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In recent years, Taiwan's startup environment has become increasingly complex and challenging due to uneven resource distribution and shifts in the capital market. Effectively increasing hit rate and return on investment (ROI) has become a paramount concern. A new type of venture capital has emerged in response to these challenges, aiming to elevate overall value through three core strategies and foster a positive cycle in the startup industry. This article is going to introduce these innovative approaches to venture capital in Taiwan.
Key Challenges in Taiwan's Startup Environment and Venture Capital
Partnerships of Startup, Enterprise, and Venture Capital
How Can New Innovative Venture Capital Increase Hit Rate and Returns?
Key Challenges in Taiwan's Startup Environment and Venture Capital
According to the survey from Small and Medium Enterprise and Startup Administration of, Ministry of Economic Affairs, the failure rate for general public startups is as high as 90% within the first year. Among the surviving 10%, 90% face closure within five years. In other words, each year, 99% of newly established companies are projected to close within five years, leaving only 1% in operation. The annual number of newly established small and medium-sized enterprises (SMEs) is around 10-11 thousand, with a total of approximately 636,648 companies over the past six years (2017-2022). However, out of these six hundred thousand companies, only around 2,000 have successfully raised fund from venture capital. Moreover, there are only 155 cases publicly listed in Taiwan's stock market (Note 1). In other words, the successful rate from startup to IPO is 0.24%. Assuming returns from post-IPO are all positive (although not always true), the venture capital’s hit rate is around 7-8%. Therefore, achieving successful exits with reasonable expected returns is becoming a challenging task for venture capitalists in Taiwan.
Taking recent listed companies as an example, if we compare their post-IPO market capitalization with the valuations of Series A and Series B, the average return on investment for venture capitalists is approximately 9-10x and 3-4x, respectively. Nevertheless, these returns are not common cases in Taiwan. In Silicon Valley, early investors often have returns ranging from tens to even hundreds of times from unicorns with strong competitive advantages. Venture capitalists can achieve the expected returns of the entire fund through a very small number of successful cases in Silicon Valley, a reality that Taiwan's venture capitalists cannot replicate.
With approximately 7.7% hit rate, if Taiwan’s venture capitalists just source deals and invest, finding a startup with IPO potential is as hard as winning the lottery. Even if a suitable startup is identified and invested, valuation of startups is often excessively inflated because of market size and funding. After a successful IPO, final return may not meet initial expectations.
In summary, Increase Hit Rate and Returns effectively has become a critical challenge for the majority of venture capitalist in Taiwan.
Partnerships of Startup, Enterprise, and Venture Capital
The majority of companies in Taiwan wants to achieve digital transformation. However, because of various factors, only a small portion of companies have successfully made it. Thus, more and more enterprises are looking for new collaboration opportunities through investment. According to "2022 Taiwan Startup Investment Trends Annual Report" by FINIT, approximately 61% of companies or corporate ventures are involved in startup investments, constituting the largest proportion among investors.
While collaboration between startups and enterprises is inherently mutually beneficial, significant cultural differences pose a major challenge. It is common for startups to lose flexibility by implementing rules and regulations from enterprises because of investment. Given that enterprises have their own core business, often different from developmental goals, cultures, and perspectives of startups, it is pretty hard for them to build up relationships smoothly. Thus, a suitable venture capital intermediary that understands both sides can play a crucial role. Such an intermediary can bridge the gap and effectively leverage the advantages of all three parties—technology, funding, and resources—to significantly increase the success rate of startups. In essence, a great venture capital aims to establish a partnership among startup teams, enterprises, and venture capital.
For enterprises, they can collaborate with elite startups with strong potential filtered by venture capitalists. This collaboration facilitates quick access to the benefits of cutting-edge technology and rapid testing and verification of business ideas, possibly even participating in investment opportunities. For startups, this collaboration goes beyond securing the necessary funds for development. It involves tapping into business opportunities and resources from enterprises, allowing startups to development rapidly while retain ownerships. Ultimately, the synergistic combination of all three parties enables startups to swiftly develop and increase their value. Partnership of startups, enterprises, and venture capital provides a win-win ecosystem, leading more fund and resources join the ecosystem in the future. This holistic approach is crucial for fostering a positive cycle in the startup industry, empowering the younger talents, and leading Taiwan towards further growth.
How Can New Innovative Venture Capital Increase Hit Rate and Returns?
There are three key factors to increase hit rate and returns: "First-Person Perspective," "In-Depth Industry Understanding Leading to Executable Strategies," and "Industry Key Resources."
In response to changing environments, some new types of venture capital have emerged in recent years. These funds not only go through the typical pre-investment processes of deal sourcing and due diligence but also prefer to invest more time and resources in post-investment management. After investing, instead of criticizing and blaming startups, they approach it from the "first-person perspective" of entrepreneurial partners. They accompany startup team by facing difficulties together and growing up step by step.
The second key factor is "In-Depth Industry Understanding Leading to Executable Strategies." While everyone can purpose strategies, finding the right strategy for a startup at a particular stage is invaluable. This involves not only financial models but also considering various factors such as market size, business model, team, compatibility with external resources, and the capital market. Deep understanding of industry is essential to provide practical and executable strategic recommendations. Although crafting such important strategies might seem like the job of founders, they are the first time to startup a company without experience. In such cases, having a trusted partner with practical advice for collaborative discussions can reduce the possibility of failure.
The final key focus is on "Industry Key Resources." For startups, besides good strategies and funds from venture capitalists, they also need to execute plan efficiently. Industry key resources become the crucial factor for accelerating growth. Different industries and companies have varied requirements for key resources. Once the right resources are identified, startups can expedite the company's growth.
Venture+ is one of the aforementioned new types of venture capital. It does not invest in short-term, Pre-IPO projects but primarily focuses on Pre-A, Series A, and Series B. Their partners have an average of over 25 years of experience in the hardware, software, and investment. They excel in adopting a first-person perspective, serving as Co-founding Partners who work collaboratively with the team to analyze operational structures using scientific and data-driven methods. This involves adjusting key strategies such as market/product positioning and business models to enhance operational efficiency. Simultaneously, they bring in external key corporate resources to assist startups in altering their existing growth trajectories.