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1
Thomas M. F. Yeh Vice Chairman
14th Conference on Pacific Basin Finance, Economics and Accounting
Council for Economic Planning and Development
Executive Yuan (Cabinet), R.O.C. (Taiwan)
July 14, 2006
Venture Capital Industry Development in Taiwan
2
I. Introduction to Taiwan’s Venture Capital Industry
II. Overview of Venture Capital Investing in Taiwan
III. The Role of the Development Fund in the Venture Capital Industry
IV. The Challenges to Taiwan’s Venture Capital Industry
V. Outlook and Next Steps
VI. Conclusion
Content
3
I. Introduction to Taiwan’s Venture Capital Industry
The VC industry has made a substantial contribution to Taiwan’s industrial restructuring, SME development, high-tech industry incubation, job creation, and stability of economic development. It played a key role in supplying funds to and facilitating collaborations between high technology companies for the last several decades. Its impact on the nation's most significant period of rapid economic boom has been remarkable.
4
I. Introduction to Taiwan’s Venture Capital Industry
1. The Current Mode of Operation in Taiwan
(1)The relationship between funds and management firms is usually dictated by a management contract. The management firms then are responsible for pursuing, analyzing, and recommending investment approach and execution.
(2)Once the investment is made, management firms are furthermore responsible for post-investment management and providing managerial and operational guidance and services to the portfolio company to help reach the ultimate goal of a successful exit.
5
I. Introduction to Taiwan’s Venture Capital Industry
2. The Current Mode of Operation in Taiwan
Source:Taiwan Venture Capital Association
6
Management ModeEntrusted to Management
CompanySelf-managed Entrusted to Other VC Firm Total
No. of Firms 199 28 4 231
Percentage 86.15% 12.12% 1.73% 100%
Sel f -managed12.12%
Entrusted tomanagement
company86.15%
Entrusted toother VC
fi rm1.73%
II. Overview of Venture Capital Investing in Taiwan
7
I. Introduction to Taiwan’s Venture Capital Industry:
Issuance of Regulations for the A
dministration
of Venture C
apital Enterprises (M
OF)
1983.11
The D
evelopment Fund and C
hiao T
ung Bank respectively provide
NT
$500 million and N
T$300 m
illionto fund the First V
C Investm
ent Program
1985.9
1991.2
Change from
administration to guidance of V
C
industry, with issuance of R
egulations on the Scope and G
uidance of Venture C
apital E
nterprises (MO
F)
2001.6
Plans to strengthen the VC
industry under the N
ational Developm
ent Plan to be matched by
establishment of an N
T$100 billion V
C fund
(NT
$30 billion public funds + N
T$70 billion
private funds). 2001.1
01998.1
The D
evelopment Fund funds
and appoints IC
BC
to administer the
Third V
C Investm
ent Program
Repeal of the R
egulations for the A
dministration of V
enture Capital
Enterprises (M
OF)
2004.2
Am
endment of R
egulations on the Scope and G
uidance of Venture C
apital Enterprises to
expand funding channels and ease restrictions on investm
ent scope and fund utilization
Th
e first VC
firm, H
ong D
a, is set u
p
1984.11
1995.3
Macron
ix becom
es the first V
C-in
vested com
pan
y app
roved
for type-th
ree listing
1997.8
Hotung V
enture Capital is liste
d in Singapore, becom
ing Tai
wan’s first V
C firm
to list overseas
2001.5
Th
e Taiw
an V
entu
re C
apital A
ssociation is set u
p
1999.5
Seed Stage
Startup Stage
Expansion Stage
Mature Stage
The D
evelopment Fund and C
hiao T
ung Bank respectively provide
NT
$1 billion and NT
$600 million
to fund the Second VC
Investment Progra
m
VC
D
evelopm
ents
Legal &
Regu
latory Revision
s an
d M
ajor Plan
s & P
rograms
2004.9
The D
evelopment Fund is placed under direct
jurisdiction of the Executive Y
uan (Cabinet).
2004.12
Executive Y
uan approves placing VC
industry guidance and assistance under jurisdiction of M
OE
A
2004.8
The D
evelopment Fund passes the G
uidelines for the R
eview and M
anagement of E
xecutive Y
uan Developm
ent Fund Investment in V
C
Enterprises
No. of V
C firm
s breaks through the tw
o hundred mark.
Th
e investm
ent
tax credit for V
C firm
sh
arehold
ers is cancelled
.
