Nasdaq and the American Electronics Association (AEA) last week published a report on US high tech exports to markets around the world. One of the names making repeated appearances in the report's various cross-sections is Taiwan. This island, a former Chinese possession, which is conspicuous for its democracy and the world's largest cash supplies - $100 billion - is the ninth largest market in the world for US high tech products, just before Israel.
Attention, therefore, is now directed towards Taiwan. This is an excellent time to examine a special venture capital fund, which has been quietly operating in Israel for the past three years - KMT. This is the economic arm of the Kuomintang, which until two weeks ago was the ruling political party in Taiwan. KMT owns seven subsidiaries, with holdings around the world in various fields, from high tech and communications to real estate. The Kuomintang is no longer in power, but KMT is continuing its activities as a purely business entity.
The assets of KMT in Taiwan are estimated at over $30 billion, with investments in over 150 companies. In recent years, the KMT has begun to cast its eyes towards external markets, and has begun investing in the US and Israel. In the name of local patriotism, we will note here that the KMT opened its second representative office worldwide in Israel. The fund's chairman is Lu Tang Hing.
It all began, however, with IJT - a joint venture capital fund of Japanese, Taiwanese, and Israeli investors, which was founded in 1995 for joint investment in start-ups. The management company of IJT (it stands for Israel Japan Taiwan) was Evergreen, the general manager of which at the time was Yiftach Atir. IJT invested in 24 companies during its first three years of existence. Several of the companies yielded successful exits, such as RADWare and BackWeb.
KMT saw how good this was, agreed that IJT was an excellent school, and decided that, from now on, since they already know the Israeli market and appreciate its potential, they would act on their own - they would invest directly on their own account. The company sent one of its young and talented analysts, Ray Yang, to study business administration for a year in Israel, in order to explore and become acquainted with the Israeli market. Former Evergreen investment committee member Moshe Stern was chosen as the company's local representative.
Since that time, KMT has stuck to a fixed system of operations. "Initially, we contacted the Israel Export Institute and the Manufacturers Association of Israel through their committee for start-ups, which has a large list of companies, and that's how we were exposed to the market", says Moshe Stern. " I meet companies, usually on a weekly basis, and I make an initial selection on the basis of presentations, business plans, and, of course, due diligence.
"The materials on the companies chosen is sent to Taiwan, where it is examined by Ray Yang. He also comes to Israel every few months in order to meet the companies and examine their products from close-up". Armed with his conclusions, Yang returns to the KMT investment committee, which makes the final decision whether to invest and how much. "If Yang is sure of a company, the committee usually goes along with him and approves it", Stern says.
Like everyone else, the Taiwanese are interested in investing in fields like computers and Internet, cable, and electronics, but they have some specific fields of interest. First of all, they have a particular affinity for telephony. This has led them to invest in AT&T of the US and to cast their eyes in the direction of Bezeq.
Another field of particular interest for the Taiwanese is environmental technology. Stern explains that Taiwan is especially troubled by environmental questions, due to the island's location, which creates many waste and trash disposal problems. Stern predicts that developments in this field will be the next big hit both in Taiwan and worldwide. In the same vein, chemical and agro-technological developments related to the environment are welcomed. Biotechnology, however, is not considered, since the Taiwanese, according to Stern, have decided that they do not possess the capability of examining and evaluating the field.
Since leaving IJT and beginning independent operations in Israel through Stern, KMT has invested $7.5 million in four start-ups. One of these is Phone-Or, which is making a name for itself in the field of optic microphones in cellular phone hand-free sets for cars. Another is Pearl Diver, which was founded by retired basketball player Gilad Simhoni. This company is based on an application enabling surfers to connect with other surfers with similar interests by means of a site, without the need to download software from the Internet.
A third KMT investment is Mate Media Access, which held a capital raising round three months ago at a company value of $26 million. Joining KMT in the round were Discount Investments and Clal Electronics Industries, each of which invested $3 million in ready cash. What is interesting about this investment is that Kwang Ha, the subsidiary through which KMT invests in Israel, was joined for the first time by its sister company.
