papers
Bay-to-Bay Strategic Alliances:
The Network Linkages Between Taiwan and the U.S. Venture Capital Industries
AnnaLee Saxenian
Department of City and Regional Planning
University of California at Berkeley
228 Wurster Hall
Berkeley, CA. 94720-1850
Chuen-Yueh Li
Department of Economics, Graduate Program
University of California, Los Angeles
405 Hilgard Ave.
Los Angeles, CA 90095-1477
Abstract: Taiwan stands out as an early success story in developing a venture capital (VC) industry. Domestic policymakers introduced VC in the early 1980s and today the island boasts a flourishing VC sector that is closely associated with the upgrading of the personal computer and integrated circuit industries. This paper describes the industry‘s origins in the close connections to Silicon Valley built by overseas Chinese, and it analyzes the resulting patterns of cross-regional collaboration between the VC industries in the US and Taiwan.
Keywords: venture capital, investment network, strategic alliance, Overseas Chinese, Silicon Valley, Taiwan, information technology.
Biographical Notes: AnnaLee Saxenian is an associate professor in the Department of City and Regional Planning at the University of California at Berkeley. Her current research focuses on the role of immigrants in building economic ties between Silicon Valley and Asia.
Chuen-Yueh Li is a graduate student at Department of Management Science and Engineering, Stanford University. Her research interests include dynamic supply chain management, game theory, network economics and venture capital.
Bay-to-Bay Strategic Alliances: The Network Linkages Between Taiwan and the U.S. Venture Capital Industries [1]
Policy-makers around the world see venture capital as essential to economic growth in the current era. For many, this new financial institution promises technological advance and regional development like that of Silicon Valley where it originated. Others recognize intuitively what researchers have documented, that a dollar of venture capital produces three to five times more patents than a dollar of research and development spending. [2] Most of these efforts to create venture capital industries are too new to judge - although some failures have been reported. [3]
Taiwan, however, stands out as an early success story. Domestic policymakers introduced venture capital to Taiwan in the early 1980s. Today the island boasts a flourishing venture capital sector closely associated with the accelerated upgrading of both personal computer and integrated circuit industries. The first venture capital firm was started in 1984. By 1999 Taiwan was the home of 153 venture capital firms with US $3.07 billion accumulated total capital invested in over 4,493 companies. [4] In that time period, Taiwan transformed itself from a source of low-cost labor to the world‘s third largest producer of information technology (IT) products.
How did Taiwan outpace its neighbors, both developing and developed, in creating a dynamic venture capital industry? This paper argues that Taiwan‘s successes in venture capital and the linked technology industries cannot be understood in isolation. A network of decentralized linkages between individuals and firms in Taiwan and the US contributed to the creation of the new financial institutions. These international collaborations have fostered transfers of institutional know-how as well as capital and market knowledge. The strongest linkages are between the Silicon Valley region of California and the Hsinchu region, where most of Taiwan‘s IT producers are located. [5] A new generation of global venture capitalists with deep networks in both regions, are playing a bridging role - promoting investments in ventures that integrate Taiwan‘s manufacturing strength and Silicon Valley‘s advanced innovation capabilities.
Most research examines venture capital at the national, or even the subnational, level. However there is growing evidence that venture capitalists are as global as the firms that they invest in. While scholarly attention has focused almost exclusively on the behavior of multinational corporations and banks, or on the emergence of global production networks, the parallel globalization of venture capital and entrepreneurship remains largely unexamined. This paper contributes to this effort by analyzing the growth of Taiwan‘s venture capital industry and the emerging patterns of collaboration between venture capitalists in Taiwan and the US.
We first examine how Taiwanese policymakers worked with US educated Chinese engineers and financiers to develop a venture capital industry. We then identify six patterns of cross-regional collaboration between investors based in Taiwan and the US to illustrate the complex and decentralized nature of these cross-regional connections. Third, we discuss the current challenges facing Taiwan‘s venture-capital industry and draw conclusions about its pattern of global investment linkages that should provide important lessons for other developing countries.
