The Taiwanese investment industry has long been strong, fruitful and diversified. The Taiwan Venture Capital Association (TVCA) in its over 20 years now boasts close to 200 venture capital (VC) members and over $170 billion in asset management. In November of 2014, the TVCA reported that there was a ‘declining total pool of capital’ in the Taiwanese VC community due to a shift in Taiwan’s tech industry. KITE Invest discusses with Su Shizhong, the Secretary-General of the TVCA, the current state and future prospects of the industry.
KITE Invest: Taiwan’s tech industry is known for being the origins of some of the world’s tech-giants, in this regard can you please comment on the current state of the tech industry and the reasons for the decline.
Su Shizhong: The achievement of Taiwan’s economy comes from the great performance of the manufacturing industry, and Taiwan is able to provide products and services with high quality and low cost with a tight due date. Moreover, Taiwan develops its strategic industry successfully such as semi-conductor and IC design, and it has devoted resources, capital, manpower and technology to build some of the world-class industries.
Right now Taiwan is losing its advantages mainly because many Taiwan enterprises moved to China, and their training there was pulled off because they gave and taught everything they have to China’s enterprises. Originally it was an inevitable trend to export our technology, just like United States and Japan had exported their technology to Taiwan thirty or forty years ago. But when Taiwan provided the technology during manufacturing process, Taiwan has to do research and develop new products or core technology just like United States and Japan. In Taiwan’s overall structure of industries, we neglect the development of core and innovative technology, and put too many emphases on the manufacturing process. In the end, China combined the technology from Taiwan and Korea and developed theirs for manufacturing process. Taiwan lost its leading position after China became the world factory.
Although Taiwan still maintains its leading position in some domains, such as the manufacture of semi-conductor, IC design, energy, and telecommunication, China is building up their brands with a 10 times or even 100 times scale under its humongous market, and purchases key components from Taiwan or ask Taiwan to do OEM or ODM for them. In short, China has the market advantage and has developed their own brands; however, Taiwan is still doing OEM. In a few years, Taiwan will be China’s factory if this situation is not changed.
The development of technology industry in Taiwan is worrying. For VCs in Taiwan, they don’t see innovative investment targets in the market and they lose their interests. But this is not the sole reason that Taiwan’s VCs have several bad years. The government’s cancellation of their encouraging policies may be a bigger reason. The policies and regulations in Taiwan are not friendly to early-stage investment and innovation development, and this is the main problem. When VCs don’t want to invest startups, they are no longer VCs, and subsequently it becomes harder to attract new capital for VCs. That’s why the environment of VCs began to get worse since 2006.
KITE: Mentioning the barriers imposed by the Government, it was back in 2000 when the Taiwan Government canceled a tax incentive for venture capital. How have these private and pubic factors affected investors? What is the outlook of VC in Taiwan?
SS: In the year of 2000, the Government cancelled tax credit of investment and it has affected the industry of venture capital massively. Why was the impact so strong? It’s because the environment of early-stage investment in Taiwan is bad. For example, 1) VCs in Taiwan can’t buy stocks under 10 NTD; 2) early investment can’t buy prefer-stock; 3) early-stage companies can’t release convertible loan; 4) there is no system of warrant; 5) the mechanism of stock option has lots of unreasonable restrictions.
VCs usually allocate 30 to 40 per cent of capital for early-stage investment, but the environment in Taiwan is terrible and this makes them not able to make up this allocation. In the beginning, the Government provided tax credit of investment to make up the disadvantages of this environment and encouraged VCs to invest. When this measure was suspended, and the Government didn’t improve the environment and in the meantime, VCs obviously won’t invest as how they used to. When VCs didn’t invest in early-stage, the capital owner of VCs cut their capital because they didn’t find VCs with investment targets that had well-developed business model. Therefore the number of new VCs and the amount of their investment decreased massively.
KITE: What is the current relationship for VCs with the Government and are there any measures that the TVCA is working on to improve the VC and startup communities respectively?
SS: TVCA has actively urged Taiwan Government to improve the environment of innovation and early-stage investment. Though we haven’t had much achievement, TVCA as a NGO will continue to persuade the Government because this is a key factor that affects Taiwan’s future development in a long time, and we must improve this environment. In the end of 2013, the Taiwan Government allowed enterprises to determine the price of their stocks; it no longer has to be higher than 10 NTD. The Legislative Yuan has adjusted the Act for Development of Small and Medium Enterprises, and it keeps the technology stocks acquired by entrepreneurs from levy temporarily. These are the accomplishments under TVCA’s efforts. On the other hand, GreTai Securities Market in Taiwan has adjusted the way the market trades and exchanges to make the commerce on emerging stock board more prosperous. This has been an encouragement and has enabled VCs to look for targets in a relatively early-stage market. TVCA is totally supportive to this end and will find more pre-OTC startups for VCs.