This is the Taiwanese company Central Investments, which hitherto has invested in real estate, and like Alrov of Israel, is converting to high tech investments. Kwang Ha and Central Investments, the two sisters, have meanwhile come to an agreement that Central Investments will invest in any company in which its more experienced sister invests. Stern says that this is a dollar for dollar arrangement; in actuality, however, he reveals, Central Investments has a much higher investment potential, since it is bigger and richer than its more experienced sister Kwang Ha.
In 1998, shortly after KMT began operating on its own, it invested $2.5 million in SmartLink. This was actually its first solo investment outside of Taiwan, without Japanese members. SmartLink encountered sales difficulties, where KMT showed how it could help "its" company: it opened a branch for SmartLink in Taiwan and gave it a marketing push. Within a short time, SmartLink significantly increased its sales, 75% of which were in Taiwan itself.
According to Stern, there is a lesson to be learned here: "Money for investments is not lacking in Israel. There is, however, a shortage of quality money with added value. A regular investor gives his money and goes to sleep, expecting an immediate return, without giving any additional contribution to the company. The Taiwanese, however, are different, for they have a double interest, both as investors and as part of the extremely large Asian market. The Taiwanese choose investments that they know will be of interest to their market, so they examine investments from the standpoint of marketing potential for the far East".
Stern reminds us that Taiwan and the KMT are also a gateway to Japanese investments, and that the way to Beijing runs through Taipei, despite political tensions. The Taiwanese are the largest investors in China. A simple calculation would seem to indicate that the KMT is the gateway to over 1.3 billion people, a quarter of the world's population. These connections, by the way, were very useful for the KMT's last investment: the fund is currently operating to set up marketing branches for Pearl Diver in Japan, Singapore, Taiwan, and China.
The KMT is not interested in companies at the seed stage, but only in more mature companies, preferably those having already made initial sales, although companies with a product in the beta stage or with an un-marketed finished product will also be welcomed. The aim is to produce added value, i.e. developments with marketing or manufacturing potential in the Far East. One of KMT's strategies is having development remain in Israel, while manufacturing and marketing are focused in Asia. Stern emphasizes, however, that development with a western orientation, meaning in the direction of the land of the ubiquitous Nasdaq, will not rule out the possibility of investment.
Now we get down to brass tacks. In the current stage, KMT has slated $50 million for investment in Israel, but Stern stresses that this number should not be depended on. Where the Taiwanese are concerned, he says, if a good opportunity appears that requires a large sum, they will not hesitate to invest. The bottom line is that money is not a problem in Taiwan, and skeptics are invited to remember the figure of $100 billion mentioned at the beginning of the article.
In the last two months, KMT decided that it was already sufficiently ready in the Israeli market to take the next step forward, and they are now operating on three additional fronts. The first is the enlisting of other Taiwanese funds and investment bodies, such as Central Investments, Kwang Ha's sister company. If Central Investments puts down dollar for dollar, the fund can actually be estimated at $100 million.
Another instrument is the setting up of a venture capital fund jointly with an Israeli investment company. The joint company will benefit from more capital and experience in the Israeli market. Together with this idea, Kwang Ha chairman Paul Chang has also launched a venture for issuing Israeli companies on the Taiwanese stock exchange. Chang reached the conclusion that some Israeli companies find it hard to issue in New York and prefer not to issue in Europe, where trading is thin. According to Stern, the stock exchange in Taiwan enjoys heavy trading, often as much as $3 billion, even higher than New York.
KMT's portfolio has yet to show exits since it began investing independently. Stern says that the company's confidence in investments in Israeli start-ups stems from the successful exits in BackWeb and RADWare, in its previous incarnation as IJT. The fact that only two out of the 24 companies in which KMT invested have ceased operations is apparently strengthening its confidence in Israeli start-ups.
In conversation with KMT analyst Ray Yang, I learned something about Zionism: "Two years ago, we discovered that most Israeli companies in the US are competing with our portfolio, which is managed by Chinese-US funds in the US. We understood that there is potential here, which must be studied and understood. So I went to Israel for a year. That was the only way to ensure our possibilities in Israel and to be active. Instead of competing with Israeli technologies, we decided to cooperate and bring them added value".
Published by Israel's Business Arena on March 28, 2000