Taiwanese Startups: Making up for Lost Time

At a "matchmaking conference," successful business executives share their experience with local university students. Photo credit: CNA

For years, the regulatory and funding environment in Taiwan was not conducive to fostering new startup enterprises. Many would-be Taiwanese entrepreneurs headed for Silicon Valley or other locations instead. But lately the situation has changed, in part because of government recognition that Taiwan was losing economic opportunities by not doing enough to encourage entrepreneurial initiative.

Taiwan has one of the world’s largest technology industries, but has struggled to develop a vibrant startup culture. As the Internet software boom has minted new billionaires in neighbors China and South Korea, Taiwan has watched from the sidelines.

Some observers contend that Taiwan is too small to nurture many startups. An island with a population of just 23 million people, they say, lacks the massive domestic market that helps power startups in China or the United States. But South Korea – with a population of 50 million, still considered relatively small by global standards – has emerged in the past few years as one of Asia’s most dynamic startup hubs. South Korean software startups have attracted billions of dollars in investment and support from Google, for example.

A more compelling explanation for Taiwan’s startup difficulties lies in the reluctance of its tech sector, investors, and policymakers to fully embrace the Internet age. Its large hi-tech companies remain focused chiefly on contract electronics manufacturing, Taiwanese venture capitalists favor later-stage investments in hardware, and the overall regulatory approach is unfavorable for cultivating startups. In this static environment, entrepreneurship has dwindled.

Nevertheless, there are reasons for optimism. Several foreign-funded incubators have sprung up in the past few years, as have an increasing number of entrepreneurship workshops and clubs. Foreign investors say that they see good potential in Taiwan for fostering startups, even if the island is unlikely to produce another Facebook or Alibaba. In addition, the Taiwan government is moving to become more supportive of startups.

In a speech in early February to the Chinese National Association of Industry and Commerce, Premier Mao Chi-kuo stressed the importance of creating a more favorable environment for entrepreneurs, noting that the Ministry of Economic Affairs has been drafting amendments to current laws to make it easier to launch a new business. In addition, the Executive Yuan’s National Development Council (NDC) is aiming to turn Taiwan into a regional innovation hub through a three-pronged strategy of deregulating, attracting funds, and building clusters.

“The big institutional investors [mainly banks and construction companies] had greater incentives for returns when the tax credit was in effect, so they were willing to take risks on the VCs, who would then invest in startups. When the government offered perks to institutional investors to put their money in real estate instead, funding got harder for VCs – and for startups”

Vice President Wu Dun-yih (second from left) presides at a ceremony presenting cash prizes to promising young entrepreneurs
Vice President Wu Dun-yih (second from left) presides at a ceremony presenting cash prizes to promising young entrepreneurs

Of those three areas, funding may be the most urgent. Difficulty securing funding has vexed Taiwanese entrepreneurs since the end of the dot-com boom. While foreign investors are taking an increasing interest in Taiwanese startups, their local counterparts have largely shrugged. Instead of seeking opportunities to back new entrepreneurs at home, experts say, many Taiwanese venture capitalists have followed the island’s hardware manufacturers to China after raising funds offshore.

Government policy has also played a role in dampening the environment for startups – in particular the decision in 2000 to cancel a long-running 20% tax credit on investments in venture-capital funds. When the tax credit was in effect, the number of funds grew from 47 in 1996 to 170 in 2000, while accumulated capital rose from US$820 million to US$4 billion over that period, according to the Taiwan Venture Capital Association (TVCA).

But by the late 1990s, when returns on venture capital could be several hundred percent, the government felt it was no longer necessary to encourage such investments through tax credits, analysts say. As a result, it eliminated the tax credit. Also in the year 2000, the government passed the Statute for Upgrading Industries, which provided tax credits to investors in property development and “strategic industries.”

Following cancelation of the 20% tax credit to VC firms, only seven new funds with a combined capital of US$270 million were created in 2001, compared with 32 funds and about US$1 billion the previous year, according to the TVCA.

“The big institutional investors [mainly banks and construction companies] had greater incentives for returns when the tax credit was in effect, so they were willing to take risks on the VCs, who would then invest in startups,” says Lucas Wang, chief executive officer of the Taipei-based accelerator TMI Holdings. “When the government offered perks to institutional investors to put their money in real estate instead, funding got harder for VCs – and for startups.”

