Last year’s new venture capital investment was 1.2333 trillion won (US$1.1618 billion), and the amount of the new investment associations reached 747.7 billion won (US$704.3 million). This year, however, new investment associations are expected to go up significantly.
Korea Venture Capital Association Chairman Lee Jong-gap, who was elected to serve consecutive terms this year, said in an exclusive interview with BusinessKorea, “We will be able to meet the goal of 1.4 trillion won [US$1.3 billion] on the new investment association side and 1.5 trillion won [US$1.4 billion] on the new venture capital investment side thanks to the policies of the Creative Economy of the Park Geun Hye administration.”
He said that the venture capital industry is thinking highly of the government’s efforts for the revitalization of the venture investment market, proposing that the venture capital industry needs a control tower that will pursue consistent venture capital policy and prevent inefficiency. The following are excerpts from the interview with Chairman Lee.
The Park Geun-hye administration is trying to boost venture capital investment by means of tax incentives and deregulation. What do you think is the roadblock for the industry to respond to the call?
The venture capital industry is thinking highly of the government’s efforts for the revitalization of the venture investment market by means of the Future Creation Fund and the Growth Ladder Fund. Many in the industry are expecting that the endeavor will result in positive momentum for them.
Even so, there are still some problems, such as the different methods of legal application for the same investment functions, and different demands from the authorities concerned. Specifically, investment in small venture firms is governed by various laws like the Small and Medium-sized Enterprise Establishment Act, the Act on Special Measures for the Promotion of Venture Businesses, the Specialized Credit Financial Business Act, and the Financial Investment Services and Capital Markets Act.
Therefore, we need a sort of control tower that will pursue consistent venture capital policy and prevent inefficiency. I believe that the barriers between the fields of investment – for example, start-up investment, venture investment, angel investment, private equity investment and tech-oriented investment – will be torn down then.
The venture capital industry has claimed that commercial financial institutions like banks and insurers take part in the sector, pointing out that the pool of investors has been too shallow. What is the current status?
According to the Financial Services Commission’s investment finance revitalization measures for venture and small firms that was announced in September this year, the FSC is planning to let banks and insurers participate in the sector by loosening related requirements.
It is currently moving to exempt investors accounting for less than 30% of a venture or small firm investment association from the obligation of reporting, while letting them be incorporated into the subsidiary. Once the plan is implemented, banks and insurers will find more incentives to make an investment in venture funds.
Still, there should be more support measures for such private-sector players’ greater participation. First of all, institutional investors and corporations investing in venture funds should be free from taxation on their gains from stock transfers, like they were before the revision to the enforcement ordinance of the Special Tax Treatment Control Act in 2002. In addition, the Detailed Regulation on Supervision of Banking Business needs to be revised as well, because, in the regulation, venture funds are categorized into non-marketable equity securities to be subject to weighted risk values. If investment in venture funds is deemed as an acquisition of risky securities, no investor will find it attractive. Also, the IFRS fair value should be allowed to be used as the acquisition cost by means of new business practices in the framework of reasonable accounting standards that allow for the characteristics of the venture capital industry.
It has been pointed out that venture investment in Korea is highly dependent on public funds such as the Korea Finance Corporation (KoFC) and funds of funds, and the government is busy increasing the private investment record by using matching funds. What do you think?
Venture investment has to be expanded to be on par with those in advanced economies if venture firms and small and mid-sized enterprises (SMEs) will be able to play a leading role in the creative economy. In this context, funds of funds and the KoFC have assumed a very important role since their first day, increasing their investment in start-up companies and making up for past market failures.
The venture investment market has high uncertainties in nature, and thus private investment cannot but be limited. The KoFC and funds of funds have made a great contribution there by attracting private-sector investors. There is no doubt that they have played a critical role in its rapid growth until now.
Our ultimate goal is to establish a venture and start-up investment system led by the private sector and institutional investors. Until then, the contribution and support of public funds have to continue for the stable growth of the local venture industry. The attraction of private investors led by public funds is still essential, and thus the public funds’ presence needs to be considered as a kind of necessary step for the eventual independence of the venture capital industry, rather than something to be criticized.
There are some people saying that Korea needs to take a leaf from the venture ecosystem of Israel. What is your opinion?
Israel’s public education fostering creativity and the social atmosphere favorable for start-up entrepreneurship are definitely worthy of praise. However, a blind benchmarking of its venture industry ecosystem is not an answer, because Korea’s social structure and corporate culture are different from those of Israel.
Korea’s economic growth has been led by big businesses and SMEs, and venture firms have played an auxiliary role during the course. However, Israel has developed its economy without global enterprises. Therefore, their policy and systems should be different.
The venture capital industry of Korea has been grown mainly by the government’s support measures, and its dependence upon public funds is still high. Although it is true that government intervention needs to be reduced with time, I believe that the government still has a role to play, until Korea’s venture investment market gets on track.
What is the size of the new venture capital investment for this year, and what is its ratio to the financing side?
As of the end of September this year, new venture capital investment reached 984.2 billion won [US$927.1 million], which is the highest Q1-to-Q3 amount since 2001. The amount of new investment associations, which is a yardstick for future investment estimates, has consistently increased to 950.6 billion won [US$895.4 million] during the same period.
However, the sizes are still unsatisfactory when compared to bank loans, and this is why we need more incentives and support for the government’s investment expansion plans to bear fruit.
As of the end of the third quarter, local SMEs’ combined bank loan balance amounted to 472 trillion won [US$444 billion]. The amount increased by 25 trillion won [US$23 billion] during the nine months of this year. Meanwhile, the venture capital investment balance was 4.2 trillion won [US$4.2 billion], less than 1% of the loan balance.
Please explain about last year’s venture capital investment results and the forecast for this year.
New venture capital investment was 1.2333 trillion won [US$1.1618 billion] last year. Although it decreased by 2.2%, or 27.5 billion won [US$25.9 million], from a year earlier, the size surpassed the one trillion won mark for three consecutive years.
The amount of the new investment associations reached 747.7 billion won [US$704.3 million] last year, to fall slightly short of expectations. However, it is expected to go up significantly, thanks to the funds of funds, the KoFC, and the National Pension Fund, as well as the government’s Future Creation and Growth Ladder Funds. Under the circumstances, we are expecting that we will be able to meet the goal of 1.4 trillion won [US$1.3 billion] on the new investment association side and 1.5 trillion won [US$1.4 billion] on the new venture capital investment side.