Because of TVCA, the National Development Council brought up a project the Headstart Taiwan in the end of 2014 and it offer incentives for VCs who invest early-stage. The National Development Fund can provide 40% capital for those who are willing to invest early-stage, and it offers up to 80% carry interest. This attracts a lot of Taiwanese VCs. So far four of them have involved in this project, one from Silicon Valley and three from Taiwan. In our estimation, there are at least twenty domestic and foreign VCs to try to apply for this project.
KITE: The state of entrepreneurship in Taiwan has come into question as less and less young people are driven to develop a tech startup. What are the reasons behind this and what are your projections of Taiwan’s young entrepreneur community?
SS: There are more young startups of software, Internet, IOT, cloud and app, as well as culture and creativity industry, but this doesn’t mean young Taiwanese don’t do technical research and development. Taiwanese young people who do technical research and development will soon be recruited by some big technology corporations, so that’s probably why you see less young technical startups.
There might be another possibility. Technical startups could bring destructive innovation and this could be a threat for big enterprises. If big enterprises can’t merge them, this might lead to a cruel competition. And Taiwan government takes more care of enterprises and neglects startups; so technical startups tend to choose to cooperate with enterprises under this environment.
The innovation and the energy of young Taiwanese have been aroused, and the environment of innovation and early-stage investment will be improved sooner or later. Looking into the future, it will be easier for young people to start a business and raise funds, and it will be easier to connect with global market. So now it’s easier for Taiwanese young people to start a business, and we believe the situation is going to be better in the future.
KITE: Are there other industries that are emerging in the wake of this technology decline? Where do you see the future of VC in Taiwan?
SS: It is true that technology industry in Taiwan has met its bottleneck, but this doesn’t mean it has no future. Of course Taiwan has lost the opportunities of branding, but Taiwan is still in a leading position concerning key component manufacturing, key technology and applied innovation technology. In the future, Taiwan will be the designing center of China, US, and Japan. We still have no brands and no revenue coming from brands. But once we become the world center of applied technology and designs, the technology industry of Taiwan will still have a chance to transform and upgrade. The Taiwan Government is about to build a global rapid sampling center, and this is a good start.
Taiwan has lost its advantages in Internet and software domains, and the education of technology in Taiwan is solid, and the salary required in Taiwan is relatively low, so there are many cases of integration of innovation and domains recently. They are applied to the industry of apps and IOT, and they are merged and invested by international enterprises. If Taiwan can be the technical developer of software, Internet, and Cloud industry, it should find its competitiveness and a prominent position in the world. Taiwan may not have brands like Alibaba and Xiaomi, but Alibaba, Xiaomi, Huawei and Baidu all use Taiwan’s innovative software and components that integrate software and hardware, and Taiwan is still surviving.
KITE: What are the goals that the Association is aiming to achieve in the near future for itself?
SS: TVCA is optimistic about future. 2013 and 2014 were probably the worst for Taiwan VCs. We think in the future industries in Taiwan need development in innovation, and to transform and upgrade. It is an irreversible trend, and it will be emphasized more after election and party alternation. As long as we put more attention on innovation, we will see more businesses, which apply innovative technology, and VCs will have investment opportunities and prosperous future. In 2015, we will definitely see more VCs and the amount of investment is going to be lifted on a large scale. We can see the future is going to be thriving.
KITE: Lastly, what advice would you give to venture capitalist (local and international) about investing in Taiwan, and to entrepreneurs about seeking investment?
SS: To VCs, Taiwan is transforming and is trying to find its new position in the brand new global industrial development. Taiwan is also trying to find its position between the cooperation and competition with China. This is the best timing for VCs to invest. The risk is high, but in return the future profit is also high.
To entrepreneurs, Taiwan is stuck in the development difficulties, and we haven’t seen any improvement regarding innovation or the environment of early-stage investment. But if entrepreneurs can survive under this bad environment, the return they will get is going to be higher when the environment is improved. Moreover, you don’t build Rome in a day, and the future is going to be better, so be an entrepreneur and start your own business when you are still young. We have to admit the road of fund raising is foggy though the dawn is expected to come soon. If entrepreneurs run into any difficulties, please come and follow TVCA.