42% Drop YOY
In the first half of this year, venture investment amounted to 4.4 trillion won (US$3.35 billion), marking a 41.9 percent decrease compared to the same period last year. This decline can be attributed to the lingering effects of interest rate hikes that began in the latter half of the previous year and a slowdown in real economic activity. Notably, venture investments in the distribution and services as well as ICT services sectors showed a drop of over 60 percent compared to a year earlier.
The Ministry of SMEs and Startups (MSS) and the Financial Services Commission (FSC) unveiled the “Venture Investment and Fund Formation Trends for the First Half of 2023” on Aug. 10. This marks the first official release of statistics that combines the investment results of both venture capital firms (VCs) and new technology-based financial firms (fintech). In the past, venture investment data had been reported solely by the MSS based on VC performance. Starting from this year, however, collaboration has been established with various private entities including the FSC, the Korea Venture Capital Association, and the Credit Finance Association. As a result, investment outcomes from both VC firms and fintech firms have been integrated into these statistics.
According to the data, new venture investments in the first half of this year stood at 4.447 trillion won (US$3.372 billion), which is a 41.9 percent decrease from the 7.6442 trillion won recorded in the same period last year. The number of venture capital and startups that attracted investments also dropped by 22.7 percent to 1,781. Additionally, the average investment amount per company fell by 800 million won from 3.3 billion to 2.5 billion won.
By industry, the distribution and services sector saw the most significant decline, plummeting by 63.0 percent. Even the ICT services sector, which typically commands the largest portion of venture investments, experienced a notable reduction of 61.0 percent. In terms of company tenure, mid-stage startups operating between three to seven years suffered the most substantial blow, with a sharp decline of 57.0 percent. Moreover, indicating the potential scale of future venture investments, the amount of newly established venture funds also plunged by 47.2 percent to 4.5917 trillion won from the previous year’s 8.961 trillion won.
As interest rate hikes caused the overall investment market to stall, the downturn in venture investments during the first half of the year was an anticipated result. The concern now shifts to the second half. The government has noted a revival in venture investments beginning from the second quarter, suggesting signs of a rebound for the latter part of the year.
In terms of actual VC data, the investment size increased by 43 percent, from 881.5 billion won in the first quarter to 1.3226 trillion won in the second quarter. The year-on-year decrease also showed a notable reduction, declining from 60.3 percent in the first quarter to 31.5 percent in the second quarter. An official from the MSS said, “While a cautious approach is needed due to ongoing factors such as high interest rates and a preference for safe assets, the trend appears to be moving in a positive direction compared to the beginning of the year.”
Particularly, it was reported that early-stage investments such as seed and Series A, as well as late-stage investments like pre-IPO, are showing signs of recovery. Another evaluator mentioned, “Investments are dividing into two categories like early-stage investments that foresee a distant future and pre-IPO stages that can deliver results rapidly within one to three years.”
However, even if the venture investment market recovers, it is analyzed that startups might not easily perceive the effects. An investment industry insider said, “The contraction of the market is immediately felt and can be drastic, but recovery inevitably takes time. Moreover, the previous two to three years were unusually active in terms of investments, so even if recovery takes place, startups are likely to still perceive higher investment barriers compared to that period.”