Following cancelation of the 20% tax credit to VC firms, only seven new funds with a combined capital of US$270 million were created in 2001, compared with 32 funds and about US$1 billion the previous year, according to the TVCA.

Jamie-lin-appworks-taiwan-accelerator
Jamie Lin, founder of AppWorks, which has graduated 190 startups and become Asia’s largest accelerator.

At about the same time, the dot-com bubble burst and Taiwanese investors suffered heavy losses. Yet as Internet startups across the world in e-commerce, search functions, and social media evolved into legitimate billion-dollar enterprises over the next decade, Taiwanese investors remained wary of them.

“During the first dot-com boom, Taiwanese investors put NT$200-300 billion into Internet companies and 99.9% of them failed,” says Jamie Lin, founder of the Taipei-based accelerator AppWorks. “Investors have bad memories of getting burned, and since the VC bosses haven’t changed, they don’t want to take the risk again.” As a result, Taiwanese investors ignored the explosive growth of Internet companies that began in the mid-2000s, Lin says, while “VCs got excited again in the U.S. in 2005-2006.”

“Taiwanese investors tend not to see value in non-capital-intensive startups – something in the medical or biotech fields is acceptable to them, but an Internet company is not.”

Taiwanese investors tend not to see value in non-capital-intensive startups, says Jeffrey Ling, Taiwan country manager of the South Korean startup Toss Lab, an enterprise messaging service. “Something in the medical or biotech fields is acceptable to them, but an Internet company is not,” he says. “A large user base means nothing to them. They ask right away: ‘have you made money?’ The answer for an Internet startup is almost certainly ‘no.’”

Foreign aid

Investors from overseas, both foreign and Taiwanese returnees, are showing considerably more interest in Taiwanese startups. Deeply familiar with Internet companies, this still small but growing group sees opportunity in the early-stage investments their domestic counterparts eschew.

Jamie Lin is one of these investors. Lin founded the AppWorks accelerator in 2010 when he returned to Taiwan from New York City, where he earned an MBA and worked for the Internet startup Social Sauce. Since its establishment, AppWorks has graduated 190 startups and become Asia’s largest accelerator, managing US$61 million in VC funds. It typically leads seed and Series-A (early-stage) rounds for its startups, investing US$100,000 to $5 million per case.

Lin says he founded AppWorks to help Taiwan strengthen its software capabilities, which have lagged behind its hardware-manufacturing prowess. But that goal has evolved into one of building up Taiwan’s capacity to be part of an integrated Internet ecosystem. “Five to ten years down the road, everything is going to be connected. Will Taiwan be part of it?” he asks. “We think the Internet is the key distribution channel for now and the future.”

For the Taiwan start-up scene to grow sustainably, Ma says that “local heroes” need to emerge. “Taiwan needs people who can be mentors for the next generation, like Jack Ma [CEO of e-commerce giant Alibaba] or Lei Jun [Xiaomi CEO].”

Jack_Ma_alibaba_taiwan_startups
Jack Ma, CEO of Chinese e-commerce giant Alibaba

AppWorks’ biggest success story so far is the online restaurant reservation system EZTABLE. The Taipei-based firm’s booking system has 150,000 monthly users, partners with 1,000 restaurants, earned US$16 million in revenue last year, and has expanded to Hong Kong, Indonesia and Thailand.

Like Lin, CEO Alex Chen studied and worked in the United States for several years. He co-founded EZTABLE upon his return to Taiwan in 2008. “People were not talking about startups in Taiwan then,” he says. “We just wanted to start a company and nobody was doing online booking for restaurants.”

Chen notes that EZTABLE’s time in AppWorks was crucial for its later success. The company was struggling when it entered AppWorks, but since graduating from the accelerator in mid-2010, revenue has grown threefold every year. “AppWorks helped us develop a better business model,” Chen says. “We added vouchers to the existing reservation service after we left AppWorks, and vouchers gave us more revenue growth.”

Silicon Valley-based 500 Startups is another early-stage seed fund and incubator program with an interest in Taiwanese startups. Among its Taiwan-based investments are the mobile multimedia messaging app Cubie, the children’s entertainment studio Roam & Wander, and BountyHunter, a crowdsourcing platform for ideas and product designs.

