Hong Kong Fact-File Part 1:
Business Formation for Individuals

1.9 Hong Kong Venture Capital

Venture Capital financing is an option for businesses to secure funds for the start-up, development and/or acceleration of their business. Venture capital is available in various forms, including:

· Seed financing: Although not the most common entry level for venture capital investment, it is sometimes possible for a business to attract investment at the very early stage of business conceptualisation.
· Start up/development: This is the point where products and/or services are produced but have not been widely tested. Capital investment could be required for plant and machinery and other fixed assets.
· Expansion: Once a business is up and running and ready to expand into other markets, new money is needed to fund additional requirements.
· Mezzanine: If a business has been in successful operation for a number of years and then wishes to float on the stock exchange, investment by a venture capital firm can prove to be a valuable asset in terms of share valuation. The investment would also provide a way to finance any restructuring necessary prior to floatation.
· Management buyouts: Here, the venture capital may be used to finance the purchase of an already existing business where the venture capital investor would own the majority of the shares but take a back-seat in the day-to-day activities, leaving this area in the hands of the new management.

While seed financing usually requires less capital than mezzanine or management buyout financing, the time venture capital companies allocate to analysing and monitoring start-up and small schemes is usually greater than that spend on the more expensive project. Small companies engaged in the high technology sector are particularly popular with venture capital companies.

The terms associated with such financing will depend on the stage of development and the preference of the capital investor. Generally speaking, investment periods range from between three to five years and the expected return is no less than 25%.

The Hong Kong Venture Capital and Private Equity Association can provide advice and guidance on all issues relating to venture capital: www.hkvca.com.hk.