The Evolution of VC in Taiwan
8
I. Introduction to Taiwan’s Venture Capital Industry:
Seed Stage--The first VC firm was set up(1984). Startup stage-- the first VC-invested company
approved for type-three listing(1995). Expansion Stage--The investment tax credit for VC
firm shareholders was cancelled(1999). Mature Stage--Amendment of Regulations on the
Scope and Guidance of Venture Capital Enterprises to expand funding channels and ease restrictions on investment scope and fund utilization(2004).
9
II. Overview of Venture Capital Investing in Taiwan
1.Taiwan’s first VC fund was established in 1984. Ten years later, the industry reached the expansion stage and entered its “golden era”, which lasted five years until 2000. Between 1995 and 2000, the number of VC funds grew from 34 to 170 while capital under management rose from USD$5.8 billion to USD$47.0 billion. At the end of 2005, there were 231 VC funds with capital under management totaling USD$58.9 billion.
10
II. Overview of Venture Capital Investing in Taiwan
2.The VC industry has yet to recover from the global economic recession that hit in 2001. Since then, both capital raised and the number of new funds established each year have fallen while performance has also suffered. Now, five years on, new challenges have arisen for Taiwan’s VC industry to contend with.
11
2,267.29
3,215.25
3,981.60 4,169.094,703.21
5,338.055,735.69 5,884.91
397.61151.4
634.84534.12187.49766.34
947.96941.99
0
1000
2000
3000
4000
5000
6000
7000
1998 1999 2000 2001 2002 2003 2004 2005
Cumulative Capital Raised
New Capital Raised
Un
it:U
SD
$ M
illion
year
Source: Taiwan Venture Capital Association
Fig.1 Taiwan Venture Capital Industry: New Funds in Year
II. Overview of Venture Capital Investing in Taiwan
12
year
Source: Taiwan Venture Capital Association
2267.29
3,215.25
3,981.604,169.09
4,703.21
5,338.055735.69 5884.91
474.74 337.52514.19364.97253.24671.22
919.95 957.60
5508.975846.68
5,034.35
4,520.00
4,155.033,901.79
2944.2
2024.22
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1998 1999 2000 2001 2002 2003 2004 2005
(Capital)
(New Investment Amount)
(Cumulative Investment Amount)
Un
it:U
SD
$ M
illion
Fig.2 Taiwan Venture Capital Industry: amount of investment
II. Overview of Venture Capital Investing in Taiwan
13
Un
it:N
um
be
r of In
vestm
en
t
year
Source: Taiwan Venture Capital Association
2,994
4,493
6,3436,957
7,560
8,719
9,76210,295
1,063513
1,155 1,499 1,850614 603
1,159
0
2000
4000
6000
8000
10000
12000
1998 1999 2000 2001 2002 2003 2004 2005
(Cumulative Investment) (New Investment)
Fig.3 Taiwan Venture Capital Industry: number of investment
II. Overview of Venture Capital Investing in Taiwan
14
69.82
142.76
90.96
27.2038.0230.3115.5417.5374.8057.5462.58
81.73
314.30
231.14169.43
93.70100.8287.75
245.47
106.97174.15
248.11
309.23
404.58
403.27
104.67
124.82
220.10
156.74
38.61
74.18
142.04
6.81
4.820.12
8.496.59
5.16
0.40
0.25
0
200
400
600
800
1,000
1,200
1998 1999 2000 2001 2002 2003 2004 2005
Seed Start-up Expansion Mezzanine Turnaround
Source: Taiwan Venture Capital Association
Un
it:U
SD
$ m
illion
Fig.4 Taiwan Venture Capital Industry: Stages of Investment
II. Overview of Venture Capital Investing in Taiwan
15
II. Overview of Venture Capital Investing in Taiwan
952.12 21%
2034.54 45%
1148.6926%
323.527%
32.64 1%
Seed
Start-up
Expansion
Mezzanine
Turnaround
Taiwan Venture Capital Industry: Stages of Investment
Unit: USD$ million
16
37.74
18.623.0101.6
167.8
62.522.4
64.328.3
40.1360.366.26.8
125.9
126.8
110.6 69.3104.8
119.1
43.2
198.9
188.7
152.3
56.5
22.7
30.2
41.3
180.9
111.9
103.5
108.2
48.5
59.13
116.6
59.7
69.3
95.1131.2
24.9
86.4
26.74
20.5
13.06
21.7
28.0
37.6
19.9 37.9
0
200
400
600
800
1000
1998 1999 2000 2001 2002 2003 2004 2005
Information Electronics Semi-conductor Telcom Optieletrical Bio-Tech
Source: Taiwan Venture Capital Association
Un
it:U
SD
$ M
illion
Fig.5 Taiwan Venture Capital Industry: Industries of Investment
