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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.
References
1.
The idea of ‘Bay-to-Bay‘ comes from: (1) the Chinese meaning of the second word
Taiwan is “bay” and (2) the region of Silicon Valley is surrounded by the San
Francisco Bay.
2.
Michael J. Mandel ‘The new economy‘, Business Week, Jan. 31, 2000, pp.73-77.
3.
Becker, R. and Hellman T. ‘The Attempted Genesis of Venture Capital in Germany‘
Unpublished draft, Stanford Graduate School of Business, June 17, 1999.
4.
Data from website of the Taiwan Venture Capital Association, http://www.tvca.org.tw/p12-1.htm
The number was calculated based on the exchange rate, US: NT = 1 : 30.8.
5.
Saxenian, A. (1999) ‘The Silicon Valley - Hsinchu Connection: Technical communities
and industrial upgrading‘, SIEPR Discussion Paper No. 99-10, Stanford Institute
of Economic Policy Research, September.
6.
The Statute for Encouragement of Investment: 1961-1990, Ministry of Finance,
Government of Taiwan, ROC (1992.)
7.
‘The Interview with Finance Minister, Mr. Li-The Hsu‘, Common Wealth,
November 1, 1983, pp.22-24.
8.
Li, C.Y., ‘The Research of the Evaluation Model of Taiwan Venture Capital Firms‘,
MBA Thesis, National Chengchi University, 1992.
9.
‘The Interview with Finance Minister, Mr. Li-The Hsu‘, Common Wealth,
November 1, 1983, pp.22-24.
10. Saxenian, op.cit.
11. ‘The Interview with
Finance Minister, Mr. Li-The Hsu‘, Common Wealth, November 1, 1983,
pp.22-24.
12. ‘The Interview
with K.T. Li‘, Common Wealth, March 1, 1985, pp.28-31.
13. Venture Capital in
Taiwan, 1998 Edition, Taiwan Venture Capital Association, 1999.
14. There are three different
categories of stocks in the Taiwan Stock Exchange Market. The requirements of
profit capability and stock distribution for a company‘s stock to be listed
as the first and second categories are very strict. However, to promote high-tech
industry, the government defined the third category stock for high-tech industry
and set up a special evaluation standard by considering the special industrial
properties (e.g., shorter product life cycle, higher investment size, and higher
investment risk, etc.) which cause difficulties achieving the required profit
performance and distribution of stocks.
15. ‘The Interview
with Finance Minister, Mr. Li-The Hsu, op.cit.
16. http://www.tvca.org.tw/p12-1.htm.
17. Saxenian, op.cit.
18. Tseng, I., ‘The Discussion
of the Development of Venture Capital Businesses‘, The Monthly Journal of
Taiwan Economic Research, Vol.21, No.1, January 1998.
19. Venture Capital in
Taiwan, 1998 Edition, Taiwan Venture Capital Association, 1999.
20. ‘The High-tech
Industry Created Their World through Venture Capital‘, Common Wealth,
September 1, 1996, pp.102-108.
21. ‘Macronix Challenge
the Economic Recession against the Trend‘, Common Wealth, October 1,
1996, pp.126-131.
22. Hellman, T., (1998)
‘WI Harper International: Bridge between Silicon Valley and Asia‘, Graduate
School of Business, Stanford University, SM-39.
23. Hellman, op.cit.
24. Over the Counter (OTC)
is the exchange market for third category stock that the real capital of the
issued company is at least NT $50 million or US $ 1.67 million and the number
of shareholders with shares between 1000 and 50,000 is greater than 300.
25. ‘UMAX‘s Close
Threat to Acer‘, Common Wealth, June 5, 1997, pp.80-82.
26. Saxenian, op.cit.
27. ‘The Dragon Head of
Paper Industry Aggressively Create High-tech Land‘, Common Wealth, April
1, 1994, pp.174-186.
28. ‘Venture Capital
Firm: Direct the Corporate Advantages‘, Common Wealth, June 1, 1995,
pp.221-224.
29. ‘Venture Capital
and High-tech Fly Together‘, Common Wealth, September 1, 1997, pp.80-92.
30. Benny Hu Interview by
author, November 1st, 1999, Taipei.
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:
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