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How To Write A Business Plan For Hong Kong Startups - Part 2
Access to funding is one of the key element for entrepreneurial success. In a competitive market such as Hong Kong, it is especially important to understand your target audience – the investor – when you are writing your business plan to obtain potential funding.
To help you with this, we structure this bldivog post into four key parts:
|Who are they?||Provide an overview of the key investor types in Hong Kong|
|What are they looking for?||Outline key factors investors look into when considering whether to invest in your business|
|When do I need to approach them?||Highlight general rules of thumb for startup valuation|
|What is the process involved for fundraising for my startup?||Provide a guide to the key stages in a typical due diligence process|
1. The Hong Kong Investor Ecosystem
There are a growing number of investors within the Hong Kong startup ecosystem. For early stage startups, generally there are three main types of investors in this space: a) Angel and Venture Capitalist, b) Incubation and Acceleration Programs and c) Government Support.
- Angel and Venture Capitalists - Angel investors (or family funds) and venture capitalists can offer a wealth of collaboration, investment and mentorship opportunities. Notable examples in Hong Kong include 500 Startups, Alibaba Entrepreneur Fund, Mindworks and Nova Founders Capital.
- Incubation and Acceleration Programs - Incubators and accelerators in Hong Kong are tailored to provide businesses with early stage support of the entrepreneurial path. They are usually structured around key application deadlines and take on incubatees in ‘batches’. Notable examples include Brinc, Cyberport Incubation, Entrepreneur First, HKSTP Incu-App and Incu-Tech, NEST and Zeroth.
- Government Support - The Hong Kong Government is committed to supporting startups and SMEs to help realize their vision and take their business to the next level. Some notable government schemes for early stage startup include: Cyberport, Hong Kong Design Centre, Hong Kong Science & Technology Parks, Hong Kong Export Credit Insurance amongst others.
2. Key Investor Considerations
Investors look into a variety of factors when considering whether to fund early stage startups. One common consideration behind every investor decisions is the likelihood of attract exit further down the line, whether this is with a strategic buyer, a later stage VC/PE investor or through an IPO. Ultimately, investors are looking at potential financial returns from the initial investment they put into your business.
So what you have to explain in your business plan is how you can grow sustainably (earn revenues), how you can defend against competitors (unique knowledge or product strength) and how you can operate with a management team with impressive track record.
We can broadly summarise investor considerations into four key factors and you should cover this aspects in the various section of your business plan:
- Market size i.e. the market potential
- Capital expenditure (“CAPEX”) / operating expenditure (“OPEX”) intensity i.e. your cash burn rate
- Scalability (speed and ease of growth)
- Competitive positioning (defensibility)
Ensure that all four factors are well-covered in the relevant sections of your business plan because you will eventually have to explain them to the investors.
3. Rules of Thumb for Startup Valuation
It is not always clear when you should approach your investors and which exact investor type you should reach out to at the current stage of your business.
We suggest a good place to start is to first assess your valuation. There are general rules of thumb for assessing a startup’s market value:
|Stage of Business||Valuation Range (USD)|
|Viable business plan for scalable idea in attractive market||$250K-$500K|
|The above plus a prototype and a strong committed team||$500K-$2.5m|
|The above plus strategic alliances/partnerships/customer base||$2.5m-$5m|
|The above plus measurable user/market transaction, a rapidly scaling business and obvious path to profitability||$5m+|
To link back to the investor type in Hong Kong, as a general guide:
- Government supports schemes are usually appropriate for early stage startups with viable business plan
- Incubation programs are targeted at those with a prototype and a strong committed team
- Angels, family fund and VCs target businesses with customer base and user transaction
4. The Due Diligence Process
For funding request for any type of the investors, you will likely have to go through a due diligence process where the investor gets to know your business, your product, your team and your market better.
The process varies depending on the investor, but largely follows a similar structure to the below:
- Screening: When you first connect with a potential investor. The investor will look at high level aspects such as whether your business fits relative to the fund’s mandate, personal click or fit as well as where the deal was sourced (through referral vs through application, for example)
- Business due diligence: This forms the basis of the decision making of whether an investor will invest in your business. They will look at factors we mentioned in the post earlier, such as management team, problem/solution and business model.
- Legal & financial due diligence: This is usually the later stage process once the investors are comfortable with your business model and team. It includes verifying financial records, key employee and client contracts, regulatory and legal checks and getting further expert opinion on market and technology.
So here’s a basic guide to some of the key considerations and practical advice on how to develop your business plan to attract potential investors.
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