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The venture capital industry in Taiwan

Taiwan's venture capital industry is currently thriving. It has been boosted by an abundance of Taiwanese high-tech companies that are proving an attractive option for investors. The Taiwan Venture Capital Association provides an introduction to VC in Taiwan and looks at the ways in which the Taiwan government can ensure its continuing success in the future.

When the Taiwan government formally established the venture capital industry in 1983, the Ministry of Finance prompted the Executive Yuan to form the Administrative Committee on Venture Capital Investment Enterprises to regulate the founding process for VC funds. Since 1983, 191 VC funds have been formally registered, with total paid-in capital of over NT$130bn.

Of the 191 VC funds that have been formally registered in Taiwan since 1983, 169 are currently active and operational, 15 have not yet been formally launched, and seven have either relocated or discontinued their operations. Of the 184 existing VC funds, there are 32 that manage their own funds and 152 use outside venture capital management organisations such as management or financial consulting firms and other VC firms. In total, there are 85 discrete venture capital management organizations in Taiwan with an average of 2 funds and NT$1.5bn capital under management per organization.

Before 1995, the founding process for funds was painfully slow with rate of new VC fund formation totalling one to seven per year; this period is considered the developmental stage in the Taiwan venture capital industry. From 1996-1998, the number of VC funds experienced a dramatic increase from 34 at the end of 1995 to 114 by the end of 1998; this represents the expansion stage of the Taiwan venture capital industry. Beginning in 1999, the rate of formation of new VC funds has steadied as we enter the maturation stage of venture capital industry development in Taiwan.

The Taiwan government's tax incentive plan prompted many risk takers to participate in the venture capital industry. During its early years, the government formed a NT$2.4bn fund of smaller funds (seed funds) to provide seed financing to a still-nascent venture capital industry. Over the last 17 years, the shareholders of VC funds have accrued over NT$6bn in benefits from government tax incentives, a small price to pay for creating the burgeoning high technology industry on the island.

Without the presence of large conglomerates seeking to vertically-integrate, Taiwan's small-to-medium technology companies have learned to thrive in a highly segmented market space. At the same time, the government has rapidly developed high technology industry regulations, establishing the National Industrial Technology Research Institute (ITRI) as a centre for high technology research and development and developing human resources, and Hsin-chu Science and Technology Park as a base for nurturing high potential technology companies. Furthermore, the steady growth of Taiwan's capital markets and lowered application barriers to small and medium-sized technology companies seeking to list on OTC or public markets have contributed to making investment in high technology companies in Taiwan a very attractive proposition. This has resulted in continued growth for Taiwan's thriving venture capital industry, which is second globally only to the US.

Many national governments have expressed interest in Taiwan's successful venture capital model including Japan, Korea, Malaysia, Thailand, Singapore, Macau, New Zealand, Canada, Israel, Germany, Switzerland, France and Mainland China.

The government-led development of Taiwan's venture capital industry has been the subject of much study and discussion in other Asian-Pacific countries seeking to implement their own incentive systems. In the aftermath of the Asian Economic Crisis of 1997, Taiwanese small-medium enterprises (SMEs) have survived and built a strong foundation for growth, drawing the attention of other Asian nations. SMEs need the financial support from VC funds, resulting in a symbiotic relationship that is mutually beneficial to both parties. In fact, Taiwan's venture capital model has been so successful that Taiwan-based VC funds are beginning to receive invitations from other nations to expand abroad.

In the past 17 years, Taiwan-based VC funds have invested over NT$92.5bn in domestic high technology companies, which has led to the emergence of a high technology industry of over NT$900bn in size. Beyond the simple infusion of capital, VC funds also provide early stage technology companies with an excellent environment for entrepreneurs to develop existing and future start-ups. Therefore, it can be concluded that the success of Taiwan's venture-driven high technology industry can be attributed to three main sources: the venture capital industry, the ITRI and the Hsin-chu Science and Technology Park.

However, due to tax and other considerations, the government recently eliminated the tax credit incentive enjoyed by shareholders of VC funds. The cancellation of government incentives has had a direct impact on the robust Taiwan venture capital industry. Individual and institutional investors who once invested heavily in VC funds to take advantage of the tax credit have decreased their commitments, resulting in a substantial drop-off in funding for venture capital. Meanwhile, government regulations have limited the participation of banks, insurance and securities firms in venture capital; postal deposits and government pension funds are still not permitted to invest in VC funds. This decrease in capital resources will be very detrimental to the operations of VC funds. As more and more VC funds shrivel from lack of funding, high technology entrepreneurs will be looking to finance their start-ups in other areas like the US or China, which will result in a major slowdown in the growth of Taiwan's high technology industry. This situation will threaten the economic well being of the entire nation.

To ensure that the Taiwan venture capital industry grows at a healthy pace and continues to bring about the growth and development of domestic high technology industries, we recommend that the government increase the amount and availability of funding sources for VC funds. By lifting regulations restricting insurance, banks and securities firms from investing in the venture capital industry, allowing postal deposits and pension funds to participate in the industry and eliminating quotas and other limitations on the structure of VC funds, Taiwan's venture capital industry can be brought in line with industry standards in developed countries where the majority of funds are from institutional investors. At the same time, it is also recommended that domestic VC funds be allowed more access to government fund to funds such as the Executive Yuan Development Fund, SME development fund, and others.

Increasing government participation in venture capital will not only add an invaluable source of funding for VC funds, but increase the government's involvement in company boardrooms. This will allow policymakers to better monitor and enforce industrial policy resulting in a harmonious relationship between government and industry.

By unlocking critical capital resources, the Taiwan venture capital industry has become the driving force behind the success of its high technology industry; in the future, it continues to be the catalyst for continued growth and success in Taiwan.

Copyright © 2001 TVCA

The mission of the TVCA is to promote, both at the national and international levels, awareness of the venture capital industry in Taiwan and its importance to Taiwan's economy. We wish to create an environment in which the venture capital industry in Taiwan can continue to grow and flourish. For more information, please visit www.tvca.org/tw