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Investing in innovation: Q&A with Taiwania general partner Cheng Wu
Judy Lin, Taipei; Rodney Chan, DIGITIMES 0

Cheng Wu, a general patner at Taiwania Capital Management, has founded several high profile companies with total market value of NT$180 billion (US$64 billion). Wu has been embracing a different approach to investing in startups.

DIGITIMES recently talked to Wu about his concept of "investment in innovation" as opposed to venture capital.

Q: You are managing the Internet of Things (IoT) fund for Taiwania. Can you identify some of the IoT trends that look promising?

A: From the perspective of investment, the combination of 5G and edge computing is a great innovation. Edge computing did not exist before and currently accounts for only 1% of all data centers. But we think it will grow to 20% in the next five years. Core computing will continue to grow, from the current 30% to 40%. Therefore, the gap between the two will shrink dramatically in five years, and edge computing will become a must-have in the future.

The combination of edge computing and 5G will bring a better architecture because 5G requires low-latency applications, and such applications require the combination of edge computing and 5G the most. So we are focusing on these two combinations, and in the future we will focus on real-time, remote application services. This will be an area of high technical difficulty but also high growth. We believe that electric vehicles (EVs) will be the next growth driver because they will lead the changes in our lives and society. The changes inside the vehicle are more direct, while the changes outside the vehicle are more indirect. The reason for Taiwan's high interest in the EV industry is that they see a big change in the supply chain, which will bring a new entry point.

Taiwan's traditional OEMs are all manufacturing ICT products, and their entry into the traditional automotive supply chain is quite shallow. However, after the electrification of automobiles, the nature, quantity and technology of components are more and more like computers, so they are actively trying to enter EV, but they are still looking at short-term business opportunities. What we see is the potential market of system and sub-system software/hardware integration and service that they have not yet seen, which is related to the component segments that Taiwan manufacturers want to enter but mostly different. Therefore, our investment will not focus on the supply chain because it is too low-level.

If Taiwan manufacturers still only do hardware, they will still encounter the challenge of doing "white-box" devices in the future, so we all take system integration as the strategic goal. But how to achieve it is a problem. There are still many layers in the middle of system to hardware, and a lot of segmentation needs to be done to strengthen the cooperation between hardware and software step by step. But at present, it is still difficult for Taiwan manufacturers to reach the international level in one step, so do not be too ambitious.

Q: What is the difference between "investment in innovation" you have been promoting and venture capital? Are there any opportunities for companies to cooperate?

A: Investment in innovation is more early stage than venture capital. Investors in innovation have thyeir own views of the market, and even see the opportunities earlier than the innovators, or have even deeper insights. Usually they do not look at it from a purely technical perspective, because they may already have years of experience in observing market needs, starting their own business, or working as a C-level executive in a company. When they see that a market may be ripe, they will not wait for the innovator to come to them, but will take the initiative to find a suitable innovator to do it. Therefore, it is a proactive package.

Many innovators may see a topic worth doing, but before doing so, they do not carefully consider the feasibility of the market, its size, competitors and capital needs, and so on. What is lacking is not capital or market, but people.

Since the team is not yet finalized, we have to take the initiative to find the right people. But we can't do it right away because it will need deep involvement of an investment company, as if we were the founders. But the team that we assemble must be experienced, doesn't need retraining; given some poointers and they'll know how to go about the work. Since the team already has an idea, they don't have to figure it out from scratch.

Since the investor in innovation is involved from the beginning, they can invite more like-minded operators and investors to participate. The concept is not "exclusive or monopolistic," but "controlling and leading" - controlling the direction of the new company's future development, but sharing the rewards of investment with the partners.

In addition, we are more of a mentor. During the first year of the company's existence, we'd spend time and effort every week and every month on this project to fine-tune the adjustments and intervene with the team with new information. So we have to find the best team so that we can spend 25% of our time supporting one team, and could devtoe time to support three more. A venture capital fund may be able to invest in 20 to 25 cases at the same time, but the maximum of investors in innovation are four. In other words, we can only do one project a year at most.

We will discuss with potential strategic partners when we are sure of the direction and explain the vision and concept to them to see if they are willing to cooperate. Usually, it is difficult to find 100% of the right people. But if we can get 70% of them, we can make up the other 30% using other measures.

