South Korea’s venture capital market has been on a steady growth track for years. Last year, fresh investment in venture companies reached a record high of about 2.38 trillion won (US$2.1 billion). This sustained increase, says Lee Yong-sung, chairman of the Korea Venture Capital Association (KVCA), means that the nation’s venture capital companies have been successful in locating and nurturing startups with great growth potential. In an exclusive interview with BusinessKorea, Lee said many high-flying venture enterprises owe their success to timely venture investment and mentoring by venture capital companies. He added, “More deregulation and market-friendly policy are required to raise the nation’s venture investment-to-GDP ratio from 0.13% to 0.23% between 2016 and 2022.” The Following are excerpts from the interview with chairman Lee.
Venture investment in South Korea hit an all-time high of approximately 2.4 trillion won in 2017, up 10.7% from a year ago. How was it possible?
The Korean venture capital market has continued to grow since 2015 when new investment in domestic venture companies exceeded two trillion won (US$1.8 billion). Last year, fresh investment in venture companies reached a record high of about 2.38 trillion won (US$2.1 billion). The continued growth is attributable to the growing awareness that venture capital plays a key role in nurturing innovative enterprises and creating jobs. Its role is not limited to venture financing. The government is also implementing market-friendly measures, contributing to the improvement of the investment environment.
In addition, investors such as public funds, insurers and banks are increasing their venture investment, pursuing common good and profits at the same time. As a result, newly established funds amounted to 4.4 trillion won (US$ 3.9 billion) in 2017, an all-time high. The total amount of venture investment funds now exceeds 20 trillion won (US$18 billion). Fresh venture investment is expected to reach a new high yet again this year as a total of 634.8 billion won (US$571 million) was invested in the first quarter alone. The annual venture investment growth rate is likely to stay above 20% this year again. We expect that the day will come in the near future when new venture investment tops three trillion won a year and the aggregate amount of venture investment funds amounts to 30 trillion won.
Is this increase in venture investment leading to an actual increase in the number of promising venture firms?
The increase in venture investment means that South Korean venture capital companies have been successful in fostering startups that can grow into unicorns with an enterprise value of at least US$1 billion and decacorns with a market value of at least US$10 billion.
There are many examples of companies that have grown into star enterprises after receiving venture investment. Pearl Abyss, the creator of the popular online game Black Desert, is a KOSDAQ-listed company with a market cap of over three trillion won (US$2.7 billion). Established by seven persons in 2010, it could accelerate its growth based on a timely injection of venture investment and mentoring by venture capital companies. In the first quarter of this year, its operating profits reached 33.5 billion won (US$30 million) on sales of 77.5 billion won (US$69 million). Its payroll has expanded to more than 500 people. Recently, it has established Pearl Abyss Capital to foster promising venture companies in diverse fields.
Other examples include SillaJen and cafe24. SillaJen is a KOSDAQ-listed company developing anti-cancer therapies and cafe24 is an e-commerce platform provider. cafe24 provided a sales platform to Style Nanda, one of the most popular online shopping malls that recently stepped into the spotlight by agreeing to sell itself to L'Oreal, the world's largest cosmetics company. Venture investment played a significant role in the success of these companies.
The Moon Jae-in administration is providing various types of assistance for venture firms, regarding them as a central part of its “four-wheel growth” strategy based on job creation, income growth, innovation and fair economy. What do you think about it?
One of the administration’s major policy goals is to spur economic growth and job creation by invigorating SMEs and venture firms, with the Ministry of SMEs and Startups acting as a control tower. These days, the government is seeking to set the foundation of a fairer economy by toughening penalties on large corporations that steal technology from SMEs. The government has received positive reviews for these moves. In my opinion, however, job creation and innovation-based economic growth still require some time to show tangible effects.
If the government intends to chase and catch the two rabbits of employment and innovation at the same time, it needs to go beyond such temporary measures as working hour reduction. It needs to come up with measures geared towards fostering venture firms that can preempt the global market with creative and innovative ideas. Support needs to be given to venture capital firms that identify and nurture such venture companies.
The government needs to recognize that invigorating venture capital companies is the key to faster future economic growth. The government announced early this year that South Korea’s venture investment-to-GDP ratio would be raised from 0.13% in 2016 to 0.23% in 2022 and further to the levels of China (0.28%) and the United States (0.37%). To attain this goal, the government needs to take bold steps to ease regulations and implement market-friendly policies.
The Act on Special Measures for the Promotion of Venture Businesses was enacted in 1997 to facilitate government support for venture companies. The law was extended for 10 years in 2007 and for another 10 years in 2017. The second extension implies that Korea’s venture ecosystem is still not running well. How do you assess the venture ecosystem in Korea?
The government has recently come up with a set of policy measures to revitalize private-sector efforts to develop the nation’s venture ecosystem. It has rolled up its sleeves to make the venture ecosystem run smoothly. Policymakers are pushing to revise the Act on Special Measures for the Promotion of Venture Businesses in a more market-friendly way. In addition, the Venture Investment Promotion Act is scheduled to take effect next year to promote the growth of the venture capital industry. One of the law’s goals is to make venture capital firms more sustainable and efficient. It also gives the private sector a central role to play in developing the venture ecosystem. All these moves are highly desirable for venture firms and venture capital companies.
M&As are important as an investment exit channel for venture capital firms. This is especially true in Korea as it takes a lot of time for a venture enterprise to do an initial public offering of its shares. What policies do you think are needed to facilitate M&As?
Our ultimate goal is to create a virtual cycle of investment, exit and reinvestment. The exit part, however, is still rather weak so most venture investors exit by selling their stakes on the over-the-counter (OTC) market. The ratio of over-the-counter selling and redemption to total investment exit activities was 51.9% on average from 2013 to 2017, whereas IPOs and M&As accounted for 23.5% and 2.7%, respectively.
On average, the IPO of a company with venture capital investment takes 13 years. This highlights the importance of M&As as a tool for intermediate investment recovery. Measures to spur M&As include more tax incentives for mergers between large and smaller companies and stronger penalties for technology stealing by large corporations. In addition, venture firms acquired by large corporations should be allowed to remain as SMEs for a while so that they can benefit from their position as SMEs and are not subject to regulations applied to conglomerate subsidiaries.
Such market-friendly policies are one of the three pillars needed to invigorate M&As, with the other two pillars being the awareness that M&As are an excellent growth strategy for conglometates, and cases of corporate growth powered by M&As. When these three pillars are in place, we will be able to see a surge in M&As.
Are South Korean venture firms being introduced well to foreign investors? What efforts are needed to attract more foreign investment into Korean venture enterprises?
According to a recent survey conducted by the Federation of Korean Industries, 80% of South Korean SMEs are planning to enter overseas markets within two years in order to seek new growth opportunities.
In this regard, the KVCA is running a council of foreign institutional investors so that local venture capital firms can expand their networks abroad and attract more investment from abroad. Moreover, the KVCA is running the government’s R&D support projects so promising local venture firms can succeed in the global market.
What is required now is an even more systematic policy for globalization of local venture firms. We need to set up more funds designed to attract foreign investment and provide more subsidies for SMEs and venture firms seeking to advance into the global market.