1. Introduction to the Venture Capital Industry in Taiwan
Taiwan‘s venture capital industry was modeled after that in the US—and with time fostered mutually beneficial economic ties between the technology industries in the two regions. Dr. Kuo-Ting Li, a former Minister of Economic Affairs who is widely regarded as the architect of Taiwan‘s technology strategy, was the original champion of venture capital in Taiwan. Li visited Silicon Valley regularly during the 1970s and 1980s to meet with US-educated Chinese engineers and seek their advice on strategies to make Taiwanese industry more globally competitive. He was especially impressed with the local venture capital industry and the institutional supports that it created for entrepreneurship.
K.T. Li thus began to champion the creation of a domestic venture capital industry long before policymakers elsewhere were thinking about it. In 1982 Li introduced legislation to create, develop, and regulate venture capital in Taiwan, including comprehensive tax incentives and financial assistance. [6] While such policy may seem uncontroversial today, Li faced significant resistance from senior policymakers like Dr. Ramo, a technological consultant of Executive Yuan, who argued that Taiwan lacked the capabilities to develop a venture-capital industry. [7]
The policy measures and regulations that Taiwan ultimately adopted were greatly shaped by the large community of Overseas Taiwanese engineers, many of whom were based in Silicon Valley. The Ministry of Finance, for example, hired US-educated engineers to develop a plan for the creation and organization of private industrial investment companies in Taiwan. They concluded that Taiwan should import the venture capital model from the US. [8] At the same time Taiwan‘s Minister of Economic Affairs, Li-Te Hsu, and the CEO of Acer, Stan Shih also visited the U.S. to learn about the institutions and systems of venture capital.
Overseas Chinese engineers also played a crucial role in the mobilization of a political consensus to support the government promotion of a venture capital industry. An IBM executive based in Silicon Valley, Ta-Lin Hsu, used his status as an outside expert—in Chinese terminology, a “foreign monk”—to actively promote the new policy measures among different governmental decision-making units in Taiwan. [9][10] In the eyes of its domestic and overseas promoters, the justifications for the introduction of the venture-capital mechanism to Taiwan were fourfold: [11]
Promote a domestic technology industry:
The supporters of K.T. Li argued that rather than trying to replicate the high level technological innovation of places like Silicon Valley, Taiwan should exploit its own strengths—its supply of relatively low cost, high skilled engineers. In this view, Taiwan would position itself to develop commercial applications based innovations from the US. Lower skill, mass production could be carried out elsewhere. [12] Li envisioned the Hsinchu Science-based Industrial Park (HSIP), which was created in 1980, as the place for Taiwanese entrepreneurs to undertake this commercialization and as the place to develop a bridge between domestic and foreign companies. The availability of venture capital would be the key determinant of success in this strategy.
Complement an incomplete domestic financial system:
Taiwanese policymakers believed that the conservatism of Taiwan‘s established financial institutions was a major hindrance to the incubation of high technology ventures. Most financial institutions at that time were commercial banks, which normally require mortgages or debt financing. In addition, the risk-averse attitude of government officials, who managed the Taiwanese government‘s “Development Fund” and “Special Loan Program of HSIP”, limited the ability of these capital sources to spawn risky technology enterprises. A private venture-capital industry would provide an important capital source for such high-risk but potentially high reward ventures.
Promote modern management techniques:
Taiwan‘s businesses were overwhelmingly (95%) small- and medium-sized enterprises and most were family-run businesses that lacked incentives to adopt modern management techniques. Policymakers believed that a venture capital industry could help promote the introduction of modern financial and management skills to Taiwan because it would institutionalize the separation of ownership and control.
Improve the inefficient securities market:
The underdevelopment of Taiwan‘s securities market limited the ability of entrepreneurs to acquire public funding. Policymakers recognized that the introduction of the venture capital mechanism would in turn entail the development of a public capital market that provided an exit option for venture capital investments.
