Council for Economic Planning and Development Executive Yuan (Cabinet), R.O.C. (Taiwan)

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


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


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


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%


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


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


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


12

year


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


13

Un

it：N

um

be

r of In

vestm

en

t

year


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


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


Un

it：U

SD

$ m

illion

Fig.4 Taiwan Venture Capital Industry: Stages of Investment


15


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


Un

it：U

SD

$ M

illion

Fig.5 Taiwan Venture Capital Industry: Industries of Investment


17


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


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


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)


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


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)


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


24

1. Purpose of the Development Fund


(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.


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.


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


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)


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


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


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.


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


33


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


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


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


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


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


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


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.

43

Thank You for Your Attention!

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