The startup ecosystem has blossomed over the past three years. To accelerate its growth, additional regulatory overhaul is needed.

The Taiwanese government has vowed to create a homegrown private company worth US$1 billion or more in the next two years. Known as “unicorns” in tech lingo, these firms are the most celebrated startups in their respective markets.

The world’s largest unicorns are in the United States and China. Ride-hailing icon Uber, valued at US$69 billion, is one, and home-sharing giant Airbnb (worth US$31 billion) is another. China’s leading unicorns are smartphone upstart Xiaomi (US$65-70 billion) and Didi Chuxing (US$50 billion), a ride-hailing juggernaut with Chinese characteristics.

The massive size of the U.S. and Chinese domestic markets provide an ideal testing ground for startups. U.S. and Chinese startups don’t need to worry about going global right away because they can first achieve economies of scale at home.

That’s not the case in Taiwan. The island’s tech-savvy population does offer an excellent starting point for early-stage companies, but the local market is too small for them to gain much traction.

That doesn’t mean Taiwan can’t foster unicorns here, though. The government’s goal is attainable, says Jamie Lin, co-founder of the Taipei-based accelerator AppWorks and an expert on startups. “The government has figured out a way to listen to what businesses want and incorporate it into actual policy,” he says, pointing to the recent relaxation of start-up funding restrictions, the decision to allow startups to issue shares at a low par value (giving startup owners more control over their firms), and expected IPO reform that could pave the way for companies to list on local stock exchanges without first proving profitability.

Eliminating the requirement to prove profitability before going public would be a boon for Taiwan’s startup ecosystem. If private investors know that startups have a more seamless path to an IPO here in Taiwan, they will be more willing to invest in them at an early stage. And it’s much easier to become a unicorn if investors believe you have a clear path to going public.

The profitability requirement is a remnant from an era when tech startups were mostly hardware makers who sought to list at a later stage of their development. Today’s Taiwanese startups are typically software companies without many physical assets.

Some observers have concluded that Taiwan’s small size could make it difficult to create a unicorn here. To be sure, most of Asia’s unicorns hail from the immense China market. But tiny Singapore has GrabTaxi, a local version of Uber valued at US$6 billion. GrabTaxi is in the midst of taking over Uber’s Southeast Asia operations for an undisclosed sum. GrabTaxi battled Uber across Southeast Asia for five years before the American company conceded defeat, agreeing to take a 27% stake in GrabTaxi while withdrawing from the region.

“If GrabTaxi can beat Uber, Taiwanese startups can beat tech giants too,” says Lin. He says that GrabTaxi’s triumph illustrates the importance of building unicorn companies. “It’s invaluable as an inspiration to a future generation of entrepreneurs,” he says.

Internationalizing

Taiwan startups are increasingly expanding abroad. That’s good news for the startup ecosystem, as the domestic market provides limited growth opportunities. But an equally important step needs to be taken: Taiwan must attract foreign investment and talent in startups.

Taiwan’s FDI has been anemic for years. Last year’s US$11 billion was the highest since 2007, when that figure was US$15 billion. By comparison, the other former Asian tigers are major FDI recipients. South Korea attracted a record high of almost US$23 billion in FDI last year. Singapore managed to get US$58 billion. Hong Kong brought in a whopping US$85 billion.

For local startups, “getting access to funding at different stages remains a significant challenge,” says National Development Council Minister Chen Mei-ling. “Young startups may struggle to grow because they cannot secure early-stage investment, while successful startups looking for exit channels face many restrictions.”

She points out that the Legislative Yuan last November passed an amendment to the Act for Industrial Innovation that allows for angel investors (early-stage investors in startups) who invest more than NT$1 million in an individual startup to receive tax deductions of up to NT$3 million (US$99,430).

That perk could prove attractive to both domestic and global investors. But international investors tend to better understand the process of investing in early-stage tech startups. 500 Startups, a California-based early-stage venture fund and seed accelerator, was actively involved in the local startup scene for several years. But its activity here has tapered off since former Greater China head Rui Ma resigned in December 2016. An avid booster of Taiwanese startups, Ma visited Taiwan several times a year in her former role at 500 Startups.

In contrast, local investors hesitate to back software companies. “It’s gotten to the point that I know exactly how local investors will say ‘no’ before they say it,” says Joey Chung, co-founder of the media startup The News Lens. “First, junior analysts from the potential investor say they’re excited about investing because they’re familiar with our product. Then they disappear for three weeks. Finally, they contact me and say their company won’t invest because the leadership – usually people 50 or older – can’t understand what our product is and how to value it.”

That type of thinking, Chung adds, “is all about being risk averse and wanting to protect your downside.” As a result, growth of early-stage companies is constrained in Taiwan.

Similarly, a lack of international talent in the Taiwanese startup scene is problematic, especially because most of Taiwan’s startups must expand globally to survive. To attract foreign talent, Taiwan last October passed an Act for the Recruitment and Employment of Foreign Professionals. The Act, which took effect in February, incentivizes foreign professionals to work in Taiwan by cutting red tape and offering various perks, such as tax and retirement benefits, as well as an Employment Gold Card that provides qualifying foreigners with greater employment flexibility.

“The Act aims to make Taiwan an attractive destination for foreign professionals, who can help strengthen the startup ecosystem,” Minister Chen says.

At the same time, Taiwan needs to attract some of its top tech entrepreneurs overseas to return home. Some of them, like YouTube founder Steve Chen, are heavyweights in the global tech community. There are thousands of talented Taiwanese software engineers working in Silicon Valley too. Their programming expertise could make a big difference here.

Successful businesspeople like YouTube’s Chen can serve as mentors to the startup community, “inspiring the next generation of entrepreneurs,” as AppWorks’ Lin says.  It’s one thing for Chen to be known as a successful Taiwanese entrepreneur based in Silicon Valley. It’s another for him to be on the ground in Taiwan, working in an office with local staff and appearing at events for the startup community. Based here, he and others like him could directly spur the healthy development of Taiwan’s startup ecosystem.

Overall, the government is optimistic about the future of startups in Taiwan, Minister Chen says. “Startups not only can help activate Taiwan’s industrial transformation, they can also offer dynamic career opportunities for our youth,” she says. “We must show young people that they can have a bright future here in Taiwan.”