Moonshot Mafia #11 | HashKey Capital: The Future of Hong Kong’s Investment Market
HashKey Capital is “an institutional asset manager investing exclusively in blockchain technology and digital assets. The principals of HashKey Capital have been involved in investing and building blockchain companies since 2015. This vision and commitment ensure that it stands at the very center of the blockchain ecosystem in Asia and globally.” (Visit HashKey Capital for more information)
As one of the crypto investment institutions with both a Type 9 (Asset Management) License in Hong Kong and a Capital Markets Services (CMS) License in Singapore, HashKey Capital is recognized by most industry insiders as a global blockchain investment pioneer. On January 17, 2023, HashKey announced that its three-stage fund, HashKey Fintech Investment Fund III (“Phase III Fund”) completed fundraising with a new fund size of $500 million.
In October, Hong Kong was in the grip of a storm. The Financial Secretary, Paul Chan Mo-po, and the new Chief Executive, Mr. John Lee Ka-Chiu, issued their first policy addresses. The former promoted Hong Kong as an international virtual asset hub, while the latter released his first policy address, proposing a “talent acquisition” policy and announcing plans to recruit 35,000 talent from around the world. Only 12 days later, the “Policy Statement on Development of Virtual Assets in Hong Kong” (hereinafter referred to as “the statement”) was officially implemented, sending a message to entrepreneurs and investors worldwide that Hong Kong is poised for growth, and the city’s crypto era is on the horizon.
As the world aspires to become the next virtual asset hub, what do investors think of this battle?
In Moonshot Commons’ Fireside Chat #11, we invited Jupiter Zheng, Research Director of HashKey Capital, to share his views on Hong Kong’s Statement as a representative of an investment institution, and to discuss the Web3 investment logic of investors in the current environment as well as the characteristics of Web3 entrepreneurs.
“The Battle for Asia’s Crypto Hub”
Many people see this statement as a sign that Hong Kong is determined to compete with cities like Singapore, London, and New York for the status of the global crypto financial center and virtual asset hub. What advantages does Hong Kong have over Singapore, which is also in Asia, to attract investors at the moment?
From what we’ve seen over the past few years, Singapore is moving at a slightly faster pace than Hong Kong. The two cities are competing not only in the virtual asset space but also in the traditional capital market space. Hong Kong has the support of mainland China. Many mainland companies have landed on the Hong Kong Stock Exchange over the past decade. In addition, many mainland companies have issued offshore bonds, so on this level, Singapore is not as developed as Hong Kong in the stock market. However, Singapore is more liberal and open, so it is growing rapidly in the direction of futures, derivatives, virtual assets, etc.
Around 2017, there were some stances on virtual assets on both sides. In 2017, the Monetary Authority of Singapore (MAS) had a relatively clear attitude towards virtual assets and ICOs, while Hong Kong was relatively vague. Since Singapore has greater policy autonomy, the regulation of virtual assets has been relatively detailed and comprehensive in the past few years. However, in recent years, we have found that Hong Kong has also been very open to virtual assets, including the announcement of a sandbox in 2018, the announcement of a Position Paper for virtual asset trading platforms in 2019, and the fact that licensed funds can hold 10% of virtual assets. Hong Kong’s issued its first virtual asset exchange license in 2020, indicating that the regulatory framework has been in operation for some time, only this time with greater enforcement than before.
The asset classification in Hong Kong has not changed much and is similar to that of the United States. It is divided into security tokens and other tokens. The security token is regulated by the Hong Kong Securities and Futures Commission (SFC), as are non-security token derivatives, while spot good is not particularly clear. The two places are moving forward together in terms of regulation, but my own observation is that Singapore is faster by half a step. This statement is a big surprise, as the Hong Kong government has directly indicated its openness to virtual assets. We have also learned from the micro level that many government departments are supportive of the Position Paper and have a positive attitude toward it. Of course, many points in the statement still need to be implemented slowly. For example, when Web3 companies enter Hong Kong, they still need to adapt to local policies.
As you said, the two cities are comparable in terms of regulation, except that Singapore may be a little bit faster at the moment. If investors were to choose to invest now, which place would be more advantageous?
Singapore has a better Web3 ecosystem than Hong Kong. Hong Kong has been a financial ecosystem for the past few years due to the last wave of tech startups. Although the tech startup scene wouldn’t be considered as developed in either place, Hong Kong has basically become fully financialized.
