AngelHub is filling an important gap in the funding market for early-stage companies, and its founder has chosen Hong Kong as its base. We spoke to Karen Contet Farzam about how it all came about.
When AngelHub was granted Hong Kong’s first securities trading and advisory services licenses for an equity crowdfunding operator in April this year, Hong Kong readers could have been forgiven for asking, What? The city had only just handed out its first virtual banking license (seven more were to follow), and Shenzhen seemed to be the place to go in search of unicorns rather than expensive, highly regulated Hong Kong.
Nevertheless, it could be said that the move heralded Hong Kong’s intention to shed its reputation as a place where only the big can get bigger in the world of finance. The approval was seen as yet another step taken by the Hong Kong Monetary Authority to catch up with other Asian jurisdictions in disrupting traditional financing and accommodating the rise of the fintech industry.
Three months on, the process appears to be rolling along nicely. As EY manager James Lloyd explained in a white paper recently issued by WHub, the local startup community organizer behind AngelHub, “A combination of regulatory and infrastructure change – from the new faster payment system (FSP) to the in-process open API framework, from virtual bank authorizations to digital insurance fast-tracking – looks set to position Hong Kong as a leading fintech hub in which to build regional and even global propositions. Given the promise (and challenges) of the Greater Bay Area integration, the emergence of cross-industry alliances and joint ventures, and the continued expansion of the mainland Chinese “techfin” players (as well as the incumbent response), the Hong Kong fintech ecosystem in entering its most exciting phase of development yet.”
AngelHub’s founders certainly seem pleased with their choice. Karen Contet Farzam and Karena Belin launched the platform as a spinoff from WHub with a simple goal: Providing investors access to “the unicorns of tomorrow” through a fully digitalized platform. “Angel investors” who provide smaller amounts of early-stage capital to young companies – often only few people with a business plan – typically had to rely on word-of-mouth recruiting in Hong Kong. While on average, such deals are expected to raise between US$500,000 to US$2 million, some would also net up to US$5 million, according to Contet Farzam.
“After running Whub for four years, which has become our connector to the startups In Hong Kong and the region, we saw a challenge that faces many startups and tech companies: fund raising, especially the pre-institutional round,” she says.
Unlike earlier crowdfunding sites like Kickstarter on which entrepreneurs raise capital through the presale of their product, often at a discount, or through tiers of various perks to attract their fans and potential customers, equity crowdfunding operators like AngelHub sell securities, whether in the form of equity in the company, debt, revenue share, convertible note, and more. In other words, equity crowdfunding gives investors skin in the game.
“To help startups raise funds is a regulated activity. That’s why we decided to apply for the appropriate licenses with the SFC. The regulations were already in place for financial institutions and all we needed was to give them some tweaks so that they could fit this new asset class,” the French entrepreneur adds. “What we’re doing is in line with the government’s initiative to develop Hong Kong as a fintech hub and I’m sure we’ll see more competition coming up,”
The licenses issued to AngelHub by the SFC restrict it to working with professional investors with at least HK$8 million (about US$1 million) in investment assets. Retail investors will not be allowed on the company’s platform.
“These investors can be high-net-worth individuals, family offices or institutions,” said Contet Farzam, who was previously an equity derivatives trader at JP Morgan. “Especially for individuals, AngelHub provides an opportunity to invest in bite sizes in early-stage startups and build a diversified portfolio.”
After obtaining the regulatory approvals, in late June AngelHub selected five start-ups out of 250 candidates to raise funds. They are from industries such as artificial intelligence, financial technology and logistics, and markets as diverse as Singapore, Israel and France.
This diversity is also an indication of Hong Kong’s power as an international hub, according to Contet Farzam. The platform aims to help 100 startups raise funds over the next three years. The team has already done a string of due diligence reports on these companies’ business models, fundraising purposes and other issues. That was before having them pass through an interview process with an investment committee comprising industry experts, serial entrepreneurs and experienced investors.
Contet Farzam, who grew up in Japan, says the startup scene in Hong Kong has changed fast. She thinks back to when she and her best friend, Karena Belin, started WHub four years ago: “There were less than 10 coworking spaces and the startup community was really young. It used to be considered a great achievement if a startup managed to raise HK$500,000.”
Although Hong Kong may have been viewed as a laggard when fintech first hit the vernacular, the slow start has been made up by the increasing velocity in which fintech innovation is being embraced. In a short span of five years, the city is already home to 550 fintech companies and four fintech unicorns, including cross-border payment services provider AirWallex, bitcoin mercantile exchange BITMex, digital wallet operator TNG Group and online lending platform WeLab.
Hong Kong’s fintech ambition may be viewed from the broader Greater Bay Area initiative, with the city’s proximity to Shenzhen, the Silicon Valley of China, creating a natural catalyst for innovation in general. Moreover, the Greater Bay Area masterplan knits together nine cities inside Guangdong with Hong Kong, and each has their relative strengths in technology that will require early-stage funding.
Despite Hong Kong’s notoriously high living costs, Contet Farzam believes the city can and will play an important role in the region’s technology development. “Hong Kong has all the ingredients. It’s a small city, therefore easy to meet people face to face which is still great.”
“All international headquarters are here or nearby. It’s easy to travel and even though the city itself has a small market with only seven million people, but it is a great place to test, iterate and potentially scale into the region,” she adds.
With the combination of public and private entities representing a cohesive full-court press to fuel innovation in financial services and create a business-friendly locale for both early stage and established firms to experiment with and launch digital financial services, Hong Kong may well be the proof that focused policy initiatives tied with a low-tax, pro-business environment can allow innovation to flourish. Perhaps at some point in the not so distant future, Hong Kong will become the world’s leading fintech hub. At that stage, expect AngelHub to be a household name.