Never Able to Stop: [Cover Story #4] Korean Startups, Venture Firms Grow Quantitatively As Well As Qualitatively | BusinessKorea

Monday, September 25, 2017

Number of Venture Companies by Approval Category
Number of Venture Companies by Approval Category
SEOUL,KOREA
5 December 2016 - 5:15pm
Cho Jin-young

Jobless growth has been continuing in South Korea. During the past three years, the country recorded a coefficient of employment of 0.35 and 0.17 in response to an increase of one billion won (US$900,000) in the asset of the top 100 and 20 enterprises, respectively. It was the reason why Park Geun-hye administration chose the realization of a creative economy as its top priority and established Centers for Creative Economy & Innovation in order to deal with the low growth of the South Korean economy and the lack of employment by means of job creation in startups, venture firms and small and midsize enterprises (SMEs). The idea was to set up an ecosystem in which venture firms and startups can be provided with assistance for training, networking, overseas business expansion and so on all at the same time so more of them can be better nurtured.

With the first opening of the Daejeon Center for Creative Economy & Innovation on March 26, a total of 17 Centers for Creative Economy & Innovation have been opened across the country. 15 major South Korean conglomerates are sponsoring the 17 Centers for Creative Economy & Innovation, instructed by President Park Geun-hye.

Some people have criticized the designation of the conglomerate and regional sponsors regarding the Centers for Creative Economy & Innovation, claiming that the designation is top-down policy led by the government in view of distribution for balanced regional development instead of the finding and nurturing of startups by large business groups themselves. In spite of such views, however, the consensus of the majority is that some sizeable assistance has been provided for a large number of startup entrepreneurs and venture firms via the Centers for Creative Economy & Innovation. At present, the South Korean government is providing more than two trillion won (US$1.8 billion) a year for ventures and startups including the firms housed in the Centers for Creative Economy & Innovation and those starting their own venture firms. This amount easily eclipses that private funds provided for venture firms in the past.

South Korea’s startup and venture ecosystem has shown both qualitative and quantitative growth for years. As of November 15, the number of venture firms registered in the country is 32,961. The number exceeded 30,000 for the first time in early 2015, increased to 31,260 until the end of last year, exceeded 32,000 in July this year and is about to top 33,000 in just four months.

The conditions to be recognized as a venture firm by the government include; the passing of examination on technology evaluation guarantee by Korea Technology Finance Corporation or technology evaluation for loan by Small and Medium Business Corporation; inducement of investment more than 10 percent of the capital or 50 million won (US$45,000) from the venture capital; and R&D investment more than five to ten percent of the sales.

81% of the total, that is, 26,698, are venture firms that have passed through the technology evaluation guarantee screening. 3.4%, that is, 1,126, are venture firms in which a venture capital such as an angel investor invested at least 10% of the capital or at least 50 million won (US$45,000). The ratio of the latter type used to be as low as 2% or so a couple of years ago.

Last year, a total of 2.626 trillion won (US$2.36 billion) was raised in venture funds to reach a new high. The amount reached 1.6682 trillion won (US$1.50 billion) in the first half of this year alone to hit an all-time first-half high, too. This means money is piling up for investment in venture firms. Under the circumstances, venture firms registration based on venture investment is on the increase whereas the ratio of venture firm registration via the Technology Evaluation Guarantee has declined by approximately 10 percentage points from a peak of 90% or so.

“Although venture firm registration via certificate issuance still takes up the largest portion, the number of venture firms starting their business by attracting investment from venture capitals is showing a rapid increase these days,” a local venture firm explained.

In the meantime, it has been found that a total of 474 venture firms in South Korea topped 100 billion won (US$90 million) in sales last year. The Small & Medium Business Administration and the Korea Venture Business Association recently announced that the number of such venture firms, that is, those that topped 100 billion won in sales, increased by 3% from a year earlier. The number of such venture firms in South Korea had been 416 in 2012, 453 in 2013 and 460 in 2014.

Last year, the venture firms that recorded at least 100 billion won (US$90 million) in sales hired 179,172 persons in total. The number of employees increased 3.3% from a year ago from 173,420.

The firms that posted 100 billion won (US$90 million) or more in sales last year took an average of 17.4 years to get there. Seven venture firms did so in less than seven years.

The Small & Medium Business Administration mentioned timely venture investment, R&D investment, enhancement of competitiveness based on continuous efforts for the improvement of technological strength, industrial properties and the like and aggressive efforts for overseas market penetration as some of the reasons they could achieve the result.

When it comes to venture investment, 200 venture firms received venture investment after their establishment, 57.4% of them received investment within seven years from their establishment and this investment contributed to their struggling through the early stage and the so-called Death Valley stage.

In addition, technological innovation by means of R&D and research personnel employment and the possession and use of industrial properties such as 43.5 patent rights on average (10 times those of venture firms in general) have contributed to the growth of this type of venture firms. The average export by firm is 52.9 billion won and the export-to-sales ratio amounts to 24.9%, too. For reference, the average export by company is 45 billion won in the case of enterprises of middle standing.

“The pace of their growth has somewhat slowed down amid today’s low growth but the figures still prove that venture firms are the dynamo for the creative economy,” said the Small & Medium Business Administration, adding, “In this context, the South Korean government will come up with policy focusing on the globalization and enhancement of the technological strength of startups and venture firms.”

Nowadays, however, venture investment is shrinking due to a series of scandals and the ongoing domestic economic slump. Some experts are pointing out that the size of venture investment, which continued to rise and topped two trillion won (US$1.8 billion) for the first time last year, is likely to decline this year.

According to the Korea Venture Capital Association, the new venture investment has declined since March this year. Specifically, the monthly investment jumped 52.9% from a year ago in the low season of January and 11% in the following month. However, it fell 4.2% year on year in March, 7.5% in April, 14.7% in May, 4.5% in June, 7.8% in July and 8.0% in August. During the first three quarters of this year, the new venture investment totaled 1.4815 trillion won (US$1.33 billion), 4.9% less than a year earlier. 

One of the reasons for the decline is investors becoming increasingly meticulous. “With the local economy mired in the recession, they are making little investment in startups doing business only in the South Korean market and they are focusing on a handful of products and services that have a chance in the global market,” said the CEO of a local venture capital.

This is why the South Korean government recently earmarked a budget of 2.3752 trillion won (US$2.13 billion) for the promotion of startups and the venture ecosystem next year, 253.5 billion won (US$228 million) more than this year’s. Next year, it is going to beef up the Tech Incubator Program for Startups (TIPS) and the Program for Startup Promotion at Colleges so that more young entrepreneurs can start their own business by making use of their technologies. 92.2 billion won (US$82.8 million) planned to be spent so the number of such colleges is increased to 40 in which startup training, business item commercialization and incubating are assisted in at the same time. The number of startups selected via the TIPS is to be doubled to 200 with a budget of 15 billion won (US$13.5 million) allocated.

In addition, the Startup Takeoff Package is expanded from 10 billion won (US$9 million) to 50 billion won (US$45 million) while startup funds for assistance in terms of commercialization, business networking and funding are expanded by 200 billion won (US$180 million) to 1.65 trillion won (US$1.48 billion). The Startup Takeoff Package is to provide business model development support, consulting and marketing assistance and so on for the firms in their third to seventh year in business, which is often dubbed Death Valley.

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