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    • Council for Economic Planning and Development Executive Yuan (Cabinet), R.O.C. (Taiwan) July 14, 2006 Thomas M. F. Yeh Vice Chairman 14th Conference on Pacific Basin Finance, Economics and Accounting Venture Capital Industry Development in Taiwan
    • Content
      • Introduction to Taiwan’s Venture Capital Industry
      • Overview of Venture Capital Investing in Taiwan
      • The Role of the Development Fund in the Venture Capital Industry
      • The Challenges to Taiwan’s Venture Capital Industry
      • Outlook and Next Steps
      • Conclusion
    • 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.
    • 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.
    • I. Introduction to Taiwan’s Venture Capital Industry 2. The Current Mode of Operation in Taiwan Source:Taiwan Venture Capital Association
    • II. Overview of Venture Capital Investing in Taiwan 86.15% 199 Entrusted to Management Company 100% 1.73% 12.12% Percentage 231 4 28 No. of Firms Total Entrusted to Other VC Firm Self-managed Management Mode
    • I. Introduction to Taiwan’s Venture Capital Industry: Issuance of Regulations for the Administration of Venture Capital Enterprises (MOF) 1983.11 The Development Fund and Chiao Tung Bank respectively provide NT$500 million and NT$300 million to fund the First VC Investment Program 1985.9 1991.2 Change from administration to guidance of VC industry, with issuance of Regulations on the Scope and Guidance of Venture Capital Enterprises (MOF ) 2001.6 Plans to strengthen the VC industry under the National Development Plan to be matched by establishment of an NT$100 billion VC fund (NT$30 billion public funds + NT$70 billion private funds). 2001.10 1998.1 The Development Fund funds and appoints ICBC to administer the Third VC Investment Program Repeal of the Regulations for the Administration of Venture Capital Enterprises (MOF) 2004.2 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 The first VC firm, Hong Da, is set up 1984.11 1995.3 Macronix becomes the first VC-invested company approved for type-three listing 1997.8 Hotung Venture Capital is listed in Singapore, becoming Taiwan’s first VC firm to list overseas 2001.5 The Taiwan Venture Capital Association is set up 1999.5 Seed Stage Startup Stage Expansion Stage Mature Stage The Development Fund and Chiao Tung Bank respectively provide NT$1 billion and NT$600 million to fund the Second VC Investment Program VC Developments Legal & Regulatory Revisions and Major Plans & Programs 2004.9 The Development Fund is placed under direct jurisdiction of the Executive Yuan (Cabinet). 2004.12 Executive Yuan approves placing VC industry guidance and assistance under jurisdiction of MOEA 2004.8 The Development Fund passes the Guidelines for the Review and Management of Executive Yuan Development Fund Investment in VC Enterprises No. of VC firms breaks through the two hundred mark. The investment tax credit for VC firm shareholders is cancelled. The Evolution of VC in Taiwan
    • 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).
    • 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.
    • 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.
    • II. Overview of Venture Capital Investing in Taiwan Unit : USD $ Million year Source: Taiwan Venture Capital Association Fig.1 Taiwan Venture Capital Industry: New Funds in Year
    • II. Overview of Venture Capital Investing in Taiwan year Source: Taiwan Venture Capital Association Unit : USD $ Million Fig.2 Taiwan Venture Capital Industry: amount of investment
    • II. Overview of Venture Capital Investing in Taiwan Unit : Number of Investment year Source: Taiwan Venture Capital Association Fig.3 Taiwan Venture Capital Industry: number of investment
    • II. Overview of Venture Capital Investing in Taiwan Source: Taiwan Venture Capital Association Unit : USD$ million Fig.4 Taiwan Venture Capital Industry: Stages of I nvestment
    • II. Overview of Venture Capital Investing in Taiwan Taiwan Venture Capital Industry: Stages of I nvestment Unit : USD$ million
    • II. Overview of Venture Capital Investing in Taiwan Source: Taiwan Venture Capital Association Unit : USD $ Million Fig.5 Taiwan Venture Capital Industry: Industries of I nvestment
    • II. Overview of Venture Capital Investing in Taiwan Taiwan Venture Capital Industry: Industries of I nvestment Unit : USD$ million
    • II. Overview of Venture Capital Investing in Taiwan -17.40% 19 2004 -52.63% 9 2005 27.78% 23 2003 18 7 32 46 38 28 14 New Funds 157.14% -78.13% -30.43% 21.05% 35.71% 100.00% 133% Growth Rate 2002 2001 2000 1999 1998 1997 1996 Year
    • II. Overview of Venture Capital Investing in Taiwan Unit: NT$100 millions -37.37% 127.90 2004 -61.9% 48.7 2005 18.86% 204.21 2003 184.88% -75.53% -19.16% 0.63% 76.47% 154.12% 60.69% Growth Rate 171.81 60.31 246.51 304.93 303.01 171.71 67.57 Added Capital 2002 2001 2000 1999 1998 1997 1996 Year
