Professional Money vs. Social-Network Money

Professional Money vs. Social-Network Money

For many other start-up companies, it is extremely difficult to borrow money from banks. Its peculiar political situation means that Taiwan is not a member of many international organizations, including the IMF (International Monetary Fund). As an entity, it has to rely on itself. This may be why Taiwan's foreign reserves are the third highest, about U.S.$110 billion in total, after Japan and China, while its foreign debts are one of the lowest in the world. So, the Taiwan government's monetary policies have been fiscally conservative.

Therefore, for inspired start-up companies, most have to turn to the owners ' or the managers' social networks for capital. Such a social network is flexible and trust-based. There is hardly any due diligence involved, and the process of raising money can be quite fast. Even now, when Taiwan has developed its own VC (venture capital) industry, it is not unusual for investments to be made based on trust and relationship. Investment decisions can be made over a phone call or golf game by senior fund managers. Subsequently, junior analysts are instructed to write investment reports to justify the decisions. Often an investment process from deal origination to closure can be as short as one week. Typically, a foreign firm may take three months to make a decision for the same investment.

The advantages of social-network funding are its speed and timeliness. The disadvantages are its size and the issue of reciprocity: If you lend me $5 today, I am obliged to lend you $5 or am obliged to buy products from you in the future. This may not be the most efficient way of resources allocation. If such reciprocity happens at a personal level, only the persons involved are affected. However, if the owner of a listed company lends the company's money to support his or her friend's start-up out of such reciprocity, this may destroy the value of the listed company and is irresponsible to other shareholders.

The traditional intimate relationship between local VC firms and the industries, gives the local VC firms a strong understanding of the Taiwanese start-ups. Hence, local VC firms are more aggressive on equity pricing. Many foreign VC firms find it difficult to compete with the local VC firms for speed and valuations.

The importance of social-network funding is certain. It offers a small start-up company a chance of survival. Without such funding, many of the successful companies of today would not have survived. However, successful start-ups must be able to graduate from social-network funding to funding from professional institutions, so they may leap forward to the next stage of development. In many cases, VC firms are closely related to conglomerates and financial institutions, which will be able to help start-ups with resources, networking, and even purchase orders. This is especially so in Taiwan where 61% of the venture funding comes from corporations, compared with 15% in the U.S.