II. Overview of Venture Capital Investing in Taiwan
17
II. Overview of Venture Capital Investing in Taiwan
488.5 14%
606.0317%
901.24 26%
647.2 19%
642.3318%
205.4 6%
Information
Electronics
Semi-conductor
Telcom
Optieletrical
Bio-Tech
Taiwan Venture Capital Industry: Industries of Investment
Unit: USD$ million
18
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
New Funds 14 28 38 46 32 7 18 23 19 9
Growth Rate 133% 100.00% 35.71% 21.05% -30.43% -78.13% 157.14% 27.78% -17.40% -52.63%
14
38
46
32
7
18
2319
9
28
-52.6%
-17.4%
27.7%
157.1%
-78.1%
-30.4%
21.1%35.7%
100.0%
133.0%
0
5
10
15
20
25
30
35
40
45
50
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-100%
-50%
0%
50%
100%
150%
200%
New funds Growth rate
No. ofFunds
II. Overview of Venture Capital Investing in Taiwan
19
Unit: NT$100 millions
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Added Capital 67.57 171.71 303.01 304.93 246.51 60.31 171.81 204.21 127.90 48.7
Growth Rate 60.69% 154.12% 76.47% 0.63% -19.16% -75.53% 184.88% 18.86% -37.37% -61.9%
67.57
171.71
303.01 304.93
236.52
60.31
171.81
204.21
127.9
48.7
-74.5%
-61.9%
-37.4%
18.9%
184.9%
-22.4%
0.6%
76.5%
154.1%
60.7%
0
50
100
150
200
250
300
350
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-100%
-50%
0%
50%
100%
150%
200%
Added Capi tal Growth rate
NT$100 millions
II. Overview of Venture Capital Investing in Taiwan
20
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
No. of Investments 471 951 1155 1499 1850 614 603 1159 1063 513
Amount of Investment 88.1 176.0 215.9 295.9 308.0 81.5 117.4 165.4 152.7 108.57
Units: NT$100 millions; No. of investments
130010631159603614185014991155951471
108.57152.71165.4
117.4
81.46
308.03295.92
215.91
176
88.13
0
200
400
600
800
1000
1200
1400
1600
1800
2000
0
50
100
150
200
250
300
350
No. of i nvestment Amount of i nvestment
Num
ber
of
Inve
stm
ents
Am
ount of Investment
(NT
$100 millions)
II. Overview of Venture Capital Investing in Taiwan
21
Historical Analysis of the Earnings Status of Taiwan’s VC Investment (1990-2004)
Dividend in %
3
13.3 13.3
20.6
-0.9
15.7
0.4
3 2.5
2018.1
14.9
5.6
0.5 1.2
-5
0
5
10
15
20
25
90' 91' 92' 93' 94' 95' 96' 97' 98' 99' 00' 01' 02' 03' 04'Year
II. Overview of Venture Capital Investing in Taiwan
22
Taiwan Stock Exchange (TSE)
GreTai Securities Market (GSM/OTC)
Total
No. of companies listed 697 466 1,163
No. of VC-backed companies listed 225 171 396
VC-backed companies as ratio of all companies listed 32.28% 36.7% 34.05%
No. of new listings in 2004 38 88 126
No. of VC-backed companies newly listed in 2004 15 24 39
VC-backed companies as ratio of new listings in 2004 39.47% 27.27% 31.00%
Taiwan Stock Exchange (TSE)
GreTai Securities Market (GSM/OTC)
Total
No. of technology companies listed 309 340 649
No. of VC-backed technology companies listed 176 157 333
VC-backed technology companies as ratio of all technology companies listed 57.00% 46.00% 51.30%
No. of technology companies newly listed in 2004 28 65 93
No. of VC-backed technology companies newly listed in 2004 15 19 34
VC-backed companies as ratio of newly listed technology companies in 2004
53.57% 29.23% 36.56%
Status of Stock Listing of VC-backed Companies in Taiwan (Whole Stock Market)
Status of Stock Listing of VC-backed Companies in Taiwan (Technology Stocks)
II. Overview of Venture Capital Investing in Taiwan
23
Item No. of People
No. of persons employed in Taiwan in 2005 9,874,000
No. of persons employed by VC-backed listed companies (2004) 338,528
Persons employed by VC-backed listed companies as ratio of Taiwan’s employed population 3.43%
No. of persons employed in industry (2004) 2,865,240
Persons employed by VC-backed listed companies as ratio of Taiwan’s total industrial employment 11.81%
ItemAmount
(NT$ billions)
GDP created by VC-backed listed companies (2004) 165
Taiwan’s GDP (2004) 9,862.8
GDP created by VC-backed listed companies as ratio of Taiwan’s GDP (2004) 1.673%
Sources: Own research; DGBAS; Taiwan Economic Journal Database.
