Attracting more venture capital to Thailand
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Today's article is on venture-capital finance in Thailand and changes in tax incentives that might draw more of it to Thailand.
Countries such as Taiwan, Japan, and South Korea all have successful venture-capital systems.
Venture-capital funds target innovative enterprises rooted in new technologies and business ideas, biotechnology and IT being two examples.
Venture-capital funded entrepreneurship and innovation has an important role to play in Thailand's economic future.
Venture Capital has the potential to differentiate Thailand's product offerings from other countries in Southeast Asia and the world.
Venture Capital also has the potential to propel Thailand up the the value chain and beyond competing purely on the basis of commodities and cheap labour.
Business plan competitions, so popular in Thailand, are a major force supporting entrepreneurship and innovation. (See also a recent article on prawn farming)
Science parks are also a major force supporting technological innovation.
Read about Thai entrepreneurship and business at Business-Asia.com.
Read more on biotech in Thailand.
Check out more Bangkok Post articles on entrepreneurship in Thailand.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What kind of business incentives is the Thai venture capital industry asking for?
2. What kind of investor are they hoping to attract to the Thai capital markets?
What are the benefits of attracting this kind of investor?
3. What will likely happen to bank lending over the next two years internationally? Why?
4. What is the current incentive scheme that the government offers venture capital?
5. What is the problem with this incentive scheme?
Why does it not provide much of an incentive?
6. What remedy is there for the problems with the current incentive scheme?
7. What countries currently waives dividend and capital gains taxes for venture capital?
8. Does SET currently waive dividends and capital gains for any category of investment?
9. What desirable type of venture-capital investor might tax exemptions on capital gains attract to Thai capital markets?
10. What kind of Thai ventures are foreign venture-capital firms currently attracted the most by?
11. What countries have successful venture-capital systems?
What areas have they been successful in?
Which country has been the most successful?
What are some of the fruits of their success?
12. What is the total number of venture-capital firms and business angels in Thailand?
13. How venture-capital firms and business angels typically differ in the size of their investments?
14. Which kind of company more likely to invest in startups, business angels or venture-capital firms?
Bangkok Post article: May 10, 2007
Incentives sought for venture-capital firms
Tax breaks a boon for businesses of all sizes NUNTAWUN POLKUAMDEEThe Thai Venture Capital Association has called on the Finance Ministry to offer tax incentives to the venture-capital industry to help facilitate business startups. Kunakorn Makchaidee, the association's president, said tax incentives for venture-capital firms and "business angels" should be offered for investments in all types of companies, not just small and medium-sized businesses.
Tax incentives would not only help promote growth of institutional investors in the capital market, but also expand funding opportunities for all kinds of companies, a key point given that bank lending is expected to become more strict following the adoption of new Basel II capital standards over the next two years.
The government currently offers tax incentives for venture-capital investments in small and medium-sized enterprises of up to 200 million baht. Investment periods must be for at least four years to qualify for waivers from corporate tax liability on the returns.
"But the current incentives aren't really attractive for venture-capital firms, as the conditions attached to the incentives are quite strict," Mr Kunakorn said.
A venture-capital firm investing in a company essentially loses its tax incentives if the firm expands to have assets of more than 200 million baht, the upper limit for companies classified as SMEs, he said.
In reality, a successful long-term investment can double in growth each year. But under the current tax rules, venture-capital firms are essentially penalised for investing in successful firms.
Mr Kunakorn said the government should scrap the investment size and period requirements, as well as consider expanding tax exemptions to include dividends and capital gains to help encourage the growth of the sector.
Some companies are increasingly looking to offshore vehicles set up in tax-free jurisdictions such as the Cayman Islands as a means of managing their investments in Thailand, he added.
In the United Kingdom, securities regulators have also waived dividend and capital-gains taxes for venture funds to encourage growth of the sector.
"But for the SET, capital gains are waived only for mutual funds and individual investors, not venture-capital firms, even though we play an active role in the primary market," Mr Kunakorn said.
