When President Tsai Ing-wen’s (蔡英文) administration is ready to take on the task of increasing domestic investment, and encouraging entrepreneurship and start-ups to develop new growth engines, giving the financial sector a bigger role is a good, if not obvious, place to start.
Less than a month after taking office, Financial Supervisory Commission (FSC) Chairman Ding Kung-wha (丁克華) has made time to re-examine the role of the financial sector in the nation’s economic development to see whether it can adopt a more proactive approach in supporting local industries and start-ups.
Among Ding’s proposals — which need more detailed planning and coordination among relevant agencies — are mezzanine financing and angel investment funds, aimed at helping to stimulate a lagging economy.
Mezzanine financing refers to a hybrid between debt and equity financing, which is designed to allow the lender to secure ownership or an equity interest from the borrower if the loan becomes delinquent.
An angel fund is a seed and early stage venture capital fund dedicated to start-ups.
These are worthy efforts by the FSC to help start-ups gain critical capital to launch businesses, but the rules governing investments by local financial institutions must first be revised if Tsai’s administration wants to successfully foster a new model for economic development.
Second, and perhaps the most important question regarding angel-fund initiatives, is what are the incentives for investors, the investment returns and risks, and the issues involving operational viability of such funds?
As part of government efforts to create job opportunities, the FSC and other government agencies are aiming to cultivate a friendly space for young entrepreneurs to realize their innovative ideas. However, the risk of starting a business is much higher for young people because they generally do not have much money, and lack experience in both product development and business execution, not to mention their ability to respond to the adverse impacts from a depressed economy and uncertain market conditions.
Indeed, people need to know that angel investors are not just about those who have money, but rather whether they are able to mentor fledgling firms through their deep industry networks and rich experience during the very early stages of start-up development.
For the FSC’s angel fund effort to take hold, it is equally important that a legal organizational structure for such funds is created before inviting prospective angel groups to invest, while other details, such as sources of capital, investment goals, operational models and supervisory mechanisms, also need to be fleshed out as soon as possible.
Until these questions are answered, Ding’s angel-fund proposal and the FSC’s on-going discussions with various financial industries and government agencies over this issue are hot air, not actions.
Have those concerns been addressed and would such an obvious and sensible concept of angel investing help create a business environment where young entrepreneurs can thrive? Perhaps not quite as fast as it did in the days of Taiwan’s economic miracle in the 1970s. However, it would at least broaden funding sources for fledgling firms beyond traditional channels, such as bank loans or the government’s credit guarantee funds to include booming financing tools such as crowdfunding, angel investing or venture capital.
Who knows, if properly functioning, perhaps the FSC’s angel fund would resonate well with financial institutions, established businesses and wealthy individuals, and prompt them to do something about their corporate and social responsibility — something that would have a positive effect on the nation in the long term.
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