Taiwan

Author: | Published: 4 Jan 2001
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Taiwan is Asia's capital for venture investment activities. This is a big statement, but we believe it to be a justifiable one. Anyone hoping to be a venture capital (VC) player in Asia needs to understand Taiwan's venture capital community in order to fully appreciate a) the regional and global role of Taiwan's VC community, b) Taiwan's immense financial firepower, and c) Taiwan's technological and manufacturing prowess, which converts venture funds into profits.

Taiwan's leading role in Asia's venture capital industry is already transforming it into a global VC leader.

Who, what and how well-endowed is Mr VC Taiwan?

There are approximately 170 VC funds registered for special government benefits in Taiwan, and an additional estimated 300 or more funds not seeking government incentives. The transactions reported by these VC funds in 1999 totalled approximately $10 billion. It is safe to conclude that with the subsequent growth of activity in hardware, software, telecoms, technology convergence, e-commerce, the internet and biotechnology, Taiwan's minimum VC investment is $10 billion annually from VC funds alone. This amount of investment is only part of the story.

In addition to established VC funds, other VC players include: a) tremendous private equity/ family wealth where corporate empires are essentially family-controlled vehicles, b) private equity and family wealth channelled through private bankers, offshore trusts and tax-efficient vehicles, and c) private investment clubs and networks of friends and co-investors which includes the overseas Chinese networks. Conservative estimates of investment from these sources of funds are at least equal to the amount of funds invested annually in established VC funds.

Taiwan's annual investment into new ventures is, therefore, probably in the neighborhood of $20 billion. For technology companies seeking funding, and for global VC funds seeking partners, co-investors or deal flow, Mr VC Taiwan is indeed a desirable date. Naturally, Mr VC Taiwan often invests with VC funds from the US, Singapore, China, Japan and elsewhere, so the regional and global impact is immense. An annual financial firepower of this magnitude places Taiwan on top of the list with the US and Japan, making Taiwan a Mecca for global VC and technology players seeking financing, co-investors, manufacturing, distribution, product launch or build-up capabilities and market share.

Since Taiwan is a small place, by necessity, VC investors have sought investment opportunities in other parts of Asia, the US and Europe, and the types of technology deals they seek has spanned the entire gamut of IT, telecommunications, technology convergence, biotechnology/ life science, traditional Chinese medicine, pharmaceuticals and almost every imaginable subset of the above.

Taiwan is arguably Asia's capital for venture investment.

How is Mr VC Taiwan different from other VCs?

What are some safe general statements about the characteristics of the various funds and players that make up Mr VC Taiwan? How does Mr VC Taiwan think, and what are the best ways to meet him?

While the details, expertise and focus of the nearly 400 different Taiwan VC funds vary, it is safe to say that for almost all of them, they are, in addition to being cash rich: a) outward looking and international in approach, b) mostly playing a regional role, c) experienced in manufacturing so they "sweat the production details", d) with operational expertise and will focus on the entire chain of assumptions and processes from their investment to generation of profits, e) able to drive purchase orders or profits to the invested venture as part of their value-added support, f) not reluctant and do not fear moves to lower production and operating costs to squeeze out inefficiencies in the manufacturing and distribution systems, since they recognize the competitive pressures of delivering a better, cheaper mouse trap to the customer. Many have the expertise to find lower cost production capacity in China, southeast Asia and south Asia as well as to handle high-end quality production in Taiwan and other specialized industrial parks in the region.

There are many front doors to Mr VC Taiwan and the industry is not monolithic. For venture capitalists who wish to meet him, cold calls will work, since Taiwan's culture is generally warm and hospitable, but the best way naturally is to be introduced by a mutual friend. The ability to establish immediate credibility, and have someone bridge the gap will speed up the dating and partnering process. Direct contacts and introductions with the VC community should be nurtured over time, and the sharing of deal flow and co-investment needs to be part of the process to build confidence, showing that one has "skin in the game".

For technology companies seeking funding, the best approaches are also intermediaries, but this must be coupled with an excellent executive summary and business plan. Many VCs in Taiwan will not accept initial meetings with technology companies without having first seen a book coupled with a bridging introduction, since the number of companies worldwide seeking Taiwan venture funding is rising. The ability to channel the executive summary and the business plan to the right Taiwan VC will also save time and wasted energy.

