In Hong Kong, it is regulators and government officials that are courting startups, providing a level of access to rival anything Swedish startup founder Nils Pihl has experienced in his home country, or within the broader European Union.
“There’s a lot of think-tanks and networking opportunities where you’ll bump into the government all the time,” says Pihl who is the CEO of spatial computing startup Auki Labs. “I get several emails from the government every week.”
Access to officials and decision-makers is just one of the many perks of having a startup based in the country, Pihl says, and he isn’t alone.
Over 125 European and UK startups founded since 2018 have set up offices in Asia, according to data from Dealroom. Fintech, marketing and enterprise software are among the most common industries within this set of expat startups.
The fintech market in the Asia Pacific (APAC) region is expected to surpass the US by 2030. Among Dealroom’s top 10 global startup hubs, fintech ranks as a top three industry across all three of its listed Asia hubs — Shanghai, Bengaluru and Singapore.
That said, overall investment dollars into fintech have seen a drop in Asia, while energy, semiconductors and software-as-a-service companies have fared well.
“In Hong Kong, fintech is the most invested area, and in China, manufacturing takes a large number of deals, which isn’t something we see anywhere else,” says Kyle Stanford, lead venture capital analyst at PitchBook.
Global venture investing is down across the board relative to last year, still Asia remains ahead of Europe in total VC funding for this year, with funding totalling $71bn and $49bn respectively, according to data from Dealroom.
Funding levels for the first three quarters of this year have also stabilised quicker for Asia relative to Europe at the post-seed stages, according to Crunchbase.
Growth is the driving factor in Asia’s appeal to startups, says Gavin Wilkins, chief commercial officer at global services provider Hawksford. In return, many Asia hubs are rolling out the red carpet to welcome startup founders in their pursuit of growth.
China’s shadow
Well, most of them.
Mainland China is one of the more challenging Asia markets for startups to enter, amid its increased tensions with the West. Investment activity in China has dropped from 74% in 2018 to 59% in 2023, according to data from Dealroom.
This comes as US investors have been pulling out of the country due to increasing tensions between the two countries. Both GGV Capital, the most active investor in China-based companies, and Sequoia Capital announced they would split their firms in two — one focusing on the US and the other on Asia. American president Joe Biden signed an executive order banning US investment in Chinese companies for certain sectors in August.
“There is a lot going on in China,” said PitchBook’s Stanford. “The economy is stumbling, which is hurting investment, and we need to remember that US investment is a relatively small portion of China VC.”
The uncertainty in China means foreign investors are looking for exposure to Asia in other markets, Stanford says. An alternative entry route into China is via startup-friendly hub Hong Kong, says Winnie Seow Mei, Hawksford’s Asia market lead. The country benefits from the Greater Bay Initiative, connecting Hong Kong, Macao, Shenzhen and Guangzhou, she adds.
“The third, fourth and sixth largest ports in the world are right here within an hour from where I am,” says Auki Labs’ Pihl, adding that startups in need of international logistics functions will be well-placed in Hong Kong.
The country’s import/export market makes it an attractive location for business-to-business fintech Airwallex, as it provides cross-border banking services to businesses, says Arnold Chan, Airwallex’s Asia general manager. B2B companies accounted for around $90tn in cross-border flows in APAC in 2021, according to a report from McKinsey.
Hong Kong is not without its own challenges. Investment trends here generally follow China, PitchBook’s Stanford says, and there’s been a significant drop in venture activity there.
It comes as Beijing imposed a sweeping national security law on the country in 2020, which many residents felt eroded the country’s freedom and resulted in widespread protests.
Hong Kong’s political autonomy forms part of a treaty that returned the former British colony to China under a “one country, two systems” policy; however, many residents have accused China of overstepping. Western investors remain wary about the country’s close ties to China.
Singapore’s stride
It’s the opposite story for Hong Kong’s rival Singapore, which is attracting 5% of the region’s venture funding compared to 3% five years ago. Hong Kong only attracts around 1% of the region’s venture funding compared to 4% five years ago, according to Dealroom’s data.
“Singapore is looking at, potentially, a record year for deal value, and deal counts that are relatively strong compared to 2022 and 2021,” says PitchBook’s Stanford.
“The country succeeds at being a conduit between different geographies,” says Pat Patel, executive director of Elevandi, an organisation spun out of the Monetary Authority of Singapore (MAS). “It had to be friends with everyone,” he adds.
Singapore is a good launchpad for startups expanding into developing Asia because of its practice of common law, its highly skilled multilingual workforce and double taxation agreements with more than 80 countries, says Hawksford’s Seow Mei.