Contribution of VC Investment to Employment in Taiwan
Contribution of VC Investment to Taiwan’s GDP
II. Overview of Venture Capital Investing in Taiwan
24
1. Purpose of the Development Fund
III. The Role of the Development Fund in the Venture Capital Industry
(1)The Executive Yuan (Cabinet) Development Fund was set up in 1973 and is one of the tools for carrying out industrial policies in
Taiwan. (2) Development Fund‘s principle goals are to facilitate industrial development and to speed up the modernization of Taiwan’s industrial sector. (3) Development Fund is also intended to play a role in accelerating national economic development and strengthening national competitiveness.
25
(1) Providing funding for major enterprises or projects targeted at improving industry at the national level.
(2) Extending loans for small and medium-sized enterprises in conformity with government policies.
(3) Introducing advanced technology, strengthening research and development, enhancing manpower training, improving pollution control, and reinforcing economic development.
(4) Carrying out other missions specifically assigned or approved by the Executive Yuan.
III. The Role of the Development Fund in the Venture Capital Industry
2. The Functions of the Fund
26
3. The Development Fund’s Investment in Venture Capital Enterprises
(1)Goals
The goals of investing in venture capital enterprises are to facilitate industrial development and to speed up the modernization of Taiwan’s industrial sector as a whole. By working with venture capital firms, the Development Fund can attract more investment from private investors and thus achieve its objectives much more effectively.
III. The Role of the Development Fund in the Venture Capital Industry
27
Investment
Indirect investment
Investment
43 domestic and overseas high-tech companies
Cooperation
42 domestic VC firms
10 overseas VC firms
Overseas high-tech companies
Technology transfer
Investment
Development Fund
(Indirect investment)
Direct in
vestmen
t in lin
e w
ith p
olicy d
irection
Fund of Fund
III. The Role of the Development Fund in the Venture Capital Industry
28
Note 1: VC investment Series 1 started from Sep. 17, 1985; Series 2 started from Feb. 26, 1991; Series 3 started from Jan. 8, 1998.
Note 2: “Challenge 2008”is included in Series 3. As of the end of Dec. 31, 2005 USD$266.4 million had been approved for 26 cases.
Note 3: Number of investment showed in ().
Note 4: 6 Cases are excluded from Series 3 because of overdue applications.
Unit: U
SD
$ Million
Fig.6 Cumulative Numbers and Funds Investment in VC approved by the Development Fund
Series 1 Series 1 Series 1 Series 1 Series 1 Series 1Series 2 Series 2 Series 2 Series 2 Series 2
Series 3
Series 3
Series 3
Series 3
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990 1997 2001 2002 2003 2005
155.4(4)
78.99(44)
804.9(19)
1,401.7(26)
1,989.3(32)
2,996.5(41)466.3
(12)310.9(8)
310.9(8)
310.9(8)
310.9(8)
310.9(8)
155.4(4)
155.4(4)
155.4(4)
155.4(4)
155.4(4)
3,462.9(53)
1,868.1(38)
1,426.6(31)
III. The Role of the Development Fund in the Venture Capital Industry
29
Notel : VC investment series 1 started at 1985/9/17;series 2 started at 1991/2/26;series 3 started at 1998/1/8Note2 : numbers of investment show in ( )
Fig.7 Series of The DF Investment in VC
299.7(41)
31.1(8)
15.5(4)
346.3(53)
263.9(52)225.2
(39)
11.9(4)
26.8(8)
0
100
200
300
400
Accumulated approved investments Accumulated actual investments
series1 series3series2 total
Unit:
US
D$
Million
III. The Role of the Development Fund in the Venture Capital Industry
30
11.9
225.2
26.8
263.9 240.3
160
53.536.5
0
50
100
150
200
250
300
Initial investment cost equity owned by DF
Returned capital
Notel : VC investment series 1 started at 1985/9/17;series 2 started at 1991/2/26;series 3 started at 1998/1/8Note2 : numbers of investment show in ( )
Fig.8 The Performance of The DF Investment in VC by Series
Un
it:U
SD
$ M
illion
21.533.3
8.0
62.9
15.0 20.2
152.0187.4
series1 series2 series3 Total
III. The Role of the Development Fund in the Venture Capital Industry
31
3. The Development Fund’s Investment in Venture Capital Enterprises
(2) National Development Plan
A sum of USD$3.1 billion is to be raised from the private sector and the Development Fund on a 70/30 basis for injection into venture funds. Its purpose is to build more venture capital funds and funnel increased investment into emerging industries. This will help achieve the objectives of expediting the nation’s economic development and strengthening its competitiveness.