"If the SET could waive capital-gains liabilities for venture capital investments, I think that you would see quite a bit of interest among listed, large-cap firms to set up their own funds to invest in related companies."
Mr Kunakorn said any potential loss in capital-gains taxes from an exemption for venture-capital investments would be compensated through higher tax revenues from other areas.
Foreign venture-capital firms in particular see little attraction in investing through the local framework. "[Overseas venture-capital firms] are interested in large megaprojects, or in taking majority shareholdings in companies and projects and then later selling off their stake to local investors through the stock market at a later time," Mr Kunakorn said.
Prof Bill Scheela of Bemidji State University in Minnesota said that in Asia, Taiwan's venture-capital system had proved to be the most successful, particularly in the competitive IT field.
Taiwanese firms now boast strong links to California's Silicon Valley, a strong entrepreneurial spirit and generous support from government tax incentives, he said, adding that Japan and Korea have also enjoyed success in their systems.
Prof Scheela said that in Thailand, around 20 companies existed as "business angels" and nine as venture-capital firms.
Venture-capital funds operated with a typical investment of 720 million baht, with 70% invested in growing or mature firms and the rest in startups. Business angels generally were much smaller, investing around 90 million baht each and 4-50 million per company. Around 47% of angel investments were in startups.
Vocabulary (in discussion above)
incentives - rewards to encourage people to do something (See glossary)
tax incentives - reducing taxes so you'll enter an industry or start a certain kind of business
venture-capital - private equity capital provided by professional outside investors to new, growth businesses. Cash is exchanged for shares in a usually high risk company with above-average returns.(See Wikipedia)
* venture-capital firms, venture-capital funds, venture-capitalists (VCs)
Thai Venture Capital Association (TVCA) - (See website)
a company's value chain - the primary activities in a company's supply chain that add value for customers and the related support activities. (See Wikipedia)
moving up the value chain - offering more sophisticated anc complex services and products that add even more value for customers (for example, Business Process Outsourcing (BPO) has moved from simple call center and data entry work to higher-end functions such as "information research, financial portfolio analysis, customer data mining, statutory reporting and inbound insurance sales." Source: Wharton Business School)
exemption - permission to not follow a rule, same as "waiver" (See glossary)
x waives y for z (verb) - x gives permission to z not to do y (See glossary)
a waiver - permission not to do something (Same as "exemption")
tax breaks - tax exemption, don't have to pay taxes on some income
a boon for x - makes life easier for x
facilitate - (formal) help, make easier and more likely to happen (See glossary)
startups - a new business venture in its earliest stage of development (See Wikipedia on startup companies)
institutional investors - an investor, such as a bank, insurance company, retirement fund, hedge fund, or mutual fund, that is financially sophisticated and makes large investments, often held in very large portfolios of investments. (See Wikipedia)
Basel II capital standards - a round of deliberations by central bankers from around the world aiming at uniformity in risk management across national borders (See Wikipedia on Basel II)
small and medium-sized enterprises (SMEs) - companies with revenue, assets, or employees below a certain level, in Thailand 200 million in assets is the limit (See Wikipedia)
a liability - money that a company owes (in accounting: liabilities and equity are on the right hand side of the balance sheet, assets on the left) (See Wikipedia)
* a tax liability
conditions attached to x - things that must be done or happen according to x (x could be a contract, for instance)
dividends - annual payments taken out of profits, made by a company to its shareholders (the rest of the profits are reinvested in the business and will contribute towards share price appreciation and capital gains in the future; See Wikipedia)
capital gains - profits from buying and then selling at a higher price (See Wikipedia on capital gains and capital gains taxes)
a vehicle for x - a way or method to achieve x
offshore - outside the country (See Wikipedia)
an investment vehicle - a kind of investment
offshore vehicles - a kind of investment outside of the country
jurisdictions - an area where a system of laws ahve authority
tax-free jurisdictions, tax havens - an offshore financial centre without taxes (See Wikipedia on tax havens)
the Cayman Islands - one of the world's leading offshore financial centres.