Technical and manufacturing might

Taiwan's economy is characterized by two leading trends. The first trend is that for the last 15 years, Taiwan-based companies have become the largest or second largest direct foreign investor in every country in southeast Asia and China, bar none. This has provided a massive regional manufacturing and distribution base, and a source of ready market and pricing information that helps maintain Taiwan business competitiveness on a global scale. The ability to manufacture and source at the lowest market price and to drop ship products in volume anywhere on the planet within three to four days is an amazing competitive advantage.

The second trend has been Taiwan's continued investment and dominance in the high-technology sectors. Taiwan is the world's third largest IT hardware player behind Japan and the US. In many components, Taiwan remains dominant with over 50% of world market share, for example: scanners (91%), PC cases (78%), power supplies (73%), keyboards (68%), hubs (66%), motherboards (64%), monitors (58%), mouses (58%), modems (58%), notebooks (49%). Taiwan is also a major player in the internet card, CD-Rom/DVD and graphic card industries, with over 40% of world market share in each.

However, the real story is emerging in the more valuable sectors as Taiwan companies ramp up TFT-LCD panels, opto-electronics, semiconductor, software, set-top boxes, internet-related products and services, telecoms-related products and services, e-commerce (portal, vertical markets and SCM) and broadband. Taiwan manufacturers continue to re-invest profits made from lower-end and traditional industries, into sectors that are further up the food chain. This is one of the main reasons that many Taiwan venture investors can channel purchase orders to their invested companies, as well as add value to lower the costs of operations and distribution to an invested company. There is a significant overlap between the venture capital funding and the traditional manufacturing industries. Many of the families and groups that control traditional industry empires have established their own VC funds or hired experts to guide their investment strategies in their clubs and networks.

Regional and global activities:

Taiwan has emerged as a leader in the information electronic industry, with over 50% of the world market value of production. It is emerging into leadership positions in semiconductors (fab, packaging, testing, design) and has set its sights on media, software and biotechnology/life science on a near and mid-term horizon. In these sectors, Taiwan VCs already play significant regional and global roles.

Taiwan's VC and manufacturing sector's ability to drop ship globally on a price-competitive basis is also a reflection of its success in transforming its brick-and-mortar logistics companies into clicks-and-mortar logistics companies. Taiwan's VCs have been catalysts to force competitive innovation at the high end of the market.

While Taiwan VCs and technology companies control factories throughout the region, their greatest international involvement is with Silicon Valley. At a recent conference in Silicon Valley called "IC's meet the Real Silicon Valley", the attendees were focused on the ethnic Indian and Chinese role in Silicon Valley. When the September 21 1999 earthquake struck central Taiwan, the world's chip prices took an immediate price shift, called the Taiwan shock, causing many Taiwan engineers and Taiwan-invested companies in Silicon Valley to hold their breath. Taiwan has the undisputed claim to the greatest level of international investment and partnering with Silicon Valley. No territory in Asia (and arguably anywhere) has closer ties to Silicon Valley.

Taiwan VCs are intimately involved in the deal and capital flows between Asia and Silicon Valley. In the last year, we have witnessed a dramatic rise in the activities of VCs in China, both domestically and regionally. In most cases, they are partnered with Taiwan-based VCs and technology. The number of deals with conception in California, funding in Taiwan and manufacturing in China has risen dramatically. Recently, we have also seen a rise in deals related to Israel's high-tech sector, e-commerce deals (portals, vertical markets and SCM), and chip deals, wafer, fab, packaging, test and design deals are all on the rise, with the trend shifting towards mainland China.

Types of deals

Deals in Taiwan are largely private placements, with a large proportion handled in offshore jurisdictions, as the laws are more flexible and the tax advantages more compelling. The deals in Taiwan range from the plain vanilla structures of seed rounds and Series A to D preferred stock financings, to more complicated convertible debt, hybrid-debt/equity instruments and pre-IPO and post-IPO transactions. Deals have included transactions under the laws of Delaware, New York, California, Bermuda, Cayman, BVI, Bahamas, Hong Kong and, of course, Taiwan.