Yet, as an investor, there is no geographical limitation. HashKey investments have been globally focused since day one and are not necessarily tied to a particular region. Of course, a certain community can be formed, but Web3 does not have the concept of a local market — it is a global market from the very beginning.
Moreover, since the world is now in the stage of economic blockage, it is possible for more flexible and open economies around the world to overtake a curve. We look at industrial investments, long-term investments, ecological investments, and industry cycles in our strategy. At HashKey, we divide the overall investment projects into four categories: one is the underlying infrastructure, the second is the protocol layer, the third is the decentralized application layer, and the fourth we call Crypto Finance, which includes some centralized financial services.
We can see the industry cycle in the past few years, for example, in 2018 and 2019, the hottest was the public chain, the so-called Layer 1; after 2020, the most popular was DeFi, which we call Layer 2; in 2021, the application layer NFT and GameFi were the track. The cycle of the industry goes from the bottom to the application layer. And when the application layer reaches a certain bottleneck, people go back to the bottom layer.
When the market is relatively slow, the layout of our application layer is to find some teams with good technical backgrounds to invest in because they have a certain cross-cycle ability. In fact, many dApps that had been launched in 2018 and 2019 did not come to life, because the market atmosphere, user education, and acceptance were not sufficient. Although people wanted to develop games very early, many factors were not available. Therefore, the projects of the application layer may be one after another, but they are not as widely used as some instrumental applications. So we focus on the infrastructure or Infra layer in this stage.
In fact, we think the boom of the application layer still needs a change of market concept. Previously, people were more interested in investing in Web3, but they had not yet turned to the concept of consumption. For example, the booming of Web2 happened when people thought it was a daily product. If I want to use this product, I will pay for it. Now there are similar investment properties of the application relies on very strong macro-environment support, and it does not have a very sustainable way to go on. Therefore, we see a lot of tracks that are not sustainable despite the good performance of users, but they are somewhat of a mirage.
“Building a sustainable Web3 investment ecology”
Can you tell us more about HashKey’s investment objectives and decision-making mechanisms? Are there any mechanisms that are specific to investing in Web3 projects?
As an investment fund, our priority is to put the interests of our limited partners (LPs) first, but that doesn’t mean we only pursue financial returns. We have put a lot of effort into building our ecosystem because, without a robust resource network, there is no way to reach high-quality project sources.
In fact, building an ecosystem can also create returns for us. After we have invested in more than 300 projects, a small ecosystem has actually formed among these projects. For example, we held Founders Day in Singapore, inviting founders of various investment projects to participate, so that we can communicate and find cooperation opportunities with each other. In this process, we also provide post-investment services for our investment projects.
HashKey 2022 Founders Day. Source: HashKey Capital.
In terms of the decision-making mechanism, we have an investment committee leading the investment decision, and different investment managers are responsible for different tracks. The internal team will then make an initial assessment of all the projects we have talked about during the week and continue to follow up on the projects that are worth investing in. After the follow-up, a report will be completed and sent to the investment committee, which will ultimately vote on the decision.
When making Web3 investment decisions, it is common for some companies in this space to have incomplete information, such as insufficient data in their startup data room. Our focus is on ensuring that the company has a license and complies with relevant regulations. Especially for a financial-related business, we will pay more attention to the company structure and legal documents of the company.
When you were talking about the risk control of HashKey, you said that you have a lot of ongoing post-investment services for Web3 projects. Can you tell us more about the post-investment services needed for Web3 projects? How does it differ from Web2 projects?
In fact, many Web3 projects need upstream and downstream cooperation and support. This support can be divided into horizontal and vertical.
Horizontally, for example, we are based in Singapore and Hong Kong and have invested in many overseas projects. We act as a bridge to help overseas projects enter the Asia market. If an Asian project wants to cooperate with a Western project or wants to go to an overseas market, we will also find the appropriate collaboration on the project.
The vertical side is the upstream and downstream of the industry. For example, basic financial service providers can provide project services for Web3. This is equivalent to finding downstream customers through us. Because a lot of B2B services only need one contact opportunity, we can help more than 300 projects of our own to contact internally.
There are also similar consulting-type services. In some projects, we have a higher presence, a board seat, and some say in the company’s decisions. We will provide some strategic perspectives because we, as an investment institution, are more mature in terms of information access and information channels, and can help our portfolio companies broaden their horizons. We will also use the products of our portfolio companies and recommend them to other institutions if they work well.
