As of the end of 2011, Korea was home to 26,148 venture firms. The number had decreased from a peak of 11,392 after 2001, the heyday of first-generation ventures, before beginning to rise in 2004 and showing rapid growth in 2010 with the advent of smartphones. 74.6% and 13.9% of these can be found in the manufacturing and IT and information processing industries, respectively.
Their business performances are also on an upward trend. As of 2010, the average sales per company reached 7.72 billion won, with the business profit rate marking 5.9%. The capital adequacy ratio was 41.2% on average, while the debt ratio was 142.7, which is regarded as quite stable.
Revival of Korean Venture Industry
During the early 2000s, no venture firm as successful as Nexon, Naver, Medison or Humax emerged due to the IT bubble burst and subsequent collapse of the domestic venture industry.
However, an increasing number of venture firms are poised to spread their wings past 2010 thanks to the popularization of smartphones and inter-industrial convergence. Two such examples are YG Entertainment and mobile messenger service provider Kakao, whose speed of growth is stunning not only first-generation ventures like Naver but also major telecom companies such as SK Telecom, KT and LG U+.
The revival has been possible at least partly because of the role of venture capitals. For instance, Kakao was established by Kim Bum-soo, one of the founders of Naver and Hangame, when he turned himself into a venture investor. In addition, YG could become a pillar of Korea’s entertainment industry by dint of Korea Investment Partners, the venture capital affiliated with Korea Investment Holdings. It was Korea Investment Partners that offered YG huge funds back in 2009 to open up overseas markets and add to the Korean Wave phenomenon.
One point to note regarding today’s venture capital industry is that the role of venture capital is now entirely different from that of startup investment firms in the early 2000s. The most notable point is that successful first-generation venture entrepreneurs are now assisting their protégés as venture capitalists.
They do not just provide the funds required for starting and operating businesses. Instead, they are working as mentors, imparting comprehensive knowledge regarding every aspect of business management, ranging from venture establishment, public relations and marketing to legal support and R&D. In short, they are handing down their experience and know-how to second-generation venture companies.
Furthermore, such activities are being buttressed by a number of large venture capitals. In the past, there were only a handful of venture capitals in Korea that could be classified as being major players, e.g. KTB Network and STIC Investments, with the majority of those in the industry being small-scale startup investment firms that had to resort to policy funds in order to invest in ventures. However, major corporations’ arms like Samsung Venture Investment and CJ Venture Investment, as well as venture capitals under large financial holding companies such as Korea Investment Partners and KB Investment, have recently begun to provide more and more support to ventures. At the same time, the government is also contributing to the improvement of the industrial environment through the Korea Finance Corporation and Korea Venture Investment Corporation operating fund of funds worth several trillion won.
Compared with 2001, the number of venture firms in Korea has more than doubled to over 26,000, with the venture capital market size estimated to be at least 10 trillion won. Furthermore, each year, one to two trillion won in new funds flows into the market. Even though it has grown enough to realize economy of scale, many people are pointing out that market participants still have to make more effort in regards to technological development and accumulation, market revitalization and the better analysis of industrial and technological trends.
Big Challenge: Invigoration of Exit Market
When it comes to investment payback, which is one important aspect of an advanced venture ecosystem, both the KOSDAQ and IPO markets appear to be failing to do their job. The number of IPO cases on the KOSDAQ stock exchange stood at just 7 during the first half of this year and 19 until October 17, easily eclipsed by last year’s 63 and 2010’s 76. Venture capitals exited their investment in 26 and 30 companies through IPO in 2010 and 2011, respectively. However, the figure fell to just 3 in H1, 2012. Unlike the American IPO market which is supplemented by M&A, Korea has a long way to go before it has a mature M&A environment.
According to the Korea Capital Market Institute (KCMI), local venture investors’ annual payback figures reached its peak in 2005 at 673.5 billion won in 940 cases and has stagnated since then, recording 595.7 billion won in 584 cases in 2011, due mainly to the doldrums in the IPO and M&A markets. The length of time taken from company establishment to IPO is also extending from the current average of 12.5 years for venture capital investees and 17.5 years for the rest.
Under such circumstances, the importance of the secondary market is on the rise in regards to creating a virtuous cycle of fundraising, investment and investment exit. “Nowadays, as the exit market characterized by IPO and M&A continues to shrink, the secondary market in which venture capitals’ investment assets are traded, is emerging as an alternative,” said KCMI researcher Nam Jae-woo.
The government is planning to come up with policy measures to boost the secondary market. “At present, secondary trading on the Private Equity Investor network is allowed only to venture capitals, but professional investors will be able to take part in the future,” said Venture Investment Division head Lee Byung-kwon at the Small and Medium Business Administration, adding, “There are concerns that uncertain regulations in the Financial Investment Services and Capital Markets Act may pose a roadblock.”