Many deals are structured for potential future exits in Hong Kong, Singapore, Nasdaq, Taiwan and other boards. Most exits are directed outside of Taiwan, since many of the market and regulatory factors do not favour Taiwan exits. Complex stock option structures have increasingly been included as performance, recruiting and retention incentives. Even China-related deals are now starting to incorporate these equity incentive programmes.

We are seeing more mixed nationality VC deals, which include co-investment from Taiwan, Singapore and China. The sexiest deals have included multi-jurisdictional structures such as combining equity funding from Taiwan, China and Singapore to finance US-based technology that is moving operations and manufacturing to China while simultaneously securing debt finance from Hong Kong.

The surprise sectors have been the rise of biotechnology deals. The original nutriceutical deals have given way to pharmaceutical deals, Alzheimer disease cures and human memory deals related to the US National Institute of Health, and deals coming from universities in north America and gene-mapping related projects. The continued growth in information, electronic and telecommunications deal flows continues to be steady, but the rise of the bio-life science deals is tangible and evident. The growth of cross-border bridging deals is also increasing, with more jurisdictions and technologies represented.

Future trends

Taiwan VCs will certainly continue to be a leader in telecommunications, media and information-venture deals. Its global role may rise as a percentage of the total over the next five years. We also believe that the level of funding will grow and exceed the estimated $20 billion annually. Clearly, the entry of both Taiwan and China into the WTO will bring greater economic inter-dependency, accelerating the flows of capital, ideas and technology. China's own venture community will expand as the private sector continues to grow and the state sector finds ways to commercialize its technology.

The big story, however, is that the Taiwanese authorities have committed to investing $5 billion over the next five years in quality life science and biotechnology, encouraging diversification away from information technology and internet deals. The number of players in this sector is still limited, but several VC funds have a number of PhDs among their ranks in the life sciences and biotechnology areas. The leader in this field is Fidelity Venture Capital, having several life science specialists on its staff, with one of the founders a medical doctor. As many as 10 VC groups and industrial companies in Taiwan have begun to play in this field. Both China and Taiwan VCs and policy planners have focused on traditional Chinese medicine as a potential area of concentration. While the potential is great to marry the ancient wisdom of the east to western clinical procedures, only time will tell whether these will be successful.

Watch the horizon

In 1983, the Taiwan government set up regulatory incentives for local companies to form VC funds that included a 20% investment tax credit for companies that invested 80% of their funds into Taiwan deals. Today, the VC world is different, since most of the deals are not Taiwan-centric and the government has recently repealed the incentives.

So the doors are open and market competition has spawned angels, incubators, launch companies, venture lawyers and an entire industry to support the VC investors and their deals. While the number of VCs has risen in Taiwan, and the dollar values dedicated for VC projects has increased, as the competition for talent becomes more fierce and the related competition for prime VC deals also rises, there may be some market segmentation between the more successful and less successful VCs.

People and groups to watch are Primus Capital Group, China International Development Consulting, Fidelity Venture Capital and Fortune Venture Investment Group. They are among the Taiwan VCs at the forefront of bridging Taiwan, the US and China, with the latter two groups active in biotechnology. Another notable group is GC CyberCapital, which focuses on cyber deals that link the global Chinese network. Others to watch in the Taiwan market will be the partners or new entrants from Singapore, Hong Kong and China, especially Government Investment Corp (GIC), Search Group of Hong Kong and China International Capital Corporation from Beijing.

California venture groups will continue to team up with the many Taiwan partners, but to date, only a few US-based VCs have emerged as players with a significant Taiwan-anchored strategy. This may be one of the developments to watch in 2001.

Summary

At the outset of this article on the Taiwan VC community, we made the claim that Taiwan is Asia's capital of venture. While opinions may differ, given the number of VC players, the size of the invested amounts, the technological diversification, the geographic footprint and the manufacturing distribution and pricing prowess, we continue to believe that Taiwan can be considered the leading Asian VC jurisdiction. If the efforts by this industry sector have not yet earned this mantle, we believe that in the coming years, given the above factors, others who do not share our perspective may come to change their minds. Keep watching the horizon, and keep those venture deals rolling.


Squire Sanders & Dempsey

14/F, 116 Nanking East Road
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Taipei
Taiwan

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