Unconventional Funding for Startups in Hong Kong

Bootstrapping your start-up business

This is a way that an individual can self-fund their business. It is the most efficient way for start-ups. It can be from personal savings, family, and or friends’ contributions. It has fewer formalities and less cost of raising. Bootstrapping should be the first option for a start-up. Be honest and open, and do not overly ask for money. Be clear if you are requesting money that you would repay or even if it does not need to be repaid. In case of money that needs to be repaid, put it on paper. With family and friends, you must make everyone feel included. An individual may hold back their assistance if he or she feels they are less valued or overlooked in the process, so it is essential to communicate well.

Advantages of bootstrapping

• Friends and family usually charge lower interest rates.
• When you use your own money, you are tied to the business. You will work hard to make it work and prevent losses.

Disadvantage of bootstrapping

• Family and friends may want favors in terms of price reduction or debts. The business owner will have to learn how to be flexible and firm at the same time.
• If not done well, it can have a lasting effect on an individual’s social life.
• It is difficult to ascertain the intentions of the funder.

Crowdfunding

This is one of the newest ways to fund businesses. It is like getting a loan, contribution, pre-order, or investments from various sources at once. As an entrepreneur, you put out a detailed description of your business on the crowdfunding platform mentioning the goals for the business, plans for making a profit, how much you need it, and the reasons you need it. Consumers then read about the business, if they like the idea, they give money-making online pledges with the promise of pre-buying the product or service or by donating. In other words, consumers pay for the product that has not yet been made, and then it is made and delivered to them.

Advantage of crowdfunding

It can generate interest and hence helps in marketing the product alongside financing.

Disadvantage of crowdfunding

You must be sure that there will be a demand for your product or service.

It is incredibly competitive, and so your business must be extremely attractive to prospective customers.

The pressure of fulfilling promised orders can be immense on the business and the business owner.

Angel investment

These are individuals with surplus cash and a keen interest to invest in upcoming start-ups. In addition to offering capital, they can provide advice. They are different from venture capital in that they invest lesser amounts. One popular example in Hong Kong is the equity crowdfunding platform, Angelhub.

Government-backed loans and grants

Federal or state governments try to stimulate bank lending to be SMEs by guaranteeing a portion of the loan. In this way, the risk for the banks can be reduced. They are attractive to many as they provide better repayment terms over an extended period.

Several federal and state governments have funding for start-up businesses to motivate them, especially if these businesses are offering social and economic benefits to those governments. Some of these capitals may come as loans or grants.

One example is the Export Marketing Fund. There are many such programs in Hong Kong, with the aim being to induce economic growth.

Disadvantage

They usually contain strict eligibility requirements; hence it is difficult to get these loans. One way to mitigate this disadvantage is by seeking advice from a firm experienced in grant applications and the related requirements. Paul Hype Page is one such firm, we have worked with the Trade and Industry Department of Hong Kong previously, and have a good understanding of the requirements.

Business Incubators and accelerators

Accelerators, such as the well-known DBS accelerator, are good for those looking for small funding and access to an ecosystem & advice. Most accelerators are mostly run by established corporations, professional investors, and even government agencies. They do not offer direct funding, but they will host a demo day, inviting potential investors to check out your company instead.

To be part of the business incubators and accelerators program, you need to apply. If your application is approved, you will participate in a mentorship program at a specific location (usually a co-working space) for a few weeks to a few months. Accelerators last for 4-8 calendar months. Business owners need to commit their time to these programs.

The advantage of business incubators and accelerators is that it allows one to make good connections with mentors, investors, and fellow start-ups.

Similarities between Incubators and Accelerators

They both offer mentorship, business network, and some form of a structured program.

Differences between Incubators and Accelerators

Incubators are like a parent to a child. They nurture the business by providing shelter tools, training, and network to a start-up business. They assist a business to walk.

Accelerators, on the other hand, helps a start-up business to run/ take a giant leap.

Invoice discounting

It is an excellent and quick way to manage one’s cash flow in the short term. Invoice discounting is an invoice finance facility that authorizes business owners to leverage their sales ledger’s value. When the business owner issues an invoice to their customer, a proportion of the total amount becomes obtainable from the lender, providing a crucial source of working resources for the whole month.

Convertible notes

Early in the start-up, a business owner needs information on how to come up with a valuation when talking to investors. Convertible notes for the bridge from the first event to the next round in which evaluation is established. Therefore, they are a simple and efficient way of funding for start-ups. They are useful as they contain limited rights and defer a lot of the complicated negotiations until a later round.

Convertible notes usually include pricing discounts to reward the investor for taking the risk of funding his or her start-up business. Pricing discount allows the holder of the convertible note to convert his or her loan into shares at a good discount, usually between 10 to 30%.

The valuation cap is a maximum valuation determined at the time of the convertible note investment at which the investor can convert his or her loan into shares.

Eventualities of the convertible note

Should the start-up not manage to raise around before the maturity date of the convertible note, the following can happen:

• The note holder can extend the note
• The note holder can force you to pay the loan. If this happens, the business owner can be bankrupt.
• The note holder can convert the note into equity at an agreed valuation.

Conclusion

In recent years, the financing options available to start-ups have grown greatly. This has made it easier for less conventional start-ups to get funding, as well as give them a chance to find a demand for their product in the pilot stages of their business.

However, deciding which option is best for your business, or even a combination of options, is now made more complicated. It can be difficult to understand and evaluate the options available. Fortunately, there are avenues for you to seek advice, and Paul Hype Page is ready to assist your financing plans, to help ensure you can start your business on the right foot.