StartUp Exit
Startup founders all would be asked on the exit options when they go out to seek fundings. These options should be considered and well planned before the startups are set up. Not when fundings are needed!
Currently, the most popular exits are listing in a stock exchange (IPO), sale of core technology including but not limited to the sale of equity. In Hong Kong, the stock exchange has several listing options for companies with different market capitalization / industries. It will take several rounds of fundings before IPO could become a reality. This journey is not an easy path and will take several years at the very least to accomplish.
For this aim, the products and / or service must have a huge market to generate sufficient revenue and profits. Business plan must be well formulated and its execution must be of a high standard in order to maintain investor confidence for continuous support. An effective team has to be built up for the growth. Selection of the appropriate investors is crucial. Good investors could help startups to focus on their strength and to expand their markets as well as network of investors. Road blocks and hiccups are inevitable throughout the journey. Investors could help startups to tackle all the barriers to scaling up.
To win the trust and support of the investors as well as the markets, startups must deliver what they have promised. All things must be on target: quality of the products / services for customers, financials for investors etc.
When time is due for IPO, a sponsor has to be lined up to oversee the whole process. It should be noted that the financial statements must be audited by a reputable audit firm otherwise it would be difficult to gain confidence from the stock exchange and general public. It is, therefore, important that all the financial and marketing figures are true. Lists of assets including IP must be available for checking and verification of their existence.
Finally, the appropriate stock exchange, not necessarily HK, has to be selected which has the suitable market sentiment and price/earning ratios for the startup.
On the sale of the core technology, HK has been trying to build itself up as an intellectual property trading hub. The Hong Kong Trade Development Council has been hosting the Business of IP Business Forum to showcase the strength of HK and to facilitate IP trading through matching the appropriate business parties. Patents can now be registered in HK. ‘Patent box’ tax incentive is available eligible IP income derived from eligible IPs (i.e. patents, plant variety rights and copyright subsisting in software). Tax rate us reduced from 16.5% to 5%. If the startup is based in HK, IP registration ie patents, trademark etc has to be made. Registration should also cover all the markets to which products / services are provided. A good branding strategy could also add value to the startup.
Quite often, buyer may buy a portion or 100% of the equity of the startup. From the very beginning, the startups must maintain good compliance of all the laws governing the startup legal entities. Otherwise, buyer may refuse to buy the equity which has legal loopholes.
Whether it is IPO or sale of core technology / equity, the other parties will conduct stringent due diligence on the financials / assets / legal compliance. Care must be made on all these areas from the very beginning if startups wish to have fruitful exits.
Useful links:
https://bipasia.hktdc.com/conference/bip/en
https://www.ipd.gov.hk/en/home/index.html
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