Financing Your Child’s Tech Startup
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Financing Your Child’s Tech Startup

25th November 2021 | 6 min read

More young people are trying to start technology businesses and asking for family investment. How to assess risk and fund them requires non-traditional investment skills.

Few startups are as personal (and potentially divisive) as the ones that your sons or daughters plead you to finance. And today’s brave world of startups is a world away from the ones you used to see in Hong Kong or anywhere else. How you screen, think about and invest in them will help you understand the aspirations of this generation. Whether or not a $100,000 or $200,000 investment actually means a lot to your net worth, no one likes to lose money. Yet, the more money you have, the more likely you will be faced with this investment decision.

Whether your child wants you to co-sign a loan to buy a delivery van for GoGo or seed the development of their new social media app, it represents your hard earned capital. It is important to realistically assess the challenges that face them. After all, none of them will have historical profits or even immediate future profits. Quite a dilemma, especially in Hong Kong, where immediate earnings are so important.

The fetishisation of the terms “disintermediation” and “disruption” and their overuse in every presentation has distorted their intrinsic meanings and impact beyond recognition.

And what might you receive for the initial $100,000 investment? Your budding entrepreneur will take a dream, convert it into an idea, migrate over to a concept, write a business plan, raise money, and maybe turn it into something that attracts users. Then, he or she will hopefully monetise the organisation into revenues that you recognise as a real-world business.

Distinguishing the difference between the ambitions of an entrepreneur versus an independent businessperson is vital to understanding your risk. It’s as vast as an innovator versus an imitator. Like the gap between McDonald’s and other burger joints. McDonald’s became a global enterprise because it invented a completely new process for fast food. The rest are merely followers.

The Hong Kong Government has tried to foster entrepreneurialism in certain areas like finance by creating a safe, regulatory “sandbox” that allows financial technology startups to cooperate with local financial institutions. Infrastructure is necessary as finance and banks are highly regulated areas. Virtual banking, digitised currency and banking services have emerged.

However, the biggest challenge for a Hong Kong based fintech is how they will access big markets like China, US and the EU to scale up and create their own version of a large and defendable monopoly. A “me too” strategy is likely to fail to expand and attract large amounts of capital beyond your early investment. 

Many imitators

Hong Kong businesspeople also have a tendency to copy and imitate. Too many local business plans fail to examine and understand competitors and the reaction of incumbents. Many of them profess that no direct competitors exist. And most of all, they can’t answer why anyone should care about their product or service. 

For the last few years, an avalanche of payment processing, food delivery and digital banking related startups seemed to be falling over each other with very minor differentiating features in a town flooded with all of these models. It’s not easy to gather investment intelligence when you are not meeting others in an intellectually fertile and fiercely inventive environment. Don’t forget that banks own and control all the data needed to develop a fintech product so your ability to innovate is necessarily constrained.

Historically, it was much easier to assess new businesses when young people started out with traditional ambitions like a bar, club or restaurant. Understanding food and beverage sales is a lot clearer than concepts like number of active users, click-thru’s and views. They seem so abstract. And monetising them is almost a form of black magic. In Hong Kong, even fashion was an understandable risk because so many successful people made a fortune in garment and textile businesses. But, even today’s fashion business has been completely revolutionised by technology and social media. 

The language of startups has changed. The fetishisation of the terms “disintermediation” and “disruption” and their overuse in every presentation has distorted their intrinsic meanings and impact beyond recognition. Introducing a new product doesn’t necessarily mean it will radically change a business, industry or mankind. And “doing good in the world” should be received as deluded grandiosity – a literal warning sign of what business pitfalls and misdirection to expect next. 

And ‘doing good in the world’ should be received as deluded grandiosity – a literal warning sign of what business pitfalls and misdirection to expect next.

Disruption is an artful term to describe how a firm can use new technology to introduce a low or high end product at low or premium prices. Their promised improvements would eventually surpass premium products offered by incumbent companies constrained by older technology and legacy infrastructure. Desktop PCs disrupted and found new uses never before conceived for mainframe computers. Then, mobile devices were invented and they usurped the dominance of notebooks and desktop PCs. 

Just because something poses or declares itself as trendy and new doesn’t mean it is disruptive. Transforming disintermediation and disruption into the latest fad is hazardous because it twists and deceives the entrepreneur’s and investor’s expectations about what is truly innovative. Something truly new and revolutionary must be an activity or efficiency that incumbent companies have not considered or dreamed of, like Uber versus taxis. Or Facebook versus Friendster and MySpace. 

Unique creation is almost inconceivable to incumbent competitors because they would almost need to self-destruct in order to reinvent themselves. If what you do is a thousand times better than your opposition it might have a chance of overturning them and creating an unstoppable monopoly that they cannot react to. Otherwise, your offering is merely a minor or replicable differentiation that is ultimately inconsequential and a bad investment.

Few people display the work ethics, maniacal drive and intelligence to struggle with the numerous iterations and reinventions that a startup must endure to reach some form of success. Then, after going through your cash (and hopefully achieving some milestone), the founders must raise more money by attracting more investors and convincing employees to work endless hours to attain the vision.

Too much easy money

Successful and experienced venture capitalists don’t view the startup investment world as a diversified portfolio of bets on stocks where you only need a few winners to exceed the losers. And you shouldn’t, too. That may work for mutual funds and ETFs, but VCs work closely with their investees in all areas and often know their spaces better than the companies themselves. They are far from passive as they direct and govern them towards revenue and technology expansion opportunities. 

After a generation of successful, technology wealth generation, there’s too much easy money floating around to support languishing startups. In China or Silicon Valley it’s easy to plead for another $100,000 from a friend who just made millions from cashing out his stock options. VCs used to dominate the fund raising landscape by applying discipline and structure to startup development. That used to mean denying funding to startups that failed to achieve key milestones and decisively shutting them down. Today, too many of them linger around early stages, just another $100,000 to $200,000 away from the promised land. Most should be put out of their misery. You will need to fulfil this role.

The current young generation are reluctant to transplant themselves to the Greater Bay Area or head in-country to Belt and Road regions. United by social media, their heroes are no longer traditional tycoons. The founders of Facebook, Uber, Snapchat, LinkedIn, SpaceX and Tesla point the way to their future. You haven’t felt it because it isn’t real to you. And feeding a successful startup not only about selling a product or outcome, but selling a feeling, a dream. 

Young people today strive for the connection they hunger for. Like all high-risk investments, they can be a potent combination of a profound truth and lie, all wrapped up tightly together.

Written by Peter Guy

Peter Guy is an award-winning business and financial opinion columnist, and is the Greater China Editor for Bread News. He brings decades of experience as an alternative asset investment manager and development banker.

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