Current trends and situation of VC

Fundraising

Since 2000, the global economy has been going to a recession and domestic investor confidence has plummeted. The elimination of a 20% tax credit for shareholders of venture funds that had been in place since 1983 further exacerbated fundraising difficulties. Just seven funds were established in 2001, a 78% decline from the previous year. Between 2000 and 2004, the majority of new funds were established by financial holding companies and corporations. During this period, 60 funds with total capital under management of NT$ 16.7 billion were formed. However, the overall domestic operational environment remained poor, and only nine funds were set up in 2005, the lowest number in a decade (excluding 2001).

In 2005, a number of funds discontinued operations. Total capital under management decreased by NT$ 7.193 billion (due to either funds being discontinued or decapitalized, a 185% increase over the NT$ 3.879 billion that was decapitalized between 1984 and 2004.

Therefore, newly-raised capital fell from NT$ 12.79 billion in 2004 to NT$ 4.87 billion in 2005(1). The NT$ 4.87 billion was a ten-year low, and just 16% of 1999 levels. Clearly, the domestic venture capital industry is stagnating. If improvements don’t transpire soon, the industry might begin shrinking.

Figure 5: Newly Raised Capital and Accumulated Total Capital, 1984‐2005 

Source: TVCA (2006)

Investments

In recent years, changes in Taiwan’s industry structure have allowed many technology sectors, including electronics, information, semiconductor, opto-electronics, and telecommunications, to develop into maturity. At the same time, the poor performance of the capital market compounded by plummeting EPS in the stock market means that it is difficult for investment prices to satisfy the expectations of both buyers and sellers. These factors combined have created a shortage of suitable investment targets. Below, the overall investment environment, investments by industry, investments by region, and investments by stage in 2005 are summed up.

1. Overall Investments

Venture funds invested a total of NT$ 10.86 billion in 513 portfolio companies in 2005. Both numbers were down from 2004, during which NT$ 15.27 billion was invested in 1,063 companies. The number of investments in 2005 was a ten-year low, while the amount of

investment was the lowest since 1997 (excluding 2001). Investment activities in Taiwan decreased during 2005 due to a number of factors, such as lack of suitable investment targets, exit obstacles, and the discontinuation of funds, etc.

Figure 6: Number and Amount of Investment, 1996‐2005 

Source: TVCA (2006)

2. Investments by Industry

In 2005, the opto-electronics (17.52% of total investments amount), traditional manufacturing (17.36%), electronics (11.89%), semiconductor (11.18%), biotechnology (7.93%), telecommunications (6.72%), and information (5.52%) industries accounted for 78% of all investments. Compared with 2004 levels, investments in the opto-electronics, electronics, semiconductor, telecommunications, and digital content industries plummeted by,

Figure 7: Accumulated Venture Capital Investments by Industry & Amount of Investment, 1984‐2005 

Source: TVCA (2006)

However, investment in the traditional manufacturing, biotechnology, software, and Internet sectors were up by, respectively, 94%, 30.5%, 143.7%, and 337.3%. Sectors that venture funds have traditionally focused on in the past, such as opto-electronics, semiconductor, and electronics, have more or less reached maturity. Although these sectors continue to receive the bulk of venture fund investments, there is not much growth projected in these sectors. The domestic digital content industry, on the other hand, is still immature, small in size, and fiercely competitive. Venture funds therefore view this industry conservatively, which is reflected in the amount of investment that flows into this sector. The biotechnology, software, and Internet industries have performed poorly in the past few years. Nevertheless, despite the overall investment amount plummeting, investments in these particular industries went up in 2005, perhaps indicating that the tide is turning for these industries. Of particular note,

2005, the sector received the second highest amount of investments among all sectors, with only the opto-electronics industry receiving more. It is clear that the advantages of and opportunities available in the traditional manufacturing industry have succeeded in capturing the attention of venture investors.

3. Investments by Stage

In 2005, expansion stage companies received 42.29% total investment amount, followed by mezzanine companies (26.95%), startup companies (20.69%), seed companies (8.06%), and turnaround companies (2.02%). Compared with 2004 levels, investment amount in expansion, mezzanine, startup, and seed stage companies fell by, respectively, 41.9%, 13.1%, 14.6%, and 28.5%. Investments in turnaround companies, on the other hand, rose by 41.3%.

Figure 8: Accumulated Venture Capital Investments by Stage & Number of Investments, 1984‐2005 

Source: TVCA (2006)

In 2004 and 2005, expansion stage companies received, respectively, 51.7% and 42.29% of total investment amount. In 2004, mezzanine, startup, and turnaround stage companies received, respectively, 22.1%, 17.2%, and 1% of all investments. In 2005, investment amount

20.69%, and 2.02%. Meanwhile, investments in seed stage companies remained constant at around 8%. Venture funds continue to focus the majority of their investments in expansion stage companies. Spurred by signs that the domestic stock market is rebounding, the rates of return of mezzanine stage companies have begun climbing. Therefore, venture funds have started to increase their investments in mezzanine stage companies while at the same time considering investments in turnaround stage companies and mergers and acquisitions. In the future, the domestic venture capital industry will likely develop in the direction of the private equity sector. (TVCA, 2006)

Exits

According to Taiwan Stock Exchange Corporation (TSEC) and Over-The-Counter Market (OTC) statistics, a total of 70 companies went public in 2005, with 13 listed on TSEC and 57 on OTC. Compared with 126 IPOs in 2004, the number of IPOs in 2005 fell to 70 by 44.4%.

It was the fewest in years, and also marked the biggest year-to-year decline. Thus, venture funds’ performance and exits from investments were adversely affected. The decline can be attributed to several factors. First, in 2005, a great number of Taiwan owned enterprises chose to list on the Hong Kong Stock Exchange. Second, the Taiwan’s stock market didn’t present bullish during the year. Third, companies delayed their IPO plans due to new underwriting regulations.

Figure 9: Taiwan’s IPO Market & Exits, 2005 

Source: TVCA (2006)

In 2005, venture-backed IPOs accounted for 53.8% of all TSEC IPOs, 35.1% of all OTC IPOs, and 38.6% of all domestic IPOs. A total of 54 technology companies went public on the with 9 listed on TSE and 45 on OTC in 2005. Of the 9 TSEC IPOs, 6, or 66.7%, were venture-backed; of the 45 OTC IPOs, 17, or 37.8%, were venture-backed. From these statistics, it is clear that technology companies remain the focus of venture capitalists.

However, compared with previous years, the proportion of VCs’ investments in technology companies has fallen, while that in the traditional manufacturing and service sectors has risen.

Overall, IPO performance in 2005 was negatively affected by a spate of factors, including cross-strait instability, soaring prices of natural resources, the trend of Taiwan-based enterprises listing on the Hong Kong Stock Exchange, and new regulations related to stock underwritings. Plans for IPOs were altered and delayed time and time again as companies waited for cross-strait relations to stabilize before going public. Therefore, in the next one to two years, the number of IPOs will likely increase, which is a good news for domestic venture capital industry. (TVCA, 2006)