When Louis Chen, in his 20s, quit his headhunting job recently to start his own business he found the most viable path to success is to go out on his own and out of Hong Kong. Carmen Ho reports.

His first step was to move to Shanghai with plans to open a caf there.

"I can't do this in Hong Kong, but in Shanghai I think I have a chance. The market is big, too," said Chen. "I feel like it's time to follow my passion."

"And honestly, I can't see myself getting anywhere with these jobs in Hong Kong."

Chen is not alone. The number of young people in their 20s who turn to entrepreneurship to deal with what they perceive as a lack of opportunity is rising. But few have a realistic chance of success.

On the surface, young Hong Kong people have become more entrepreneurial. More startups spearheaded by millennials - some fresh out of university - have been popping up in recent years. In a 2015 survey, the city's investment development agency InvestHK found that 1,558 startups had launched in Hong Kong in 2015, a 46 percent jump from the year earlier. At the same time, six new accelerators opened in 2014 and 2015.

While it is encouraging to see the growing interest in startups among the young in Hong Kong, a city that has a relatively low entrepreneurial spirit compared to other commercial hubs like Shanghai and New York, experts fear that the spike in interest does not come with a proportional spike in entrepreneurial knowledge. Many startups in Hong Kong are launched by young people who want to avoid getting stuck in a low-paying job with little upward mobility, says Samson Tam, chairman of the Hong Kong Business Angel Network (HKBAN). As a result, failure is common.

Without a solid understanding of the market or a well thought-out business model, the decision to make the leap into starting a business can be nave and the business poorly executed. And because startups are often characterized by unstable income and unclear career progression, young entrepreneurs often fail at the business and don't gain much work experience.

Lack of business acumen

Forbes magazine says 90 percent of startups fail. The Guangdong Human Resources and Social Security Bureau says just 1 percent of startups by university graduates succeed. As of September 2016 there were 320,790 small-and medium-sized enterprises in Hong Kong. They employed 1.28 million people, about a third of the city's workforce.

Experts like Tam say very few startups in Hong Kong make it long enough to turn a profit. Even more worrisome, many young Hong Kong people who decide to give it a shot are neither realistic nor serious enough about their businesses.

Tam of HKBAN is an active angel investor. HKBAN is also the leading organization for the Hong Kong ICT Awards 2017: Best ICT Startup Award, which provides venture capital funds and angel investments from Hong Kong and the Chinese mainland.

"Hong Kong has very few successful cases of startups achieving IPO compared to Shenzhen. I see a lot of people who just want to try but don't work very hard for it, or they underestimate the challenges. They are also quite risk-averse, unlike in the US where a lot of people would even drop out of college to start their business if they believe it would work," said Tam.

Therefore, most young people who try to start their own business therefore aren't the top 1 percent, said Tam. They are not necessarily the most competent. They choose this path mainly because of the lack of good job opportunities available to them. They are entrepreneurs not by choice or a burning desire to innovate, but by necessity and, as a result, their success rate is lower.

"Years of economic prosperity have resulted in a society that is highly risk averse, leading younger generations to aspire for careers in fields such as investment banking or working for one of the big corporates," notes the InvestHK's annual survey report. To date, there has not been a single "unicorn" start-up in Hong Kong, a business that grows to have a valuation of more than $1 billion.

The World Economic Forum (WEF) says Hong Kong is the ninth most competitive economy in the world but that standing is much lower in specific areas. Hong Kong ranks 26th out of 138 countries and regions in health and primary education and 27th in regards to innovation. The rankings slip even further to 35th when it comes to the city's capacity for innovation and 43rd in regards to the availability of scientists and engineers. This lack of capacity for innovation is the most problematic factor for doing business in Hong Kong, according to the WEF's Global Competitiveness Report.

"A major problem is that university professors in Hong Kong lack experience in creating startups. There are not enough good mentors to guide young people who are interested in doing business. There needs to be more alumni and resources, and more training and exposure," said Tam.

Perhaps because of this lack of business acumen among young people, angel investors also wait for clear signs of success in both Hong Kong and the mainland before investing and this makes it even more difficult for new start-ups.

"There seems to be a stereotype for startups from Hong Kong among some investors. For example, they would assume that startups from Hong Kong can never grow big. It's frustrating to be labeled like that and even get rejected for this kind of reason," said Charlie Sheng, co-founder of MailTime, an email messenger app that was listed as one of Hong Kong's hottest startups in 2016 by Hong Kong Business, a magazine.

The difficulty in getting funding coupled with the expensive reality of doing business in Hong Kong means new businesses often fold not long after their launch, especially if the founders do not have a strong profit model.

Creativity and originality are also in short supply. Most startups here are based on borrowed ideas from overseas firms that have succeeded. In many cases, after witnessing other people's success, local entrepreneurs decide to build a similar, Hong Kong version of the business. But the vision is often shortsighted, the execution too late and quality sub-par. Success in overseas markets also may not translate to success in the Hong Kong and mainland markets. Such differences are often neglected in decision-making.

Legal counsel is a must

"Three to five years ago, the quality of startups in Hong Kong was so low. Implementation is slowly getting better now as there are more incubators, accelerators and entrepreneurship camps to help young entrepreneurs," said Tam.

But this may not be enough. Finance and expertise are just a few of the missing keys. Another largely neglected one is legal knowledge and compliance.

"When you're forming a team, right from the incorporation of the company, you should have someone with legal knowledge and expertise," said Shweta Swaroop, senior legal executive at Manulife (Singapore). Before working at Manulife, Shweta was the an in-house counsel for a financial startup in Singapore.

"It is very important for startups to hire an in-house counsel when turning a business idea into reality. Even something as basic as an employment contract should be reviewed by a lawyer. You may not know the gravity of a decision at the time you make it; you may not foresee a lot of problems," she said.

Another problem in Hong Kong is that investors are generally not willing to take chances on a start-up.

When MailTime started in 2014, the founders spent months pitching to investors in Hong Kong but got nowhere, said Sheng. But when they went to the Chinese mainland, they soon raised sufficient investments from the top venture capitalists.

"The investors in Hong Kong have little faith in technology and are relatively conservative; for example, they would value a startup company very low for its profitability when it's still in a very early stage," she said.

The encouraging entrepreneurial environment on the Chinese mainland is attracting young Hong Kong entrepreneurs in other industries too.

Locals who choose to make the leap in Hong Kong are few. Tam estimates that out of every 100 university students, only five to 10 would have an interest. The small community means a lack of synergy, resources and mutual support.

"If you go to any startup event or popular co-working space in Hong Kong, you would find out that it's basically a foreign community, which means you would see that most entrepreneurs are from outside Hong Kong," said Sheng. "Also it's quite a small community. When it's too small, it could get boring and not so helpful."

Many young entrepreneurs in Hong Kong start businesses because they make good university projects, she said, but there is much more that universities cannot teach them, said Tam.

"They need to have strong learning ability. Technology is changing rapidly. There will be more cross-sector demands and tasks," he said.

Tam foresees more startups in artificial intelligence, big data, Internet of Things, medical technology and robotics in Hong Kong in the future. But whether the next generation of locals develops the right mindset and has access to adequate resources and support remains a key question. If not, the city may see a future in which a vast number of young talents are unwilling to work long hours for little pay and yet are unable to make their own contributions.

(HK Edition 01/17/2017 page9)