The Taiwanese government set up several key policies to establish the venture capital industry. On the tenth of November in 1983, the Executive Yuan promulgated the “Project for Promoting Venture Capital Investment Enterprises” and the “Regulations of Governing Venture Capital Investment Enterprises” and formally opened the dean to the domestic enterprises to establish VC firms in Taiwan. To encourage the establishment of VC firms, the government drew NT $800 million out of the “Development Funds of the Executive Yuan” as “seed fund” to perspective venture capital firms. In addition, the government entitled the VC firms to the relevant tax incentives as provided by law. To stimulate investors to join the industry, the regulation gave venture capital investors, individual or corporate, a 20 percent tax reduction upon investment in strategic industries. Although the regulation has been replaced by “The Statute for Encouragement of Investment” and “The Statute for the Upgrading of Local Industry”, the above stated condition still remain intact and valid. [13] In 1984, the Ministry of Economic Affairs issued the standard of the third category stock to help high-tech businesses go public. [14] Taiwanese government also changed the Law of Security Exchange to promote the development of a public capital market.
Recognizing that Taiwan lacked the relevant institutional know-how, policy-makers organized collaborations with large US financial institutions such as the Bank of America and Citibank to facilitate the transfer of relevant financial and managerial expertise. [15] They also sent individuals to the US to be trained in managing a venture capital company. In 1984 Acer established Taiwan‘s first venture capital fund—a process that required substantial assistance from policy makers because traditional Taiwanese industry resisted making such investments.
However such efforts were not sufficient. Faced with the challenge of raising capital from Taiwan‘s risk-averse financial and industrial communities, K.T. Li invited the Overseas Chinese community to establish venture capital businesses in Taiwan. Two Silicon Valley-based groups responded—Ta-Lin Hsu, who had since left IBM, started Hambrecht & Quist (H&Q) Asia Pacific, and Peter Lui and Lip-Bu Tan started the Walden International Investment Group (WIIG). They were able to raise capital for Taiwanese funds with relative ease from the networks of Overseas Chinese who were more familiar with venture capital, and so established Taiwan‘s second and third venture firms in 1986 and 1987 respectively. Both have played a key role in establishing the US model of venture finance in Taiwan, and both continue to invest actively in technology firms in both Silicon Valley and Taiwan. They represent early examples of the international investment collaborations that we describe in this paper.
In spite of these early difficulties, Taiwan‘s venture capital industry has grown rapidly. Acer started the first local venture capital firm in 1984. By 1990 there were 20 firms, and in 1999 Taiwan was the home of 153 venture capital firms with a cumulative investment of $3.07 billion in 4,493 companies. [16] Industry watchers claim that Taiwan now has one of the world‘s most dynamic venture capital industries, after the US and Israel. [17]
One measure of the success of Taiwan‘s venture capital industry is the impressive performance of venture funded technology firm in both the public markets and over the counter trading. Ten of the 32 new ventures started in the Hsinchu Science Park in 1996 received funding from local venture funds. [18] By 1998, more than 130 venture-funded companies were listed on the Taiwan Stock Exchange and another 3 were listed as third category stocks. And more than 40 of Taiwan‘s venture-funded companies are listed on NASDAQ. [19]
The emergence of Taiwan‘s venture capital industry attracted growing numbers of Overseas Chinese back from the U.S. to start their own businesses, thus strengthening the technical community linking Taiwan and the US. [20] The case of Miin Wu—a Stanford graduate who worked in Silicon Valley for over a decade before returning in 1988 to start Macronix International, one of Taiwan‘s first semiconductor companies with funding from H & Q Asia Pacific—is well-known example. [21] By 1996, 2,563 engineers and scientists had returned to work in the Hsinchu Science Park and 40% of the 203 companies in the park were started by returnees like Miin Wu.