The best partner for investment in innovation is someone who has started a company before and has experience in technology innovation. There are many unpredictable setbacks and failures on the way to starting a business, but a large part of them are predictable. The focus is on solving the predictable ones first, rather than predicting the unpredictable ones, in order to increase the chances of success. How successful a company can be is the result of timing, location and people. People, market and technology inevitably have variables, but if it is a good team, it will be able to adjust in time. The worst case scenario is that a competitor comes unexpectedly. But if the direction is right, then the competitor will be there to just share the success. If it fails, it is more of a problem of your own execution.

If you want to work with a company, the problem is more complicated, because the company has its own established strategy, or you will first evaluate whether the project can complement its existing strategy. However, if some companies are already doing well in their own business and are looking to expand into other related fields, then there is room for cooperation.@

Q: You have manged to build four successful companies in a row, and you have always been able to see the market trends and execute them before anyone else. Do you have a systematic methodology?

A: It's a very institutionalized set of things, but it's not difficult, and everyone may not implement it in the same way. First of all, all innovations can be observed. The most successful innovation is to optimize the observations that have already occurred. So when I observe a phenomenon, I'd think, "Is there a technical perspective to evaluate it? Is it possible to complement the change in technology with a change in business model?" If there is also a destructive innovation in technology, then it will lead to a perfect combination.

The second is the innovation of technology and business model. One is analyzed from business behavior, from the top down, while the other is analyzed from the technical perspective, from the bottom up. The top level of innovation is actually the innovation of business behavior. Innovation in technology may not directly affect our life or business behavior and economic growth. But innovation in business model will definitely do so. So instead of going up from the bottom, we should go down from the top.

The third point is to find the breakthrough point of disruptive innovation. Most successful innovations are about making breakthroughs which change the status quo. There are also innovations that add value to existing products, such as improved functionality, better prices, and universal accessibility, but such improved innovations are "a better mousetrap." "Me-too" innovation may still achieve success, but it would be rather difficult. Therefore, we focus on destructive innovation, which is a destructive change of the original shape of things to bring economic value. The average annual economic growth rate of countries around the world is about 3-5%. Where do those companies with 100% or 200% growth come from? They are companies with disruptive innovations, replacing existing choices with innovative products, services or business models. If there is no breakthrough, human beings can only live under the influence of 3-5%. If there is a breakthrough, there is a chance to grow 100% or 200%, and build success on the failures of others. This is a very cruel fact.

People may wonder how Apple, being a computer vendor, came up with the iPhone. But in fact, they already made the iPad before they made the cell phone, because they wanted to convert the desktop and notebook computer into an consumer electronics device by removing the keyboard and using a touch panel. So Apple's real innovation was the iPad, which brought about a change in the human-machine interface to touch and slide, so simple that children as young as two or three years old could play without being taught. The iPhone is just a smaller version of the iPad with a mobile modem.

Q: Is this observation related to your own technical background? Or is it because you have read extensively? What is the foundation of your knowledge that you are expanding from?

A: It is a gradual process. As one's thinking deepens, one extends from a single profession to other professions that converge, often involving other areas of knowledge. This is the time to step out of the comfort zone of thinking or profession and challenge oneself to learn unfamiliar but relevant knowledge. The current education system trains a person well in a single field, but does not teach him or her cross-disciplinary learning skills. Some schools in the US require students to learn across domains from the beginning, but we have yet to see such a structure in Taiwan.

Q: Every company is promoting innovation, but corporate culture has a great influence on the success or failure of innovation. How to cultivate an innovation-friendly corporate culture?

A: When a Taiwanese company wants to innovate, they usually create a subsidiary, but they are subject to a high degree of control by the parent company. That's the problem. The right thing to do is to let them do it and have the courage to withstand failure. But you can't put all your eggs in one basket. There should be strategic planning, for example, planning three areas for employees who want to be involved to operate independently, so that they can go public independently in the future. In 1997 and 1998, Acer had the foresight to promote more than 10 companies, four or five of which have now grown into huge enterprises. At that time, it was the right time, the right place, and the right people, and the PC industry was leading the way. These subgroups happened to be supporting each other.

Taiwania general partner Cheng Wu

Taiwania general partner Cheng Wu
Photo: Michael Lee, Digitimes, June 2021

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