III. The Role of the Development Fund in the Venture Capital Industry
32
(Forecast)
Fig.9 Development Fund Investment in VC: National Development Plan
Un
it:
nu
mb
er
of
inve
stm
en
ts
Un
it:U
SD
$ M
illion
100
81
71
61
51
42
3324
158
0
300
600
900
1200
1500
1800
2100
2400
0
20
40
60
80
100
120
Cumulative Investment Amount 62 124 218 311 404 497 606 715 824 933
Cumulative Investment from Private Sector 230 407 507 724 945 1163 1414 1669 1924 2176
Number of Investment 8 15 24 33 42 51 61 71 81 100
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
III. The Role of the Development Fund in the Venture Capital Industry
33
IV. The Challenges to Taiwan’s Venture Capital Industry
1. Shortage of Capital
Venture funds’s performance has been badly affected by the generally poor economic conditions prevailing over the past several years. With less and less capital available, fund raising became more and more difficult, putting a heavy drag on venture funds’ performance. This created a vicious cycle that hamstrung the venture investing industry.
34
IV. The Challenges to Taiwan’s Venture Capital Industry
2. Shortage of Investment Cases
The main drivers responsible for the boom in the venture capital industry toward the end of the 20th century were the information technology and semiconductor industries. Both have now reached maturity and are facing their own challenges. On the other hand, the emerging industries, highly touted biotechnology and digital content industries, are still in the initial stage of development in Taiwan. So they have somewhat disappointed early investors.
35
IV. The Challenges to the Venture Capital Industry
3. Difficulties of Exit
The stock markets around the world performed poorly between 2000 and 2004. Without good opportunities for exit, money was locked in and could not be used for new investments, compounding new investors’ growing reluctance to pump in fresh funds.
36
V. Outlook and Next Steps
1.Widen the Varieties and Broaden the Scope of Venture Investment
Today, Taiwan’s rapidly growing industries are much more diversified, and the varieties of financial markets and products increase on a daily basis. Venture funds have to adjust to the times and reassess new investment strategies and directions.
37
V. Outlook and Next Steps
2. Set up a Platform for Promoting Investment Exchanges
Every year Taiwan’s government and private sector jointly holds large-scale trade shows and exhibitions for various industries, they have been used mainly as a networking forum for the industry members. An effective investment matchmaking platform needs to be very well managed and kept in focus.
38
V. Outlook and Next Steps
3. Enforce Good Corporate Governance Practices and Increase the Responsibilities of Company Directors and Supervisors
Implementing good corporate governance practices and increasing the responsibility of company directors and supervisors would go a long way in safeguarding the stock market from unexpected such shocks and restoring investor confidence.
39
V. Outlook and Next Steps
4. Expand Investment Horizons beyond Home Shores
The keys to successful globalization of VC investment are as follows:
(1) Cooperating with large-scale international venture funds.
(2) Holding or attending international venture capital events.
(3) Joining global venture capital organizations.
40
V. Outlook and Next Steps
5. Combine Smaller Entities into Bigger ones to Achieve Economy of Scale
Small and mid-sized venture funds should seek merger opportunities with larger funds in order to achieve economy of scale. Joint ventures and alliances are also ways to combine smaller players into bigger ones. Once economy of scale is achieved, good talent will come naturally, and venture funds can compete globally.
41
VI. Conclusion
1.Taiwan’s venture capital industry has developed successfully due to its close ties to the rapid rise of the domestic high-tech industry and sound government policies. However, the weakening of the global economy and an inability to adapt to changing times have put a brake on the VC industry’s development and caused it to languish in an extended period of correction.
42
VI. Conclusion
2.To break out of their current torpor, Taiwan’s venture funds need to take on new areas and markets. Moreover, venture funds need to move towards diversification and globalization, and to develop in the areas of private equity, reorganizations, and mergers and acquisitions.
3.With new directions for progress and building on its earlier success, the venture capital industry should be able to regain its former glory and shine even more brightly in the near future.