The deepening of the social and economic connections between Silicon Valley and Taiwan‘s Hsinchu during the 1990s stimulated the emergence of a new generation of venture capital providers that see their role as bridging distant technical communities. These new global venture capitalists are promoting collaborations between producers of IT and related products in Taiwan and in the US —typically integrating Silicon Valley‘s advanced innovation capabilities with Taiwan‘s manufacturing expertise. In short, the new venture capitalists are deepening the mutually beneficial ties between the two, differently specialized, regional economies.
2. Six Investment Network Patterns Linking the US and Taiwan
The venture capital community is thus at the center of a rapidly emerging global network of investments in technology-related industries. The balance of this paper identifies six distinct patterns of investment networks linking the US and Taiwan. The actual network may be more complicated, often combining several patterns. The main actors in these network patterns include venture capital firms based in the US and in Taiwan, established financial institutions, traditional business groups, established technology producers, and new ventures based in the US and Taiwan.
Pattern I
The financial sources of this type of investment pattern are mainly from Taiwan‘s PC or IT (information technology) companies. This type of VC management company is normally organized by a group of professional managers who have experiences in and are familiar with the PC or other IT industries. They focus their investments on ventures that are expected to generate high return rates in familiar fields. They are aggressive in newly emerging market and are willing to invest at an early stage. In addition, by investing in ventures based in the US and Taiwan, the VC management companies can also play a bridge role between the US ventures and their Taiwan-based partners.
InveStar Capital Inc., for example, is a venture fund management company that specializes in IT investments. It has with offices in Silicon Valley and Taipei. The founders of InveStar are Taiwanese engineers with decades of experience in the leading Taiwanese technology companies. The capital is primarily from established Taiwanese IT corporations such as Acer, Taiwan Semiconductor Manufacturing Co (TSMC), and ASE (95%) and the balance from financial institutions. InveStar also manages an independent TSMC corporate fund. It has already invested over 80 startups, 30 of which were early stage investments. Many of these ventures are based in Silicon Valley. Ken Tai, one of the founders and general partners at InveStar, sees his firm as linking Silicon Valley‘s new product designs and technology and Taiwan‘s semiconductor manufacturing and system integration capabilities:
The new technology is all in Silicon Valley, but when you want to integrate that technology into a final product, Taiwan is the best place. Taiwan is the best place to integrate technology components together in a very efficient way because it excels at production logistics and information handling.
Tai goes on to describe InveStar‘s active role as an intermediary in this process, a role that includes relationship building as well as the provision of capital:
When we invest in Silicon Valley startups we are also helping bring them to Taiwan. It is relationship building we help them get high-level introductions to the semiconductor foundry and we help establish strategic opportunities and relationships in the PC sector as well. This is more than simply vendor-customer relationships. We smooth the relationships. [22]
Pattern II
The sources of capital for this type of investment network are very diversified. However, the venture capital firms are typically of US origin and have strong connections with international financial institutions. With international coverage, they can provide their portfolio companies valuable access into international technologies, marketing and manufacturing. They focus primarily on investing in IT ventures in Taiwan (or other Asian countries) and most of the fund managers are overseas Chinese who have strong ties with the U.S. and Taiwan. As a result, they not only play the bridging role between the two regions, but also provide the resources needed to help Taiwanese ventures go public in the U.S. The best examples are the two original US venture funds in Taiwan, Walden International Investment Group (WIIG) and H&Q Asia Pacific Ltd.