Those companies attracted investment from 500 Startups because they had strong user bases and a global distribution strategy, says Rui Ma, a venture partner at 500 Startups and the company’s head of Greater China investment. “We saw the companies had the ability to scale up fast because they were determined to expand outside of the small Taiwan market from the beginning.”

As the first generation of successful entrepreneurs reinvests in and founds new companies, a virtuous cycle takes hold, Ma says, noting that former Alibaba employees have created more than 130 Internet startups. One of those, the Didi Dache taxi-hailing app, has raised more than US$700 million from investors.

As an example, Ma cites Cubie, which launched in March 2012 and joined 500 Startups in October of that year. It was an early entrant in the Southeast Asia market, a strategy that helped it achieve rapid growth. Cubie now has more than 11 million users.

BountyHunter, after developing a large user base in Taiwan and becoming profitable, is now using funding from 500 Startups to expand in the United States and Thailand, Ma says. Companies using BountyHunter include Google, Microsoft, and Lexus.

For the Taiwan start-up scene to grow sustainably, Ma says that “local heroes” need to emerge. “Taiwan needs people who can be mentors for the next generation, like Jack Ma [CEO of e-commerce giant Alibaba] or Lei Jun [Xiaomi CEO].”

As the first generation of successful entrepreneurs reinvests in and founds new companies, a virtuous cycle takes hold, Ma says, noting that former Alibaba employees have created more than 130 Internet startups. One of those, the Didi Dache taxi-hailing app, has raised more than US$700 million from investors. The social shopping platform Mogujie, also founded by Alibaba alumni, received US$200 million in Series D funding in June 2014. The company is worth more than US$1 billion, analysts say.

Interestingly, Jack Ma himself weighed in on the issue of Taiwanese startups last December during the Cross-Strait CEO Summit in Taipei. In his speech, in which he noted that few new companies had been founded in Taiwan since 2000, he said he hoped to establish foundations that would help young Taiwanese entrepreneurs start new businesses in China and sell their products there.

Jack Ma’s offer has generated mixed sentiments among Taiwanese, says Wang Yi-chih, a senior industry analyst and e-commerce expert at the Taipei-based Market Intelligence & Consulting Institute (MIC). Although Alibaba’s e-commerce platform would enable Taiwanese entrepreneurs to better access China’s 600 million Internet users, with Jack Ma’s support increasing their chances of success, China’s market conditions are highly challenging, Wang says. “Almost all Taiwanese Internet startups in China over the past 10 years have collapsed due to unwritten rules and legal constraints,” he observes.

The China market is less attractive to Taiwanese – especially the nation’s youth – than it was a decade ago, says John Chen, research director at MIC and a China specialist. “The investment environment is deteriorating as economic growth slows,” he says. “Wages are higher, the cost of living is rising, and air pollution is growing.”

Meanwhile, Taiwan’s government and some companies are allocating funding of their own for startups, Chen notes. “Instead of going to China, the majority of Taiwanese entrepreneurs may rather choose to stay in Taiwan,” he adds.

With that trend in mind, the NDC is aiming to jumpstart what it sees as Taiwan’s latent entrepreneurialism by making the business environment friendlier for startups. Under its new HeadStart program, the Council is working with both foreign and local VCs to establish four US$100 million funds to finance local startup companies. The NDC will invest up to 40% of the capital in each fund. VC investors will receive as much as 80% of the profits that the funds post in the future

The state lends a hand

“With these matching funds, we can offer VCs a high return on their investments and lower the risk they face investing in early-stage companies,” says Chen Shu-chen, a senior specialist in the NDC Department of Industrial Development. “We believe this policy will also help increase the interest of domestic investors in local startups.”

In January, the NDC announced it would invest US$83 million in four different venture capital firms as part of the HeadStart program. The NDC will provide US$15 million to 500 Startups and US$30 million to a joint-venture fund run by Taiwan’s Industrial Technology Investment Corp. and the Battelle Memorial Institute, a US-based science and technology NGO.

In addition, the NDC will provide US$12 million or match 30% of limited partner (LP) contributions to AppWorks’ new fund, and US$20 million or match 30% of Translink Capital III’s upcoming fund.

