For startups, it’s a great time to consider Taiwan as the country redoubles its efforts to kick-start a startup ecosystem. Following Google’s latest US$851 million investment in a Taiwan-based data centre, the island’s attractions have become an open secret in terms of its location, low operating expenses, and world-class IT talent. As an entrepreneur, though, you might not know its ultimate enticement for a growing business like yours.
Specifically, eligible companies and subsidiaries may receive initial funding up to NT$20 million (US$650,000) followed by NT$100 million (US$3.3 million) in subsequent rounds, courtesy of the government’s new direct investment program for startups—and this is not limited to Taiwanese founders.
If you have substantial markets in the Asia Pacific or are thinking of setting up an operational centre in the region, Taiwan’s National Development Fund (NDF) is now offering a lucrative reason for you to follow Google’s lead and set up shop in the country.
First, a bit of history
To understand this program and why it may be a good fit for your business, it helps to know what the NDF is and how it has been fine-tuning its approach over the years. As the investment arm of the state-level National Development Council, the NDF has tried various means to foster a supportive local startup environment.
This included an NT$100 million grant program introduced in 2013, an entrepreneur visa program introduced in 2015, and investing its own funds directly and via local accelerators and other venture capital partners.
As earnest as these initiatives have been, they’ve had mixed success to date. The NDF’s previous grant program carried repayment obligations whose terms could be seen as unclear, entrepreneur visas had few takers at first, and the local startup scene was still hobbled by a lack of engaged angel investors.
Also Read: What is the state of Taiwan’s AI ecosystem?
Critically, a lack of good exits and quality startups have been cited as reasons for early-round investor reluctance. As it faces an increasingly tight race with top innovation hubs in Hong Kong, Japan, and Shenzhen, the NDF is strongly motivated to adopt a bolder stance.
A new approach, with plenty of money to go around.
And bold it has been, formulating no less than a “version 2.0” initiative to help startups. The NDF may now invest up to NT$20 million in any new startup versus a prior ceiling of NT$5 million, thereby emphasizing an equity stake rather than a grant that must be repaid.
Moreover, criteria for investment have been loosened in that the NDF no longer expects a one-for-one match in putting up its own money vs. other shareholders.
The main requirement continues to be that the fund invests on the same terms as the company’s other investors. This also holds true for subsequent rounds of funding, where the NDF may invest up to NT$100 million of its pro-rata shares on the same terms as other participants.
It’s still highly suggested that a firm have its own capital sources lined up, of course, but the pressure of seeking out an exactly corresponding dollar amount has been relieved.
The administrative process has also been streamlined, as applicants need only gain approval from half of the review board instead of two-thirds as was the case before. So long as they are recognized members of the investment community, the other investors can be based overseas as well (except mainland China).
The NDF has also made it easier to buy out its stake once a business gets off the ground. Angel investors and new startup owners may now repurchase NDF shares at 1.5 times the original price, down from 3.0 times previously.
With the cost of buying out the government’s stake effectively halved, early investors are incentivized with a call option—a potentially lucrative prospect as a successful startup approaches an exit with a much higher valuation for the same shares.
The overall program has also been expanded to NT$2 billion (nearly US$66 million, doubled from last year). As of now, 57 companies have received a total of around NT$760 million in funding, meaning NT$1.2 billion (US$40m) remains available. The fund is committed to fully invest this amount—so there’s still plenty of money to go around.
What this means for overseas entrepreneurs
In their quest to invigorate Taiwan’s startup space, officials understand that success will depend on much more than taxpayer dollars. Such money means nothing without worthwhile investments, and authorities are determined to welcome ideas and talent from abroad while better cultivating them at home.
Broadly speaking, initiatives like the “Employment Gold Card” as well as tax and retirement benefits for foreign professionals all show the seriousness of Taiwan’s efforts in the past few years.
Regarding the NDF’s expanded angel investment program, foreigners are by no means excluded here either. The fund’s litmus test for foreign companies and entrepreneurs would be the establishment of a Taiwan subsidiary with operations within its borders (i.e., not a branch office or representative office).
Meeting that criteria, the NDF is open to investing and routinely invests in offshore domiciled companies; this contrasts with other well-known national funds like Singapore’s.
It may sound daunting, but the process of setting up a subsidiary in Taiwan can actually be quite straightforward and 100 per cent foreign ownership is allowed (again, except for mainland Chinese entities).
One hurdle is that it can be difficult to find English-language information online, though this too is changing (e.g., see this handy checklist for incorporating in Taiwan). While regulations may seem exacting in places, they can be navigated, and authorities are progressively cutting red tape to make the process easier and more accessible for foreign investors.
Judging if this program is a good fit for your business
Foreign-domiciled startups can benefit from liberalized government investment in Taiwan, after carefully assessing their own needs and situations.
Practically speaking, the NDF investment may be a worthy consideration for a) bootstrapped entrepreneurs or b) seed stage to pre-A start-ups, companies that can benefit from an additional investment of US$100,000 and US$650,000 (i.e., up to the ceiling for initial NDF investment under the current setup).
For foreign start-ups and entrepreneurs, setting up in Taiwan makes the most sense if there is an organic reason to do so, e.g. accessing Taiwan’s market or establishing a human resource hub in the country.
Naturally, the additional overhead will arise due to doing business in multiple markets and the usual caveats would apply regarding business risk, currency risk, political risk and so on.
Lastly, there are nuances of the NDF program that is not fully covered by this article and all final decisions rest with the fund and its designated administrators.
However, while the requirements for the NDF investment scheme are dynamic and constantly changing, it is fair to say that it is evolving towards a more entrepreneurial friendly format.
This article was first published on e27, on Nov. 23, 2019.