CID Group's Steven Chang
Integration: Taiwan's Next Big Opportunity
Steven Chang's CID Group has been Taiwan's most successful venture capital firm for nearly a decade. As he looks to the future, what are his latest strategies, and what investment opportunities does he see in Taiwan?
Integration: Taiwan's Next Big OpportunityBy Judy Lin
From CommonWealth Magazine (vol. 533 )
When the CID Group held its annual meeting in mid-September on the third floor of Shangri-La's Far Eastern Plaza Hotel Taipei, it drew an impressive audience. Among those on hand were the directors of the Big Four international accounting firms in Taiwan, a representative from the Singapore government's investment arm, GIC Private Ltd., and managers of the endowment funds of Ivy League universities and the DuPont Family Trust.
These international investors all have some of their money with CID, which Charles Yen, vice chairman and president of venture capital firm Vincera Capital, describes as "Taiwan's best venture capital equity firm."
Founded 15 years ago, CID currently manages more than US$1 billion (NT$29.5 billion) in funds, making it the biggest venture capital firm in Taiwan, and it has generated an annualized internal rate of return of 35 percent over the past 12 years. Even when the dot.com bubble burst, the firm's first fund helped investors triple their money. Over its 15 years, the value of the fund has grown 90 times.
Turning Down US$350 Million
"We are extremely grateful for the support of international investors. CID will put up half of the capital for the new fund we are creating this year," said Chang, catching the attention of the audience.
When CID announced in March and April that it was putting together its fifth fund – the CID Greater China Fund IV – the firm's clients pledged over US$400 million in investment over the next few months. But after careful consideration, Chang decided in July to set the fund's size at US$100 million, with CID's 13 general partners putting up half of that amount themselves and the remaining US$50 million offered to closely aligned international investors. In essence, Chang politely turned down six out of every seven dollars pledged.
"The aim in putting up half the money was to demonstrate through our commitment that our future investment direction is the right one," Chang says with sincerity.
Chang's gamble was made in part to help his CID Group make the transition from a venture capital firm, which invests in new businesses, to a private equity firm, which gets involved in established companies and needs to integrate more resources.
At a time when most people see Taiwan's economy as sluggish, Chang announced that 80 percent of the new fund would be invested in Taiwan. "I feel that Taiwan's future opportunities will be created by integrating, strengthening and transforming existing strengths for new markets," he says.
Over the firm's 15 years, CID's managing partner has rarely agreed to interviews, preferring to remain out of the spotlight and spending little time on developing connections. CommonWealth Magazine took six months to set up an interview with Chang and was the only media outlet invited to CID's annual conference. During the two-hour interview, the most lasting impression was how determined this successful venture capitalist was to avoid the word "success," repeating more than once: "CID has still not succeeded. We have always worked hard just to survive."
Raised in difficult circumstances, having lost his father during his childhood, Chang prefers to use the phrase "accumulating capabilities" in analyzing his firm.
Studying History to Spot Winning Trends
Before starting the CID Group, Chang had spent eight years at China Development Industrial Bank where he was responsible for major investment projects, including the founding of Worldwide Semiconductor Manufacturing Corp. His boss at the time, former Hotung Venture Capital president Ben Chang, describes him as "willing to do any job and never being selective about what jobs he did."
One day, frustrated bank colleague Charles Chang blurted out to his buddy that rather than simply helping others invest, they should do the investing themselves.
"I just casually answered that we could do it, without ever thinking that he would hand in his resignation the following day," recalls Steven Chang.
Yet his friend's aggressive move left Chang with no way out, though he did take three and a half months to draft a business plan before leaving the bank.
That business plan positioned CID as a firm "integrating global resources to create companies with high levels of synergies." The result was that unlike most venture capital companies at the time, which invested randomly, Chang looked closely at supply chains for investment targets. He knew that if he was to invest in component suppliers, he would have to get close to companies that used those components, so he aggressively pitched Quanta Computer chairman Barry Lim and Asustek Computer chairman Jonney Shih on investing in the new company.
"He established an innovative model for venture capital in the Chinese-speaking world," says Chang's mentor, William Seetoo, the NCCU chair professor in National Chengchi University's Department of Business Administration.
Seetoo explains that most venture capital investment opportunities are proposed by others and then assessed by a venture capital firm. But CID takes a more proactive approach, looking for gaps between supply and demand in industrial value chains and then proposing comprehensive solutions to take advantage of the niches. "He really thinks through things thoroughly and carefully and looks at them in-depth. He is very much a strategic thinker," Seetoo says of CID's managing partner.
Chang has a real interest in industrial history and why sectors rise and fall, enabling him to grasp trends with extreme precision. That interest dates back to when he was an MBA student at National Cheng Chi University.
His master's thesis explored the correlation between conglomerates' diversification and their earnings per share, which required crunching a lot of numbers. He and two classmates got the financials for the subsidiaries of 500 big corporations between 1971 and 1991 from Taiwan-based China Credit Information Service and performed regression analysis on them, manually entering tens of thousands of pieces of data.
In examining the numbers, Chang gained broad insight into how fluctuations in Taiwan's economy and its industrial structure affected companies' operations at different periods of time.
"I don't just look to see if one company or one sector is doing well right now, because an industry's competitiveness and the economic environment can change with time," he says.