These groups, because of their strong ties to international financial institutions, are increasingly investing in other regions with promising technology ventures as well. H&Q Asia Pacific has recently started funds to invest in India and Mainland China. The WIIG Group has investments in Israel, India, China, and Singapore, as well as Taiwan. And W.I. Harper, a spin-off from WIIG, has likewise been active in Hong Kong, Beijing, and Taipei. The strategy of these groups is to leverage their extensive networks of relationships in the US and the Asia-Pacific region to help create and maintain a unique deal flow and to offer their portfolio companies access to this network for possible strategic relationships, technology transfers, and market entry. [23]
Pattern III
A third type of venture capital firm is created by the newly successful technology companies that were themselves initially venture funded. After going public in the US or being listed on the OTC (Over the Counter) in Taiwan, these firms often established their own corporate venture capital fund or firms that invests in promising new ventures based both in Silicon Valley and Taiwan. [24] This type of venture fund will focus primarily on investing in start-ups that offer a potential technology or business fit with the parent company. These funds tend to be aggressive in newly emerging markets, to invest at early stages of a venture‘s life, and often facilitate co-operative agreements between the parent company and the start-ups. In addition, by investing in other industries, they can diversify their original business risk, deepen or integrate their existing technologies with the new ones, and acquire certain degree of synergy with their portfolio companies.
Taiwan‘s UMAX, for example, was originally funded by a domestic venture capital firm. In 1997, it set up the Powerworld Fund with initial capital of US $27.5 million in order to invest in high technology start ups that could eventually be integrated into the Umax-Elite Group. [25] Other firms that have started their own VC funds include semiconductor maker, Macronix, and the Acer Group.
Pattern IV
Traditional Taiwanese business groups were initially reluctant to invest in IT industries. However by the 1990s but as Taiwan‘s economy boomed, the capital generated in traditional industrial sectors such as plastics and textiles was increasingly channeled into local venture capital funds, much of which in turn was invested in Silicon Valley. [26] Their primary motivations are to gain access to new technologies and develop opportunities for diversification as well as to reap the tax benefits provided by the Taiwanese government. Increasingly traditional business groups hope to diversify their business into technology industry to take advantage of the high growth rate of the industry and upgrade their businesses. Some of these VC groups are deeply involved with Taiwan‘s national infrastructure construction projects and so are enthusiastic in the application of the Internet and E-Commerce to increase their business opportunities.
Take the Yuen Foong Yu V.C. Investment Corporation, whose business group is Taiwan‘s largest paper manufacturer with US $1 billion in sales. Its investments include both domestic and overseas companies. Prime View International, a LCD manufacturer in Taiwan, is one of the ventures it has funded. [27] Formosa Plastics Co.‘s diversified investments in new technology companies is similarly motivated by a desire to gain financial benefits, diversify group risk, and identify good investment targets in a timely fashion. [28] One of its most successful investments is microprocessor producer, Via Technology.
Pattern V
Several of Taiwan‘s leading financial institutions, which have had close relationships with government, have been making industrial investments for decades. These institutions tend to be more risk-averse than the more recently established VC firms and they often invest in late stage and even mature companies. Their investments in the U.S., especially Silicon Valley, for example, are still judged almost exclusively by the conservative desire to maximize financial returns. These VC groups also offer less assistance to portfolio companies in technology transfer, market entry, expansion, or management consulting, particularly when compared to other investors.
The China Development Industrial Corporation (CDIC) the venture arm of KMT, which has recently established an office in Silicon Valley, is a prime example. CDIC has been investing in Taiwan‘s private sector for 40 years. Their cumulative investments amount to approximately US $1 billion. [29] CDIC‘s current portfolio includes over 120 high tech companies in Taiwan and about 20 in Silicon Valley. [30] Many of its Taiwan technology investments involve collaborations with domestic investors like H&Q. It also co-invests with Silicon Valley venture capital firms for California-based investments.
Pattern VI
Many Taiwanese businessmen invest directly in Silicon Valley. [31] These investors are like the classic business angels, except they are making global rather than domestic investments. [32] They typically have in-depth knowledge and experiences in the technology industry and deep personal networks in the US. The main difference between the individual angels and traditional Chinese investors is that the former make their investment decision based on the professional evaluation of ventures while the latter make investment decisions based mainly on familial and other personal relationships. These professional angels also focus primarily on technology industries, are more willing to take more risks and to invest more than the traditional Chinese investor.