This ease of doing business is partly why UK-headquartered fintech Wise selected Singapore as its APAC hub. The business’s mission is to make it as simple as possible to send money around the world. Asia creates a huge opportunity because many businesses and people in the region struggle with high fees, hidden exchange rate markups and slow speeds, says Lim Paik Wan, APAC expansion lead for Wise, in an email to Sifted.
According to a report from McKinsey, Asia alone accounts for 35% of global cross-border payment flows, which reached $150tn in 2022.
Getting boots on the ground
From small beginnings in 2016, Wise now has a workforce of more than 400 in Singapore, Lim says.
Part of its success comes from building strong relationships on the ground with regulators and local partners, says Lim, adding that the Economic Development Board (EDB) of Singapore and MAS are key partners. When Wise first expanded to Singapore, it also collaborated with GovTech, a government agency that rolls out tech services to Singaporean citizens, to improve its know-your-customer solution in the country.
Stablecoin provider Circle also attests to the importance of securing local partners. The startup entered Asia via Singapore this year and put most of its commercial resources into a local anchor partnership with Grab, a Southeast Asian superapp, says Kash Razzaghi, Circle’s chief business officer.
“Once you launch an anchor — customer or partner in a region — what happens is there’s a trickle-down effect, where you get a lot of exposure and other similar types of partners and customers now A) know who you are and B) are reaching out to you,” Razzaghi says.
A physical presence in these hubs can be important for a multitude of reasons beyond building partnerships. End clients will often expect a presence, says Hawksford’s Seow Mei. The same goes for regional investors, says YC Choy, vice president and head of region for Europe for the EDB.
When to expand?
Choy observes most startups will start expanding into Asia at the Series A and Series B fundraising stages, which implies they have found product-market fit at home.
“Compared with Europe and the US, Asia is a very different market that requires very different strategies for growth, and a lot of capital,” says PitchBook’s Stanford. “Most expansion plans wouldn’t come until late-stage funding.”
Tapping local resources
Startups can also tap grants from government agencies once they are based in the region. Singapore’s MAS offers grants including one that provides up to 50% support for projects related to the infrastructure or utility projects within the financial services industry, as well as a grant that offers up to 30% support to projects that demonstrate the adoption of AI and data analysis techniques.
Startups can also benefit from the country’s tax exemption scheme and help from the EDB, which has a programme that helps startups establish a core team in the country.
In Hong Kong, InvestHK supports overseas expansion into Hong Kong and its spinout initiative StartmeupHK. The government’s Innovation and Technology Fund has a broad range of schemes to support locally based startups.
Localisation, localisation, localisation
With the European and UK markets facing uncertainty, a well-thought-out business plan for entering a growing market like Asia can go a long way towards benefitting fundraising at home and abroad, Hawksford’s Wilkins says.
Expanding without a clear plan will mean startups spend a lot of money and lose a lot of time, Wilkins says. The plan should answer questions including what part of Asia the startup will be targeting, on-the-ground infrastructure required, what licences are needed and the company’s capitalisation requirements.
Startups can’t just copy and paste their western business plan; localisation is important, Hawksford’s Seow Mei adds. A high-profile example is ride-hailing firm Uber, which did little to adapt its app to the Southeast Asia market and ended up exiting the market and selling to Grab.
Each time Airwallex expanded to its three different Asian hubs — Hong Kong, Singapore and Malaysia — it hired local talent to better understand market needs, Chan says.
Auki Labs’ Pihl describes local talent as a “mixed bag”. Hong Kong is a fintech hub, so talent is strong for financial services but less so for skills such as scalable network engineers.
There are also talent programmes to plug skill gaps. Hong Kong has a competitive visa program for graduates from the top 100 universities. While in Singapore, the EDB works with tech giants to “overtrain” talent to fill talent gaps, Choy says.
Singapore is sandwiched between two European countries — Switzerland and Denmark — as the second most talent-competitive country, according to business school INSEAD’s 2022 Global Talent Competitiveness Index. China also climbed in the report’s rankings and is now the most talent-competitive upper-middle-income country in the world.
Startups can use the presence of other global companies to determine the pool of talent and customers they will be able to tap. For example, around 80 of the world’s top 100 technology companies have a presence in Singapore, which creates a deep talent pool.
Companies can also attract talent from their own employee base by offering them the opportunity to relocate. A 2022 survey of 1,481 employees from talent mobility firm Topia, in collaboration with CITE Research, found that 76% of employees would consider moving abroad for an assignment and 66% agreed that international experiences were critical to career development.
“You’re often going to be surprised at how many people are willing to move abroad, even if it’s for three months, six months, nine months,” Circle’s Razzaghi said.