“Entrepreneurs favored by investors: practical individuals who have strengths and resources”
In addition to the proof of needing a license that you just mentioned, what are some of the other qualities that companies look for when making investment decisions?
We look for companies that are down-to-earth, such as those that can code very well or have a solid product. Even if they don’t know much about Token Economy, we will provide guidance or consulting services. Our biggest consideration is the team’s ability and attitude to develop the product because the user’s choice is product-oriented. The token is a means to help the product reach the user, it is not an ultimate goal. Therefore, we need to have a grasp on the founding team. Of course, it is not a one-time judgment. We will continue to observe and understand, similar to tracking the future development of each company after the investment.
We also consider risk control because some risks are not the problem of the team, but the shape of the industry. As an investment institution, we must be responsible for the investors. We often say that investments are divided into four stages, “fundraising, investment, management, and retirement”. In fact, “management” and “retirement” account for a very large proportion. Therefore, in order to manage the risk, we will value the ability and enthusiasm of the founding team, and of course, we will give them some suggestions to actively manage the risk.
Since many startup teams are following our public website, is there any advice you can give to these entrepreneurs?
I think entrepreneurship is equivalent to a combination of different competencies. First of all, it’s technical competency, which means the base code. A lot of web3 projects are narrative-driven, but after a few years, the ability to deliver will be less than before. Being able to tell a story in the early stages will really attract investors and give you an advantage from the media perspective. Of course, this is also a strong point, but if we really do something like Crypto Finance, we still need to be realistic about what kind of customers we can attract and how much cash flow we can generate.
The second point is user experience. For example, a Token project requires a combination of many abilities, not only base code but also the ability to reach users with the product. In fact, when more Web2 entrepreneurs enter this field, they will find that the user experience is terrible, especially in operation-dependent projects such as games.
The other thing is that the startup team should be good at making connections with various organizations at the beginning. Whether it is investors or organizations, they will need strong business development (BD) skills.
So when we talk to entrepreneurs, we find that it is better to have a team with different skill sets. Some very technical people are at a disadvantage because they are not very good at external communication. A good team is one that has strong technical skills, someone who is good at user experience, and someone who specializes in dealing with organizations. A lot of opportunities are from a chat at a meeting. If the meetings are successful, the opportunities will be acquired, and vice versa.
“The Future of Hong Kong: Where to land next?”
At the time of Token 2049, many people would lament that Chinese Web3 entrepreneurs have a very low voice. Following this statement declaration, how do you see the future trend of Chinese entrepreneurs? Will the new policy in Hong Kong prompt more Chinese companies to enter the market?
I think it will. Blockchain itself originated in the West, and you can clearly feel that the trend is still in the hands of the Western community. But I think it’s the same as the development of the Internet, which was also born in the West, but the Internet can’t grow without the market in the East.
Token 2049 Singapore. Source: Token2049.
Although the West has a greater advantage in the ability to narrate or innovate, our strengths in marketing, operation, user reach, and product experience are very important. When blockchain turns to the application layer in the next decade, I think Chinese entrepreneurs or the market in the East should have a lot of room for development. As we can see from GameFi, most of the market is actually in Asia, so I think the future may be like the Internet, with the East and West going hand in hand.
Recently, many friends in the industry are discussing how the new policy is laid out in Hong Kong, and everyone is much more active than before. There will be some change in the middle of this, and some Chinese companies will start to invest or plunge into the market.
As to whether it can really boom, it depends on the support work in Hong Kong next year in addition to policy advocacy. For example, for start-ups’ venture capital, park layout, etc., the information has not been fully disclosed. I think after more people arrive, we will gradually become familiar with the intermediate steps, so it is a promising future.
What actions would HashKey take in Hong Kong in the future to follow up on this announcement?
Since HashKey Group is actually based in Hong Kong, we have been working on the licensing of virtual asset exchanges for the past few years to lay out the future development of virtual assets. For example, in November, we were granted a Type 9 License by the Securities and Futures Commission of Hong Kong (SFC) to withdraw the restrictions on managing virtual assets. This means that in the future, we will be able to launch investment portfolios made up entirely of virtual assets under the supervision of the SFC.
I think the importance of Hong Kong as a breakthrough for China to the outside world will not change whether it is going overseas or as a financial center. It has been the case in the past decade, and it will be the case in the next decade as well. There will be opportunities for both Web3 practitioners and other industries to be at the forefront of the trend.