One experienced venture capitalist estimates that the amount invested in Silicon Valley by individual Taiwanese investors is more than 20 times the amount invested in the region by Taiwanese VC companies by 1997. [33] Ding-Hua Hu and Ken Tai are the well-known examples in this pattern. Hu earned a Ph.D. in the University of Missouri with major in EE. His professional history has positioned him well to be an angel investor: He has served as a Professor at Chaio-tung University (one of Taiwan‘s leading engineering schools), Associate Director of ITRI, the first General Director of ERSO, CEO of H&Q in Taiwan, Chairman of Macronix, Chairman of the Taiwan Venture Capital Association, and Chairman of Chien Kung V.C. Corp., Alpha V.C. Fund, Inc. and Chien Cheng V.C. Corp. (current). [34] As a result, he has many former students based in Silicon Valley and a well-developed personal network and reputation in the technology communities in both Silicon Valley and Taiwan.
Emerging Pattern I: Co-investment between Taiwan VC Firms and the US VC firms
Emerging Pattern II: Cross Investment or Strategic Alliances between Taiwan VC firms and the US VC firms
During the research, we have also identified two emerging patterns that are shown above. Emerging pattern I indicates that the situation in which Taiwan‘s VCs lack know-how or expertise in emerging new technology fields such as biotechnology or the Internet, and therefore join with more knowledgeable US-based VCs to initiate a fund. Such a fund invests in specialized companies that can themselves accelerate transfers of technology and know-how through strategic alliances. This type of collaboration appears to be behind new investments in Mainland China as well.
Emerging pattern II indicates the global expansion of Taiwan‘s VC firms. We expect to see this type of linkage patterns not only between Taiwan and the US in the future, but also between VCs from a wide range of technology regions, including Israel, India, China, Singapore, and even parts of Europe.
A Comparison of the Different Investment Patterns
We have provided a conceptual model for analyzing the network linkages between Taiwan and US VC industries. This framework could be fruitfully applied to cross-national VC collaborations elsewhere in the world as well. Such collaborations are increasingly common in Asia as well as in Europe, and it would be feasible and informative to explore similarities and differences in investment and alliance behavior.
Some of the most interesting empirical questions about the Taiwanese VC industry remain unanswered. Ideally we would like to group the VC firms in Taiwan according to the different patterns of collaboration described here and track the evolution of these patterns over time. However such an analysis is beyond the scope of this paper. There is currently no detailed and consistent data about Taiwan‘s VC investment and alliance behavior of the sort that is more commonly available in the US and Europe. Moreover, a VC firm typically manages several different funds, and the management team of each fund varies with the interests of the investors. This means that any given firm might pursue multiple alliance strategies over time. Future research on this subject would thus require collecting data through either a survey or interviews with the relevant fund managers in each of Taiwan's 153 VC firms.
In the absence of such detailed data on trends, we provide some observations and comparisons among the different patterns described above. The VC firms described in Patterns I (High Industrial Concentration) and II (International Financial Institutions) are ideally positioned to create a “network of networks” by building on deep social ties that facilitate the global search for investments and accelerate the time to investment. [35] By bridging the technical communities in the two regions, they are also able to provide higher value-added to their portfolio companies than traditional investors or many single country venture capital firms. Venture capital firms that have international financial connections (Pattern II) provide strong funding capability because of their institutional presence and reputation in the US as well as highly diversified sources of capital. And while the High Industrial Concentration (Pattern I) focuses investment in familiar fields such as the semiconductor and personal computer industries, Pattern II has a greater range of target industries for investment.
VC firms that emerge from the Transformation of Investees to Investors, Pattern III, has grown rapidly in recent years. Venture funds in this model typically seek to reinforce and extend the businesses of their major investors. This is like a two-edge sword for new ventures. Former investee VC‘s can typically provide significant value-added to portfolio companies because of their professional background and networks in technology industry. [36] However the cost for the venture is often the loss of autonomy. For example, VCs in Pattern III may require that a venture develop products that fit into the product range of their parent company to facilitate bundling them together in the future.