“We are happy to see support for startups in terms of real money deployed from the government into companies,” says Rui Ma of 500 Startups.

Further, the NDC is pressing to amend laws seen as impeding startups from operating in Taiwan. As a result of those obstacles, many Taiwanese startups have registered in the Cayman Islands or moved to Singapore.

“These laws, which were established in the early years of the Republic of China, are interpreted very strictly,” says Wu Ja-lin, a section chief at the NDC’s Regulatory Reform Center. “The government now wants to loosen them to provide a better environment for startups in Taiwan.”

Meanwhile, the NDC is also seeking to make it easier for Taiwanese startups to change the par values of their shares, since a fixed par value reduces the potential range of return on the investment. Although Taiwanese companies no longer need to set the par values of their shares at NT$10 – the regulation was revised in December 2013 – they are still not permitted to change the par value once it has been declared.

Although Taiwanese companies no longer need to set the par values of their shares at NT$10 – the regulation was revised in December 2013 – they are still not permitted to change the par value once it has been declared.

 

Startup Cluster

Under HeadStart, the government also plans to spend more than NT$100 million to transform the Taipei Expo Park (site of the Flora Expo in 2010-2011) into a startup cluster, which it hopes will attract 100 companies a year. Clusters are important because they bring together a critical mass of interconnected firms, entrepreneurs, and expertise, analysts say. As a cluster grows, new companies, talent, and investment pour in.

The Taipei Expo Park project was inspired in part by Block 71 in Singapore, a former factory the city-state’s government refitted in 2011 as a hub for its startup community. Block 71 has been a major success, doubling from 250 startups at its debut to 500 today. Earlier this year, Block 71 expanded to San Francisco to foster closer ties between tech startup communities in Singapore and the United States.

As Taiwan fortifies its startup ecosystem, it can also learn from the experience of South Korea. Like Taiwan, South Korea has a relatively small domestic market and became a global economic power in part because of its strength as a technology hardware manufacturer. Hardware remains the bread and butter of its electronics giants LG and Samsung. But in the past few years, South Korean startups have moved into mobile gaming and social media with great success.

Kakao is the best-known example. Its KakaoTalk instant messaging service is on 93% of smartphones in South Korea, according to research firm AC Nielsen. After Kakao merged with Daum Communications in October 2014, the combined group’s market value came to US$9.45 billion, according to South Korea’s Yonhap News Agency.

The merger of Daum and Kakao turned Kakao Corp. majority owner Kim Beom-soo into a billionaire overnight. Now Kim is reinvesting that wealth into new South Korean startups through his VC firm K Cube Ventures. K Cube’s portfolio includes Frograms, maker of an online movie recommending engine, and Greenmonster, which produces the virtual scrapbook app Take Flava.

South Korea’s success with startups can be traced back to its decision after the 1997-1998 Asian financial crisis to make the Internet a strategic industry, says Lin of AppWorks. The South Korean government invested in fiber optics, built a comprehensive nationwide broadband network, and launched programs to strengthen the digital literacy of the population.

Changseong Ho, co-founder of the Viki online video subtitling service, sold that company to the Japanese e-commerce giant Rakuten in 2013 for US$200 million. Now he too is using a VC firm of his own – TheVentures – to fund early-stage software startups, including Bridge Mobile, maker of an Internet-based mobile phone call service, and Parking Square, which offers a parking-space app.

The surging South Korean startup scene is attracting international attention as well. Google will open a 20,000-square-foot center in Seoul this year to provide mentorship and increased global exposure for South Korean startups.

South Korea’s success with startups can be traced back to its decision after the 1997-1998 Asian financial crisis to make the Internet a strategic industry, says Lin of AppWorks. The South Korean government invested in fiber optics, built a comprehensive nationwide broadband network, and launched programs to strengthen the digital literacy of the population. Lin believes those policies spurred the development of Internet gaming companies, laying the foundation for the South Korean startup ecosystem.

South Korea, Lin notes, has the world’s fastest Internet connection speed and has been a leader in developing 3G and 4G technology. By contrast, Taiwan’s Internet connectivity is the 19th fastest in the world. “South Korea, like the U.S. and China, foresaw the Internet would redefine global commerce,” Lin says. “It also understood that the Internet could make a small country a bigger economic player. But Taiwan did not. Taiwan remained on the manufacturing path, and its competiveness has suffered.”