(See Wikipedia on the Cayman Islands and its financial services industry)
Offshore Financial Centre, offshore jurisdictions - a low-tax, lightly regulated jurisdiction with commercial infrastructure for offshore companies and the investment of offshore funds (See Wikipedia on Offshore Financial Centre and Offshore banking)
the primary market - market for selling for selling the first time (for stocks this is the Initial Public Offerings (IPOs) of stock)
the secondary market - market for reselling (for example, trading stock shares on a stock exchange)
a listed firms - companies whose stock is traded on a stock market
large-cap - large market capitalisation or "blus chip" stocks, the stocks of the largest companies (See Wikipedia on market capitlisation)
loss x compensated through y - y replaces the loss of x
a stake in x - have an interest in x, own part of x
California's Silicon Valley - an area around Stanford University south of San Francisco, California where the American computer industry developed, Hewlett-Packard and Apple Inc, and Google are among the famous companies started there (See Wikipedia)
entrepreneurial spirit - willingness to work hard and take risks when starting a small business
generous - gives more than expected
"business angels" - an affluent individual who provides capital for a business start-up, usually in exchange for ownership equity (See Wikipedia on angel investor)
mature firms - companies that are fully developed (and no longer growing quickly like they did when they were first started)
Answer Key:
1. What kind of business incentives is the Thai venture capital industry asking for?
a. Tax incentives.
b. For business startups.
c. Not just SMEs.
2. What kind of investor are they hoping to attract to the Thai capital markets?
What are the benefits of attracting this kind of investor?
They hope to "promote growth of institutional investors" in Thai capital markets.
Institutional investors have a large amount of money to invest and they are not mere speculators hoping to make short-term gains and then pull their money out.
They are responsible investors targeting long-term returns to support businesses such as insurance or pension plans.
3. What will likely happen to bank lending over the next two years internationally? Why?
Bank lending will likely become more strict after "the adoption of new Basel II capital standards over the next two years."
4. What is the current incentive scheme that the government offers venture capital?
a. Tax incentives: tax exemption on corporate tax liability.
b. For SMEs up to 200 million.
c. Must invest for at least four years.
5. What is the problem with this incentive scheme?
Why does it not provide much of an incentive?
Venture-capital firms are "essentially penalised for investing in successful firms."
If the growth rate of a startup is rapid, it can easily surpass the 200 million baht limit for SMEs.
6. What remedy is there for the problems with the current incentive scheme?
a. Eliminate 200 million investment size limit.
b. Eliminate four year limit.
c. Extend tax exemption to startup stock dividends and capital gains.
7. What countries currently waives dividend and capital gains taxes for venture capital?
The United Kingdom.
8. Does SET currently waive dividends and capital gains for any category of investment?
Yes, but only for mutual funds and individual investors.
9. What desirable type of venture-capital investor might tax exemptions on capital gains attract to Thai capital markets?
Listed, large-cap firms might "set up their own funds to invest in related companies."
10. What kind of Thai ventures are foreign venture-capital firms currently attracted the most by?
a. Large megaprojects.
b. Majority shareholdings in companies to be sold off to local investors eventually.
11. What countries have successful venture-capital systems?
What areas have they been successful in?
Which country has been the most successful?
What are some of the fruits of their success?
Taiwan, Japan, and Korea all have successful systems.
Taiwan has been the most successful, especially in the IT industry.
Taiwan now boasts:
a. Strong ties to the Silicon Valley in California.
b. Strong entrepreneurial spirit
c. Generous tax incentives offered by the government.
12. What is the total number of venture-capital firms and business angels in Thailand?
29 total = 9 venture-capital firms + 20 business angels.
13. How venture-capital firms and business angels typically differ in the size of their investments?
Venture-capital firm investments are a lot larger, typically 720 million baht versus 4-50 million for business angels.
14. Which kind of company more likely to invest in startups, business angels or venture-capital firms?
Business angels. They invest 47% of their funds in startups versus 30% for venture-capital firms.
