Taiwan VC: Captive element

Starting a software company is relatively simple and cost-effective, but scaling up can be much more of a challenge. AirSig, a Taiwan-based mobile authentication app that launched in June of last year, is currently facing this very issue.

Its main product, Air Signature, allows users to unlock devices - such as mobile phones - by writing their signature in the air. The technology can also be used in a wide range of hardware devices, such as smart home systems or private cars. Three months ago, AirSig received $2 million in Series A funding from Taiwan electronics giant Foxconn Technology Group.

"Capital isn't our main concern. The key consideration is how we set up alliance with a large corporation that is using our technology. Foxconn is well-established in the global market, so it could help us expand overseas quickly," says Moss Chuang, technical director of AirSig.

Foxconn is one of numerous traditional hardware players seeking solutions to make their businesses more internet-related. With independent venture capital funding stagnant in Taiwan over the last few years could corporate VC play step into the breach?

"It's a transition time, which requires corporates and start-ups to explore what tech applications are going to be like in 2-3 years," says Joseph Chan, a partner with incubator appWorks. "In the past, corporates mainly invested in their own supply chains. Now they are thinking about how to integrate technology into their hardware to meet consumer demand."

Growth momentum

Go back 10 years and VC funding was readily available in Taiwan from multiple sources. Large PC makers such as Acer were actively investing so independent VC players were willing to do the same, backing a string of local start-ups. But when the world moved on to internet technology, Taiwan's start-ups got left behind. The VC firms followed the innovation, entering China and Southeast Asia.

"Funding has dried up in Taiwan in recent years. There is still some early-stage VC investment but most of it is capital-intensive, targeting areas such as biotech. Those investors are more familiar with traditional businesses like semiconductors and PCs. They are less familiar with internet innovation, so they won't put any capital into those kinds of start-ups," says Lucas Wang, CEO of TMI, a Taiwan-based angel investor group.

Corporates are already filling the gap. Two months ago, Acer established a NT$1 billion ($34 million) VC fund - Acer Venture Capital Fund - to invest in start-ups. The corporate investment arm will help speed up Acer's cloud-computing strategy for Acer. Although the new fund has yet to make any investments, Acer has formed partnerships with incubators and accelerators - including appWorks - to promote start-up using its existing resources and technology.

According to industry participants, a number of other listed technology firms have followed suit, including Asus. At the same time, a number of key shareholders in listed companies are making angel investments. Momentum is picking up, to the point that corporates are now a meaningful source of Series A funding.

"We have got a lot of good start-ups, but we haven't established an ecosystem from the funding side, which means we only have early investment at this stage. Moving forward, I think we still lack Series A investors. But we do see corporates doing early-stage investments. A couple of local VCs are also starting to do later stage of investments in internet companies," says TMI's Wang. ‘I think the whole environment is changing in a practical way, but it's very slow."

Government action

It remains to be seen whether corporates can be a sustainable source of capital for local start-ups. The check sizes are relatively small and the investments are strategic in nature, which means the money could equally well go overseas in search of technology to support the parent's expansion plans. As a result, the government is also trying to reboot the start-up ecosystem.

Last month, the $10 billion National Development Fund (NDF) initiated a new program to attract international VCs to invest in Taiwanese start-ups and also help local companies expand into overseas markets. Any foreign VC firm with a presence in Taiwan could feasibly receive a grant equivalent to 40% of the total fund size. However, all the capital must be invested in local early-stage firms. The NDF has also introduced other measures designed to reduce the bureaucratic and economic burden on start-ups.

Local industry participants identify IPO deregulation as another potentially useful move. At present, listing applicants must have a track record of profitability, but this can be a big ask for a start-up in expansion mode. The regulator occasionally makes exceptions but the approval process is long and uncertain. VC firms are put off by the lack of liquidity.

"The technology industry doesn't lack capital," says appWorks' Chan. "The main issue lies with liquidity as every investor wants to realize their investments. Government funding is an encouraging move, but it would also be helpful if the government allowed companies that have yet to post a profit to go for IPOs."

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• Topics
• Greater China
• Venture
• Early-stage
• China
• Taiwan (China)
• Venture