South Koreans have exported software – primarily gaming at first – for a long time and so many products are designed with a global view, says Rui Ma of 500 Startups, who formerly covered that country for the company. “South Koreans are also very aggressive in terms of regional expansion compared to Taiwanese,” she adds.

 “South Korea, like the U.S. and China, foresaw the Internet would redefine global commerce,” Lin says. “It also understood that the Internet could make a small country a bigger economic player. But Taiwan did not. Taiwan remained on the manufacturing path, and its competiveness has suffered.”

Indeed, South Korean Internet giant Naver, owner of messaging app Line, purchased the Taiwanese startup Gogolook in December 2013 for a reported US$17.29 million. Gogolook is the maker of the Whoscall app used to identify unknown callers on mobile devices. Whoscall can detect spam calls based on calling time, frequency, and other factors. When Naver bought Gogolook, Whoscall already had 1.2 million monthly users in Taiwan, Japan, and South Korea and a database of 600 million numbers.

Gogolook’s strength in data analytics made it an attractive acquisition target for Naver, analysts say. Naver is in the midst of an aggressive campaign to strengthen Line internationally as it competes against Tencent’s WeChat and WhatsApp, two other messaging apps with large user bases.

Strength in hardware

At the same time, some Taiwanese startups are building on the island’s strength as an electronics hardware maker. Taipei-based startup Joyray Technology will release an open-platform smartwatch for children this spring, which will be able to run Google’s Android or Apple’s iOS. Founder and chief executive officer Jerry Chang is a veteran of Foxconn’s smartphone business group and has enlisted the hardware manufacturing giant to produce the smartwatches.

Chang sought US$100,000 in funding from the crowdfunding platform Kickstarter and received about 85% of his target sum. He says he may seek the remainder on Indiegogo, a large global fundraising site.

But Chang has also persuaded local venture capitalists to provide early-stage funding for product development. While not disclosing the amount they invested, he did say: “These two investors share our vision and believe we can execute toward that direction. They think the smartwatch is an important new emerging product and they should be involved in it.”

Analysts expect the global wearable devices market to surge over the next few years. The U.S.-based research firm IDC reports a threefold increase last year in shipments of wearables to reach 19 million, and predicts that the figure will hit 112 million by 2018. U.K.-based Juniper Research sees the wearables market as growing even faster, forecasting that shipments will reach 27 million this year and 116 million by 2017.

Getting them young - XYZprinting's mobile 3D printing lab pays a call at an elementary school. Photo: CNA
Getting them young – XYZprinting’s mobile 3D printing lab pays a call at an elementary school. Photo: CNA

3-D printing is another new product category that offers opportunities for Taiwanese firms. And while Taiwan’s XYZprinting is not a startup in the traditional sense – its parent company is the massive electronics conglomerate New Kinpo Group, which earns billions in revenue annually – it nonetheless launched the world’s first all-in-one 3D printer and scanner in October 2014. The printer takes from a few minutes to a several hours to scan an object, depending on the size. It also comes with free software, both to scan the object and to adjust the size and color and print it.

XYZprinting was founded in 2013 and is currently the world’s second-largest maker of 3D printers after the U.S.’s Makerbot. XYZprinting is expected to ship more than 100,000 3D printers globally in 2015, up from about 30,000 units last year.

“Integrating hardware and software is the way forward for Taiwan,” says James Hill, curator of the newsletter Startup Digest in Taipei and former business development manager of Cubie. “Startups should take advantage of Taiwan’s hardware manufacturing capabilities, which are some of the best in the world, just as London is using its strength as a global financial center to become a hub for fintech” – applying technology to financial services to create new business models, such as mobile payment systems.

In another positive development, online booking provider EZTABLE announced in January it had raised US$5 million from local venture capital funds CMC Capital and Hsun Chieh Capital, backed by semiconductor giants MediaTek and United Microelectronics Corp. (UMC), respectively. When asked how EZTABLE was able to attract funding from Taiwanese investors typically averse to Internet companies, EZTABLE chief executive Alex Chen replied: “Investors like a benchmark. We told them we wanted to be the OpenTable of Asia. They realized that someone else had already had great success with the online restaurant reservation model, so we seemed less risky to them.”

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