Taiwan regulation: Forward views, sideways moves

Efficiency is not as hardwired into the political world as it is in business. So when emerging venture ecosystems like Taiwan call out for government assistance, it may come as little surprise that the well-meaning responses often fall short of expectations.

In a climate of renewed urgency to transition to a more modernized, digital economy, Taiwan's Financial Supervisory Commission (FSC) has pushed through new guidelines aimed at allowing local venture capital firms to pursue onshore IPOs. Although the plan represents a positive step in a slow deregulation process, it is not expected to make a significant impact due to more intrinsic issues in the government's stewardship of the industry.

Along with the general requirements that apply to all listing applicants, the FSC is imposing five additional criteria on VCs hoping to go public. These include government approval for every investment made - which may not exceed a 20% equity stake - as well as a NT$2 billion ($63 million) threshold for paid-in capital. There are some 200 firms in the Taiwan Venture Capital Association, but only about 10 are expected to be able to meet these listing requirements.

Communication problems

Such inhibitors reflect a policy environment where even deregulation attempts appear internally hamstrung and bureaucratic. Further, the presumed goal of jumpstarting local VC fundraising is often seen as unnecessary compared to broader systemic problems, including policies that limit start-up creation opportunity and irregular government relations with emerging industries.

"Availability of private capital is not a problem. The problem is it needs to be channeled into fast-growing industries like e-commerce; the problem is that understanding," says Joseph Chan, a partner at Taipei-based accelerator and VC firm AppWorks. "In the past, the government dealt with manufacturing industries and understood them. But there isn't a very good comprehension of Taiwan's new digital economy."

Since the start of the internet era Taiwan has emerged as Asia's fifth largest economy on the back of a strong focus on IT hardware manufacturing. Electronic appliances such as smart phones typically account for about half of all exports at a value of around $150 billion a year.

Recent efforts to offset this lack of diversity have failed to translate into a concerted push to foster an ecosystem of next-generation start-ups. AVCJ Research's data reveal a muted and erratic early-stage VC investment environment in recent years, peaking at a subdued $66.3 million in 2013 across 11 disclosed deals after falling as low as $6.6 million across three disclosed deals in 2012.

The notion that this stagnancy is due largely to a communication gap between government and start-ups is catching on. Last month, Taipei lent an ear to the industry with the nomination of a new digital minister, Apple consultant, entrepreneur and self-described "civic hacker" Audrey Tang. "I plan to introduce key elements from the open multi-stakeholder governance model as practiced by large-scale open source projects and international communities," she says, regarding intentions to facilitate exchanges between the government and emerging internet-enabled industries.

At 35, Tang is set to be the youngest member of Taiwan's cabinet and the first tasked with IT sector advisory duties such as helping develop the Asian Silicon Valley project, a proposed technology park in the country's northwest. "I think it's an acknowledgment that digital policy is - almost by definition - a cross-ministry issue that would call for such a position," she says.

Asian Silicon Valley, however, has been widely criticized as another example of good government intentions with underwhelming prospects for practical ecosystem development. The site is expected to focus on the factory and supply chain applications of internet-of-things technologies, leaving little room for comparison with its diversified Californian namesake.

"The policymakers' idea of innovation is stuck on creating more hardware, infrastructure and manufacturing versus really participating in the knowledge economy," says Rui Ma, a Greater China partner at 500 Startups. "There are certain policymakers in Taiwan who take a much more progressive view on how to create innovation, but those people aren't in the majority."

Hearts and minds

This culturally entrenched risk wariness can be problematic at both government and industry levels. Local VC firms are typically characterized as demanding onerous terms, difficult liquidation preferences and control measures that result in entrepreneurs giving up control of their companies in early rounds. Efforts to bring in more progressive views have notably included the various international cross-pollinations of state-backed vehicles like the National Development Fund, which sponsors foreign VCs willing to set up an office in Taiwan.

Nevertheless, cross-border firms taking a new interest in local start-ups continue to face red tape roadblocks, particularly at the seed level, where inflexibility in company structures makes it difficult to implement a lighter range of deals.

"Because of the legal paperwork and overhead, it doesn't make sense for investors to invest small amounts of money," Ma adds. "There is generally more acceptance of start-ups and entrepreneurialism, but for ecosystems like in mainland China or Silicon Valley, you really need local capital, and that hasn't really happened yet in Taiwan. It's okay to rely on international firms to go over there, but Taiwan is not going to be a core part of those firms' business."

For now, establishing a local investor base with the risk appetite to truly embrace seed-level companies in emerging technologies remains dependent on growing a start-up ecosystem through attracting foreign talent. AppWorks' Chan sees real traction on this front with the recent launch of an entrepreneur visa program, but notes that there are still regulatory headwinds for foreign university students who are looking to make their stand in Taiwan.

"There has been some deregulation and marginal progress, but we need more and we need it to be faster and executed properly," he says. "With the immigration rules now, it's pretty hard for these new overseas graduates to stay in Taiwan with a working visa - and we need them to stay."

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• Topics
• Greater China
• Technology
• Regulation
• Early-stage
• Venture
• Taiwan (China)
• Venture
• TMT
• 500 Startups