VC firms organized either by a Traditional Business Group (Pattern IV) or by a Big Taiwanese Financial Institution (Pattern V) are oriented primarily towards maximizing financial returns. They tend to invest at later stages than VCs in other patterns. And while VC‘s in Pattern III use their industry experience to create new investment opportunities, the investors from Taiwanese Business Groups or Financial Institutions typically lack the expertise and know-how needed to create such opportunities.
Taiwanese Angel Investors, Pattern VI, represent the main source of informal yet global venture capital in the market. Their motivation is similar to that of the Big Taiwanese Financial Institutions, however they tend to take greater risks and to invest at earlier stages than their counterparts in Pattern V because of their personal experiences in the industries in which they are investing. In contrast with US business angels, who prefer to invest in ventures close to home, these Taiwanese angels aggressively seeking the investment opportunities in overseas markets, especially in Silicon Valley. [37]
3. Conclusions: Policy Lessons and Future Trends
Taiwan‘s large, relatively sophisticated venture capital industry would be the envy of most developing nations. The development of the industry during the 1980s and 1990s benefited greatly from the contributions of the US educated Chinese engineers and US financial institutions as well as foresighted Taiwanese policymakers. These initial linkages have in turn been transformed into enduring networks of investment and collaboration between venture capital providers and technology producers based in Taiwan and the US. This experience was unique in several ways: Taiwan‘s VC industry benefited from the presence of large numbers of Overseas Chinese in Silicon Valley as well as long-standing economic and political relations between the US and Taiwan.
The historical uniqueness of this experience suggests that efforts to imitate of the Taiwan model may be neither possible nor appropriate. However it is important to note that the contributions of the US (and Silicon Valley in particular) have been primarily in the transfer of venture capital infrastructure and managerial know-how rather than financial capital. This suggests that policymakers seeking to develop dynamic venture capital industries will need to focus as much on the availability of organizational and managerial knowledge as on the availability of capital.
Taiwan‘s venture capital industry still faces problems. These are problem are likely to emerge in other nations attempting to create venture capital industries as well. In particular, Taiwan‘s VC firms are still far behind their counterparts in the US in terms of funding early stage ventures and providing value-added services to their portfolio companies. Four distinct challenges remain:
Insufficient Funding of Seed-stage Investments
The Taiwan Venture Capital Association reports that seed stage investments account for only 10% of investments (by number and value), while ventures at the development stage capture 46% of total investments. [38] These numbers indicate that Taiwan‘s venture capital firms are more risk averse compared with their counterparts in the U.S., where around 34% is invested in seed and early stage ventures. If Taiwan wants to take advantage of the wealth of new opportunities provided by the Internet or other new emerging technology fields, for example, the venture capital industry needs to become less risk-averse and invest heavily in earlier-stage ventures. As the sources of financing in the market multiply it is possible that the oversupply of venture capital will encourage more investments in earlier stage ventures.
Industrial Concentration of Investments
More than 70% of the venture capital invested in Taiwan through 1998 was targeted at the semiconductor or PC related industries, while investments in software and biotech accounted for only 13%. [39] This concentration of industries is understandable given Taiwan‘s historic strengths in hardware. However it will eventually reduce the growth rate of the VC industry because of the fierce competition in the global IT and related hardware industries. In addition, it will continue to limit the growth of the high potential new investments in biotechnology, software, and the Internet.
Limited Sources of Capital
Government restrictions on investment by pension funds, insurance companies and private banks into VC funds severely limit the sources of capital available to industry. By the June of 1997, the contributions from private banks and insurance companies to the total capital of the industry were 6.1% and 4.7% respectively. The numbers are quite low compared with the capital structures of foreign countries. [40] Although there is oversupply of venture capital in the industry now, we argue that it may be a temporary phenomenon because the influx of the new capital is coming from the traditional industries, which are attracted by the high-return rate of VC industry or Internet investments. Therefore, to ensure the stable supply of capital in the long-term, the government should relax the restrictions on investment by pension fund, insurance companies and private banks.
