Why Beyond Ventures' Lap Man won't invest in ICO projects

August 10, 2018 13:44
Lap Man, co-founder of Hong Kong-based fund Beyond Ventures, aims to help local startups grow and extend their business networks throughout China and around the world.  Photo: HKEJ

Lap Man, the founder and chief executive of DYXnet Group, has been described as a telecommunications veteran, serial entrepreneur, and investor extraordinaire. But in recent years, he has become more widely known as a venture capitalist after co-founding Hong Kong-based fund Beyond Ventures, which can draw up to HK$1.2 billion (US$153 million) for investment in innovation and technology startups. 

Adopting the slogan “From Hong Kong, For Hong Kong”, Man's fund is one of the very few venture capital (VC) funds focused on Hong Kong, with an aim to help local startups grow and extend their business networks throughout China and around the world.

In late July, the fund became one of the co-investment partners to the Innovation and Technology Venture Fund (ITVF), a vehicle launched by the Hong Kong government to encourage private investment in local technology startups.

“Hong Kong can be a fertile breeding ground for world-class tech startups, and the city needs a local VC fund,” Man told the Hong Kong Economic Journal in an interview.

Since its launch in September last year, Beyond Ventures has invested in five companies, including SenseTime, Prenetics, and Insight Robotics.

Compared with other Asian cities, Hong Kong’s tech startup ecosystem has had a slow start as support from the government and the private sector lagged behind.

Man said there are lots of outstanding technology research and studies done in local universities, and the application prospects could be huge, citing Hong Kong-based SenseTime, the world's most highly valued artificial intelligence (AI) startup, as an example.

Man started his entrepreneurial journey in 1994, when he and his brother established a Hong Kong-based internet firm called LinkAGE Online. In 1999, during the dotcom boom, he founded his own company, DYXnet Group, an internet network service provider focusing on the Greater China market.

When the internet bubble burst in 2000, Man ran into a debt crisis. However, he rejuvenated his company and sold its virtual private network (VPN) business unit to Nasdaq-listed 21Vianet Group for over HK$1.5 billion.

Looking back, Man said one of the most painful challenges in his work is raising money from investors: “You’ll have countless people rejecting, denying, and challenging you and your business.”

Level of commitment

Now overseeing Beyond Ventures fund and reviewing over 200 startup projects annually, he pays special attention to whether entrepreneurs are able to deliver a promising result despite being strapped for resources.

What he has observed in Hong Kong is that "many [startup teams] are not ready at all, or they have only a written proposal on hand, and they have not started the business yet... Why should investors trust you with their money if you have not even committed to it?”

Currently, there is a lot of interest in startups. Companies and universities have launched various startup incubators and accelerators. Chinese private equity and venture capitalists, as well as internet giants like Alibaba and Tencent, are pouring massive cash into startups in the region.

Man admits that there is so much money floating around, but it is not easy for Hong Kong startups to seek financial backing from Chinese capital, which has a much higher requirement on the business scale for their portfolio companies.

“Local startups nowadays face intense competition from the whole country and from overseas as well," he said. "Survival, in fact, is becoming more and more difficult.”

Along with the rise of cryptocurrencies, initial coin offerings (ICOs) offered a new means for startups and projects to raise capital. In 2017 alone, ICOs were able to raise over US$5 billion.

Before regulators started cracking the whip, many startups were able to raise millions of dollars in capital, sometimes in just a matter of minutes, by issuing new digital tokens in exchange for more redeemable and valuable cryptocurrencies such as bitcoin and ethereum.

Driven by the cryptocurrency mania, many tokens issued via ICOs saw return rates of 10 and even hundreds of times. Even today, more and more VC funds specializing in investing in ICOs and cryptocurrencies are appearing on the market.

VC model upended

Despite the market enthusiasm, Man said his fund has no intention of participating in ICO projects or investing in crypto tokens.

“I don’t understand why some ICO projects, which clearly have no chance of getting money in the VC world, could raise tens of millions via ICO with a so-called whitepaper,” he said, referring to the project proponents' business plan and forecasts.

Under the traditional VC investing model, a VC fund provides capital to a startup in exchange for shares of the company. In general, the fund will realize returns by selling the shares after the startup matures or is publicly listed. In the meantime, the VC fund will have to bear and manage the underlying risk associated with the startup. 

However, ICOs have upended the traditional VC model by allowing investors, or token holders, to exit flexibly within a relatively short period of time.

Man said: “[Investors] can have no time risk, and get several times of return. Well, that’s too good to be true, isn’t it?”

“Even if there is [such investment], it won’t last long,” he added.

Entrepreneurs like Man, who only invest in traditional internet companies while avoiding projects related to cryptocurrencies, are dubbed “the internet classics”.

“I am more conservative, I may be willing to invest two years later,” he said. “Blockchain technology may have some value, but it is still a question right now whether it can be applied as soon as people suggest.”

This article appeared in the Hong Kong Economic Journal on July 30

Translation by Ben Ng with additional reporting

[Chinese version 中文版]

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