Taiwan’s AI stock boom is making early-stage startups a harder sell

In recent months, Taiwan's stock market has experienced a significant surge, driven by investor interest in the country's AI supply chain. This boom is making it increasingly difficult for early-stage startups to secure funding locally. Taiwan's benchmark Taiex index has risen by more than 50% this year, outperforming other major indices such as South Korea's Kospi.

The gains are attributed to not just chip manufacturing giants like Taiwan Semiconductor Manufacturing Co., but also chip design, advanced packaging, networking, and server companies.

The wider exposure to Taiwan-listed stocks has resulted in about 7% of them doubling in value this year, compared to just 3% in South Korea. Consequently, Taiwan has become a preferred destination for AI-related investments in Asia. A recent Bank of America survey revealed that 35% of fund managers anticipate Taiwan to benefit the most from the next phase of the AI cycle, tying it with the US, while only 5% chose South Korea.

For startups, this scenario has led to a shift in funding strategies. Operon Solutions, a Y Combinator-backed industrial AI startup, had to raise $700,000 in pre-seed funding primarily from Silicon Valley investors. Founder and CEO, Anderson Chen, stated that the semiconductor market offers superior returns compared to stocks, making a successful IPO less lucrative. This situation has created challenges for Taiwanese startups, as many investors now gravitate towards listed shares and away from venture capital.

Caleb Chu, an early-stage investor and founder of Taiwan-based Nova Studio, highlighted the growing preference for B- and C-round deals and pre-IPO companies among Taiwanese investors. He noted that the route to returns in these later-stage investments is more clear-cut. Additionally, private-equity funds face a similar challenge due to TSMC's share-price strength, which has created a "crowding-out effect." As a result, these funds are increasingly favoring liquid public AI stocks over long-term, less certain investments.

While the situation appears more favorable for early-stage AI startups abroad, Taiwanese founders are still finding ways to secure early backing. Chen believes that Taiwan's technical talent and semiconductor expertise continue to make it an attractive location for raising capital. Despite the increased competition, Chen observed that fundraising for Taiwanese deep-tech startups seeking overseas capital has become somewhat easier.