Limited Added Value Created by the VC firms to Portfolio Companies
Venture capitalists in Silicon Valley provide a wide range of value-added services to their portfolio companies in addition to financial capital. Unlike their counterparts in Taiwan, they can size up new technologies and applicants and nurture them through the difficult early years as small businesses. Taiwan has significant depth of experience with the IT hardware sectors and hence some venture firms (particularly Patterns I, II, and III) do add value. However there are few individuals with the capabilities needed to help a newer generation of Internet and software start-ups. [41] Of our six network patterns, those dominated by Traditional Business Groups and Taiwan‘s Big Financial Institutions are most likely to have this kind of problem due to their lack of technical knowledge or organizational know-how in these newly emerging industries.
One potential solution for Taiwan‘s venture capital industry is to aggressively seek and/or expand collaborations with foreign VC firms that can provide the expertise needed to quickly enter new businesses. Hence the trends described in emerging pattern I and II, although still quite new, are promising. Recent data suggests that Taiwan‘s software industry is experiencing accelerated growth and increased profits. [42] Moreover the popularity of Internet and the high return rate of Internet investments in the US should encourage Taiwanese VCs to aggressively seek investment opportunities in Internet-related and software companies. By expanding their collaborations with the US or other countries‘ VC firms to compensate their disadvantages in these emerging technological fields, Taiwan‘s venture capital firms and their new industries should be better positioned to compete in and contribute to the global economy.
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31. Ding-Hua Hu Interview by author, May 4th, 1997, Taipei.
32. Freear, J., Sohl, J. and Wetzel, W., `Angels and Non-angels: Are there Differences?‘, Journal of Business Venturing, 9(6): 109-123, 1994.
33. According to Taiwan Venture Capital Association, the total accumulated amount invested in foreign countries is US$514.28 million by 1998. In addition, according to Benny Hu - the president of CDC, current annual investment amount in Silicon Valley by Taiwan‘s VC industry is over NT $5 billion or US $167 million.
34. Venture Capital in Taiwan, 1998 Edition, Taiwan Venture Capital Association, 1999.
35. Hara, G. and Kanai, T., `Entrepreneurial Networks Across Oceans to Promote International Strategic Alliances for Small Businesses‘, Journal of Business Venturing, 9(2): 489-507, 1994.
36. Sapienza, H., Manigart, S. and Vermeir, W., `Venture Capitalist Governance and Value Added in Four Countries‘, Journal of Business Venturing, 11(6): 439-469. This is similar to the results of Sapienza, H., Manigart, S. and Vermeir, W. (1996) who found that VCs with operating experience in the venture‘s focal industry added significantly more value than those with less industry-specific experience.
37. J. Freear, J. Sohl and W. Wetzel (1994) found that business angels in the US prefer investing in entrepreneurial ventures that are in the later stages of development which is more conservative compared with Taiwanese investment angels.
38. Venture Capital in Taiwan, 1998 Edition, Taiwan Venture Capital Association, 1999.
39. Venture Capital in Taiwan, 1998 Edition, Taiwan Venture Capital Association, 1999.
40. Tseng, op.cit.
41. ‘Asia Online: The tiger and the tech”, The Economist, Feb. 5th - 11th, 2000, pp.64-66.
42. Isaacs, J., `PC Makers Shift New Investment Toward Software‘, Nikkei Electronics
43. Asia, Feb. 2000 issue.
Pattern I: Investment with High Industrial Concentration
Pattern II: International/US Financial Institutions
Pattern III: The Transformation of Investees to Investor
Pattern IV: Traditional Business Group
Pattern V: Taiwan‘s Big Financial Institution
Pattern VI: Taiwanese Angel Investors:
