Significant VC Improvement
The current administration's Creative Economy policy is two years in the making now. BusinesKorea sat down with Lee Yong-sung, chairman of the Korea Venture Capital Association (KVCA), to ask how the policy is playing out in the real world. He spoke about the changes that are being seen in the small and medium business environment of the country, the amount of foreign venture capital that is flowing into the country, and the next steps that need to be taken to further expand private sector involvement in venture capital investment. What follows are excerpts from the interview.
It has been two years since the incumbent government announced its “May 15 measurement.” Please tell us the general results of the measure.
“Virtuous Cycle Measures to Develop a Venture-Startup Funding Ecosystem,” so called the “May 15 Measurement,” is a part of the current government’s policy to promote venture businesses under the banner of the Creative Economy announced in 2013. Since then, various government plans related to the measurement have come up, and obstacles to growth of not only venture investment but also venture business as a whole have improved. Through this, the whole scale of the venture capital industry has significantly improved. It seems that the industry showed exceptional quantitative growth in 2014 a year after the announcement, as well as the current qualitative growth a year later through the improvement of numerous related systems.
The Small and Medium Enterprise Establishment Investment Association’s investment in the KONEX market has been excluded from the list of limiting investments in listed stocks. It shows a movement to revitalize the KONEX market. When banks and insurance companies finance venture funds at a certain rate, they should be included as a subsidiary and have obligations to report. As the rate has increased from 15 to 30 percent, the government vitalized private investment. Such revision of the related system and laws seems to be part of qualitative growth. Also, the government announced the revised bill to allow fintech investment in venture capital, so venture funds’ quantitative and qualitative growth is highly likely to continue.
Thanks to such government policy, the new formation of venture capital in 2014 reached 2.5382 trillion won (US$2.29 billion), showing the possibility of sustainable growth with the highest result since 2000. New investment recorded 1.6393 trillion won [US$1.48 billion] last year alone, and 358.2 billion won (US$323.49 million) in the first quarter of this year, growing continuously.
Some say that this still leaves much to be desired in terms of business start-up and investment returns even though venture investment showed remarkable growth. Are there any additional improvement plans and measures?
In the cycle of the venture ecosystem, which connects investment, start-ups, growth, and reinvestment, the bottleneck state is still the stage of investment returns. For a smooth cycle, much time and effort is steadily required.
Since venture investment largely depends on investment collection through the form of initial public offerings (IPOs), we should make efforts to reform the system and come up with countermeasures for revitalizing the KOSDAQ and KONEX markets. Recently, various policies for the smooth operation of the KONEX market are being announced, and the deposit regulation of individual investors has been decreased from 300 million won (US$270,929) to 100 million won (US$90,310). Along with it, the KONEX small investment account has been introduced, and a new plan to allow investment regardless of deposits of up to 30 million won (US$27,093) has been announced. The new policy is in place from May this year, and it is expected to play a role in activating the KONEX market.
As a measure to boost the collection market, I suggest to consider creating funds to invest in the KOSDAQ and KONEX markets by expanding a “pension fund investment pool system,” which has been managed by the Ministry of Strategy and Finance from 2001. At the same time, various controlling devices, which create funds only for the KOSDAQ and KONEX and offset risks including investment funds in unlisted stocks, should be developed as well.
Moreover, the KOSDAQ market is limited in terms of role and function in a differentiated management system and capital market infrastructure in a bid to support small and medium-sized venture businesses. In order to solve this problem, the plan to establish a new management system of the KOSDAQ is also needed through the substantive separation of the KOSDAQ market.
Please tell us the scale of total venture capital at home last year and how much was private capital. What is the deregulation tasks needed to expand private capital?
As of the end of 2014, the formation of new venture capital amounted to 2.5704 trillion won (US$2.32 billion) and reached a record high since 2000, opening a second venture renaissance. Among them, private capital, excluding government funds, accounted for nearly 40 percent, and more than half of it is public funds. The diversified finance structure is a problem waiting to be continuously solved by the industry. Rather than the structure that depends on the government, it is possible to secure more stable venture capital only when private interests come forward to expand venture capital.
Accordingly, inducement for private capital expansion is needed, and there are still many problems to be solved in order to do so. For instance, banks and insurance companies should be excluded from regulations to be included as a subsidiary and from risk weight applications on financing venture funds. Also, the efforts to expand tax benefits, including stock transfer gains, and reinforce the soundness of venture funds should be accompanied.
There is a growing number of Korean venture businesses targeting the global market. How much is Korean venture capital interested in this trend?
As venture businesses are becoming more globalized, more and more venture businesses are designing the firm according to overseas expansion from the beginning, unlike in the past. Even though most domestic start-up businesses have targeted the home market so far, the globalization of domestic small and medium-sized venture businesses will accelerate faster than ever before with various support and attention. In particular, the fund of fund provides a relatively large amount of capital to funds for the companies at the startup stage, and it keeps investing in funds for the overseas expansion of domestic companies.
Also, venture capital, which manages infant funds, creates overseas expansion funds and invests in start-up businesses at the same time. So, there is a synergy to aggressively support overseas market expansion of investor companies.
There are also venture businesses, which were invested and tapped into the global market, to wait for being listed in the NASDAQ. As the movement for active globalization has concretely appeared, the globalization of the domestic venture ecosystem is moving forward. Moreover, the industry and associations should join hands to seek overseas investment. It also should prioritize the improvement of laws and systems for globalization and need to build global track records by strengthening the network with foreign investors.
Overseas venture capital is becoming more interested in domestic venture businesses. What is the level of professionalism and competitiveness of domestic venture capital?
The Yozma Group, which is considered a major market player in Israel, announced that it will make 300 billion won [US$270.93 million] in domestic investments for three years. And, one of the top U.S. biotech venture capital firms decided to invest in domestic venture funds to the tune of US$100 million [110.73 billion won]. Also, the Small and Medium Business Administration and the Korea Venture Investment Corporation signed a contract to raise 10 billion won [US$9.03 million] of funds with top global accelerator 500 Startups. This is only a partial example, but various overseas venture capital is flowing into the domestic market like this. It seems to be a movement to seek companies that have growth potential in the global market.
The globalization of domestic venture capital is still in the former phase of maturity, and we should benchmark investment strategy and manpower utilization, which checks the standard, through inflow of overseas venture capital. Currently, a considerable number of domestic venture capital does not have specialist posts or experts related to overseas business strategy in the company. Considering this fact, they should train professionals for overseas investment cooperation and lay the groundwork for establishing the global cooperation network and overseas market expansion of domestic companies.
The final goal is to simultaneously pursue the LP diversification and globalization of venture capital by increasing investment in overseas LP as a result.