Hong Kong is one of the busiest ports in the world. The city’s strategic location at the gateway to China, has always been appealing to those in the manufacturing, supply chain and shipping businesses. Tech startups in the logistics sector are also beginning to notice this and are setting up shop.
Logistics and startups are not often thought of in the same sentence. The movement, tracking and delivery of goods have long been the stronghold of large industrial players. But with cloud technology, entrepreneurs who see the potential for improving efficiency, creating better visibility and providing better service, are using technology to add a layer of service on top of legacy processes or in some cases competing with them head on. As their businesses grow, they are choosing Hong Kong as a strategic location for expansion.
Hong Kong’s Strategic Location
For Ryan Petersen, CEO of Flexport, an online freight forwarding and customs brokerage service, Hong Kong was an obvious choice. “We move so much air freight out of southern China through Hong Kong airport, the largest cargo airport in the world, that it was a no-brainer for us to set up operations there.” Hong Kong’s strong logistics sector is often underplayed as glitzy bank skyscrapers dominate the skyline. However, trading and logistics is the largest industry in Hong Kong, making up almost a quarter of its GDP.
According to Francesco Grillo, CEO of Steel Available, a sourcing startup that works in the heavy industrial sector “Hong Kong was a natural next destination. It provided a great base for me to maintain my existing Chinese business network and begin expanding to South East Asia. Hong Kong has a skilled labor workforce and a highly efficient business environment.” For Trusu, CEO and co-founder, Osman Mendoza, “Hong Kong was highly strategic. Offering a high concentration of businesses in a relatively concentrated area, it allows us to scale with ease. From a geographical perspective, its proximity to Guangdong Province and the rest of China is also a huge benefit for sourcing and on-boarding users.” Both Trusu and Steel Available are currently in the blueprint accelerator program run by Swire Properties.
Challenges Faced by Startups
The city is certainly a smart choice for these startups, but expansion to any city can be challenging. Building out a new office and hiring staff in a new country can be a make or break moment which leads to further growth or turmoil. Even large companies can make overconfident assumptions about their ability to enter new markets. But for smaller players, the stakes are even higher, as new market entry can quickly burn through capital, leaving very little cushion if plans are not thought through or executed properly.
Expansion requires a thorough understanding of the new market as well as a strong network on the ground. Flexport’s Petersen explains, “The hardest part of international expansion is finding great people who will buy into your company culture, understand its vision, and have the ability to adapt those to local market conditions.” When small companies expand to new market, it is often the biggest strategic decision in their lifecycle up to that point. Doing the research, understanding local regulations and establishing trust in a new environment takes time. Grillo noted “From my experience, the main challenge has remained the time required to identify and build new relationships with key stakeholders in each market.” Trusu’s Mendoza echoed similar sentiments and also added that “expanding into a new market can mean building your network from scratch.”
Expansion into a new country also means a new set of clients with their own needs and preferences. Companies are sometimes unaware that what might be working well in their home market, won’t translate well to a new market. Matt Cheng, Founder & Managing Partner at Cherubic Ventures has invested in several cross border U.S. and China based startups, including Flexport. He has a front row seat to ventures that are expansions and shared, “We’ve seen startups trying to enter large markets such as China or the U.S. but fail miserably due to a lack of real understanding of local market dynamics.”
Advice for Startups Considering Expansion
While new market entry is challenging, it can be the source of strong revenue growth and create scale when done properly. While consultants are generally not needed or too expensive for startups, expansion requires experts who can guide founders on regulations, hiring practices, taxes and other local market differences which need to be considered. Product research and testing are also important to do ahead of time. Cheng advises, “Collect feedback on your products from local users and potential customers to gauge whether your products and services have an edge in the new markets. Don’t make any assumptions. Make decisions based on your strengths and weakness and not what you read on the media.”
And it doesn’t end with preparation. Companies considering an expansion to a new market need to factor in that once they have expanded, they will need to be in regular communication with the new office and market. Expansion needs to be viewed as a step change in the business, not just a hurdle to cross. Adding a new jurisdiction to a business increases operational complexity in a permanent way. Petersen recommends, “When you open a new office you need to send your best people and go there often. You need to have cultural ambassadors on the ground who can be champions of the company values.”
It’s tempting to expand too quickly when sales orders start increasing from abroad or when competitors open a new foreign office. But these are red herrings. Expansion cuts like a knife, both ways. It can amplify all the good processes and operational excellence in a business or it can overwhelm and ruin an already poorly run business. It’s better to have a self-sustaining, smooth operating, home market business and ample capital cushion before taking such a big step.
Perhaps the best advice for startup CEOs thinking about expansion is to hit the pause button and ask themselves if their home office could operate without them for a month. If the answer is no, they probably aren’t ready.