In devising his investment strategies, Chang has also drawn on the evolution of industrial chains and how they first moved from the United States to Taiwan and then on to China. To forecast trends in the China market, for example, he refers to the unfolding of various sectors in Taiwan in the post-World War II era, from basic necessities such as food, clothing and housing to travel, education and entertainment.
Contacts Don't Win Respect
After 2000, many Taiwanese venture capitalists flocked to China to prosper, but not many survived. CID was one of the few firms that got stronger by investing in China.
Chang recalls that he went to China for the first time in 2000 to visit Richard Chang, who had left Taiwan for Shanghai to set up Semiconductor Manufacturing International Corp. The Shanghai he experienced was far different from what he had imagined. After that, he would visit Shanghai for one week a month, trying to obtain industry information the Taiwanese way – by visiting industrial parks.
But he soon realized that it was an exercise in futility because China at the time did not have much in the way of organized, comprehensive industrial data, and he also found it difficult to develop contacts. Yet he still felt strongly that he needed a more in-depth picture of Chinese society and its markets to invest there.
To develop a more systematic understanding of China's huge and mysterious market, Chang enrolled in the Ph.D. program in business administration at Shanghai Jiao Tong University. He then opened the CID Research Institute in 2002, staffing it with more than 20 Chinese nationals with MBAs, and CID remains today the only Taiwanese venture capital firm doing industry research in China.
"He is very calm and stable," says Rachel Sang, a classmate of his in the business administration program in Shanghai and now the director of the CID Research Institute.
When Chang was thinking about studying in China, he opted against the path taken by most Taiwanese businessmen – enrolling in an EMBA program to make friends and build up their network of contacts. He also decided against the program for foreign students because he feared getting special treatment, instead applying for the Ph.D. program for locals, which had much harder entry examinations.
So why avoid the preferred option of other Taiwanese executives? "I think social networking is pointless. Simply relying on making connections will never earn you respect, and those contacts can change or disappear. Only ability can allow you to survive," he says with the utmost seriousness. "You have to make people need you."
Adds Vincera's Yen: "The research institute is his most distinctive competitive edge. When the service industry wants to get a reading on the local market, only CID among Taiwan's venture capital firms produces research from a local perspective in China."
Starting over a decade ago, CID began investing in service sectors feeding domestic demand in China, such as education, consumption and modern agriculture. Among his picks: China's biggest exporter of bamboo shoots, the Fujian Yada Group, and Rotam Global AgroSciences Ltd., a producer of crop protectants and plant nutrients.
More recently, CID has taken a stronger interest in more high-tech areas, such as the Internet, big data, biomedical products, and green technologies.
Andy Tsai, a managing director of international private equity firm StepStone Group LLC responsible for Taiwan and broader Asia, believes that the Taiwanese venture capital firms that survive in the future will be those that either are highly specialized or are skilled at raising funds internationally. When Singapore's GIC invested in CID 13 years ago, it was a pivotal milestone in turning CID into an international-class firm.
Chang says GIC's investment helped him understand the differences between international investors and Taiwanese investors.
The international investors represented by GIC prefer to allocate assets based on rate of return targets and risk expectations, and consequently GIC asks CID to provide rate of return targets and risk indexes for its funds, which require the building of models.
To date, GIC has invested in all four of CID's funds, and its validation helped draw interest to CID from the endowment funds of Ivy League universities and Middle East sovereign funds.
When the firm decided to raise only US$50 million from outside investors for its fifth fund after taking a US$50 million stake itself, it represented a smaller amount than had been targeted for any of its first four funds and signaled a change in strategy.
'Integration' Replacing 'Innovation'
"The ecology is changing; the number of fish in the pond is gradually getting smaller. The shrinking of the venture capital sector is a historical inevitability," Chang asserts.
Over the past 30 years, venture capitalists have been able to turn a profit in the short term because of the fast pace of technological progress and the support of capital markets, which has drawn a growing number of people to the business and left investors willing to invest, Chang says.
In the past 10 years, however, American venture capital firms have generated progressively lower rates of return and faced longer payback periods. More recently, "innovation" has become increasingly difficult, creating a huge challenge for venture capitalists.
The business opportunities afforded by "innovation" are being replaced by those found in "integration."
Chang believes that the relative slowdown in China's economic growth and its massive oversupply problem almost guarantee that consolidation will be a mainstream trend in Greater China over the next 10 years.
He sees three approaches to integration: 1) help old-economy businesses transition into new-economy businesses such as Internet; 2) help e-businesses draw on old-economy resources to get stronger; and 3) help competitive companies find bigger markets.
"Right now, companies may have to rely on venture capitalists for 90 percent of the help they need," Chang says.
Because talent is the key to success in managing integration, Chang decided to build a strong well of seasoned professionals across sectors and draw on its strength to make the most accurate investment choices. To fill out his team, he recruited former MStar Semiconductor president Steve Yang and the partner-in-charge of global headhunting firm Heidrick & Struggles' Taipei office, Jack Tsai.
"Accuracy is not related to the size of the investment. It's about allocating resources more efficiently," he says.
With all the peaks for CID, there must have also been valleys, and when asked about the lows over his 15 years in the business, this reserved entrepreneur who stiffens at the sight of a camera suddenly breaks out in laughter, readily acknowledging that there are often lows.
"But as long as you treat adversity as accumulating capabilities, and you continue to do so, things turn out all right," says Chang, quickly regaining his serious demeanor.
Translated from the Chinese by Luke Sabatier