    • II. Overview of Venture Capital Investing in Taiwan Units: NT$100 millions; No. of investments Number of Investments Amount of Investment (NT$100 millions) 152.7 1063 2004 165.4 1159 2003 108.57 513 2005 117.4 81.5 308.0 295.9 215.9 176.0 88.1 Amount of Investment 603 614 1850 1499 1155 951 471 No. of Investments 2002 2001 2000 1999 1998 1997 1996 Year
    • Historical Analysis of the Earnings Status of Taiwan’s VC Investment (1990-2004) Dividend in % Year II. Overview of Venture Capital Investing in Taiwan
    • II. Overview of Venture Capital Investing in Taiwan 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) 31.00% 27.27% 39.47% VC-backed companies as ratio of new listings in 2004 39 24 15 No. of VC-backed companies newly listed in 2004 126 88 38 No. of new listings in 2004 34.05% 36.7% 32.28% VC-backed companies as ratio of all companies listed 396 171 225 No. of VC-backed companies listed 1,163 466 697 No. of companies listed Total GreTai Securities Market (GSM/OTC) Taiwan Stock Exchange (TSE)   36.56% 29.23% 53.57% VC-backed companies as ratio of newly listed technology companies in 2004 34 19 15 No. of VC-backed technology companies newly listed in 2004 93 65 28 No. of technology companies newly listed in 2004 51.30% 46.00% 57.00% VC-backed technology companies as ratio of all technology companies listed 333 157 176 No. of VC-backed technology companies listed 649 340 309 No. of technology companies listed Total GreTai Securities Market (GSM/OTC) Taiwan Stock Exchange (TSE)  
    • II. Overview of Venture Capital Investing in Taiwan Sources: Own research; DGBAS; Taiwan Economic Journal Database. Contribution of VC Investment to Employment in Taiwan Contribution of VC Investment to Taiwan’s GDP 11.81% Persons employed by VC-backed listed companies as ratio of Taiwan’s total industrial employment 2,865,240 No. of persons employed in industry (2004) 3.43% Persons employed by VC-backed listed companies as ratio of Taiwan’s employed population 338,528 No. of persons employed by VC-backed listed companies (2004) 9,874,000 No. of persons employed in Taiwan in 2005 No. of People Item 1.673% GDP created by VC-backed listed companies as ratio of Taiwan’s GDP (2004) 9,862.8 Taiwan’s GDP (2004) 165 GDP created by VC-backed listed companies (2004) Amount (NT$ billions) Item
    • III. The Role of the Development Fund in the Venture Capital Industry
      • 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.
    • III. The Role of the Development Fund in the Venture Capital Industry (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
      • 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
    • 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 investment in line with policy direction Fund of Fund III. The Role of the Development Fund in the Venture Capital Industry
    • Fig.6 Cumulative Numbers and Funds Investment in VC approved by the Development Fund 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$266.4 million had been approved for 26 cases. Note 3: Number of investment showed in (). Note 4: 6 Cases are excluded from Series 3 because of overdue applications. Unit: USD$ Million 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
    • III. The Role of the Development Fund in the Venture Capital Industry Notel : VC investment series 1 started at 1985/9/17;series 2 started at 1991/2/26;series 3 started at 1998/1/8 Note2 : numbers of investment show in ( ) Fig.7 Series of The DF Investment in VC series1 series3 series2 total Unit : USD$ Million
    • III. The Role of the Development Fund in the Venture Capital Industry Notel : VC investment series 1 started at 1985/9/17;series 2 started at 1991/2/26;series 3 started at 1998/1/8 Note2 : numbers of investment show in ( ) Fig.8 The Performance of The DF Investment in VC by Series Unit : USD$ Million 21.5 33.3 8.0 62.9 15.0 20.2 152.0 187.4 series1 series2 series3 Total Returned capital
      • 3. The Development Fund’s Investment in Venture Capital Enterprises
      • (2) National Development Plan
      • A sum of USD$3.1 billion is to be raised from the private sector and the Development Fund on a 70/30 basis for injection into venture funds. Its purpose is to build more venture capital funds and funnel increased investment into emerging industries. This will help achieve the objectives of expediting the nation’s economic development and strengthening its competitiveness.
      III. The Role of the Development Fund in the Venture Capital Industry
    • III. The Role of the Development Fund in the Venture Capital Industry (Forecast) Fig.9 Development Fund Investment in VC: National Development Plan Unit : number of investments Unit : USD$ Million 100 81 71 61 51 42 33 24 15 8 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
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • Thank You for Your Attention!