.

“AI is going to be one of the key focus areas in the Hong Kong market going forward,” Alyssa Aaron, director of investments at Nest Ventures. “In the wake of the Chinese government’s ambition to be a world leader in AI by 2030, investors are pouring billions into AI startups similar to SenseTime.” 

Flight to quality
The larger investment rounds and heightened market uncertainty, especially in late 2018, have pushed investors, including VC funds, to place a higher premium on quality when evaluating potential targets, analysts noted.

“The overall backdrop is that there is a flight towards quality because as you can see in the public market, investors are getting more discerning about company growth potential. They are really looking at an individual company’s capability and quality, rather than just a generalised approach that you have seen in the past two years,” said Tse. “I think it's a positive trend for companies that are delivering quality and are really thinking about creating innovative products and services. It’s a good recalibrating juncture."

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However, many homegrown startups are either insufficiently prepared or lack the desired scale by Mainland Chinese investors, noted Lap Man, co-founder and managing partner of Beyond Ventures, a Hong Kong-based VC fund established by VC fund eGarden Ventures. 

"What we have observed in Hong Kong is that many startups are not ready at all, or they have only a written proposal on hand, and they have not started the business yet," said Man. "Though there is so much money floating around, it is not easy for Hong Kong startups to seek financial backing especially from mainland Chinese capital which has a much higher requirement on the business scale of the startups.”

Large corporates in Hong Kong have shown increased interest in exploring digital transformation, Aaron said, citing how 85% of firms boosted their digital investment in 2018, whilst 93% said they were planning to hike such investment over the next two years. She also noted that many corporates have begun setting up a dedicated ventures arm in order to facilitate innovation, including the electricity supply company CLP Group.

“We are expecting to see more startup-corporate partnerships and corporate venture investments in 2019 and in the future,” said Aaron.

Where Man is certain is the need for increased collaboration to more effectively navigate a riskier operating environment. "Market sentiment has been hit by uncertainties with multilateralism, escalating trade disputes, increasing debt, Brexit and rising climate risks. Having said that, we see increasing collaboration between incubators, startups and VCs.”

With the economy becoming more uncertain, Tse said there will likely be “some crunching” on valuation on VC fundraising, although it remains to be seen whether that will lead to a withdrawal of VC activity by less experienced players that were attracted to the sector. “Good managers continue to be strong in fundraising but you can see that the less proven managers would have a hard time raising capital.”

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