What Is Casting Damper on Current Venture and Startup Boom?

During the past few decades, the Korean economy has grown at a rapid pace by means of government-led policy focusing on chaebol, or conglomerates. With the economic growth model revealing its own limitations, the Park Geun-hye administration is trying to foster the growth of venture firms and startups in the framework of the creative economy.

Under the circumstances, the general public is getting more and more interested in setting up their own companies. An increasing number of related contests are taking place now, while more organizations like business incubators and accelerators work actively.

Such efforts have resulted in at least some revitalization of the venture and startup sector, which has been evidenced by improving industrial indices. Both the number of companies and total investment in the sector are showing an upward trend these days. However, those bills associated with the promotion of startups and venture firms have been pending in the National Assembly for six months or more, posing concerns that the sector could lose steam and fall back into stagnation.

According to the Ministry of Science, ICT and Future Planning (MSIP) and the Small and Medium Business Administration (SMBA), signs of another venture boom will be seen six months from the implementation of the industry promotion plans prepared by seven agencies concerned, including the Ministry of Strategy & Finance, the Financial Services Commission, the SMBA, and the MSIP. Specifically, the related indices such as the number of venture firms, angel investment in them, the number of newly founded corporations, and that of collegiate startup clubs are on the rise altogether.

The number of venture firms is 29,044 as of the end of September, already having exceeded last year’s total of 28,193. Venture investment has reached 984.2 billion won (US$927 million) during the same period, to show an 11.8% growth from a year earlier. The amount is likely to further increase once the Growth Ladder Fund (worth two trillion won), the Future Creation Fund (600 billion won) and the First-generation Venture Fund (100 billion won) are on the track in the near future.

The number of newly founded corporations increased 0.2% from 51,057 to 51,151 until August, too. Although the rate of increase is rather small, the number increased 23% when compared to the five year average. In addition, that of collegiate societies rose 50%, from 1,222 to 1,833, between 2012 and the first eight months of this year.

Still, the legal and financial systems for supporting venture firms and startups are far from satisfactory now. The bills associated with the May 15 Plans for Virtuous Cycle in Venture and Startup Investment Ecosystems have been pending for half a year. For instance, the Support for Small and Medium-sized Enterprise Establishment Act, the Act on Special Measures for the Promotion of Venture Businesses for angel investment income tax deduction, and the Capital Market and Financial Investment Business Act for crowd funding are tabled in the National Assembly’s standing committees. However, deliberation is showing no progress at all.

In particular, the act to facilitate the incorporation of granddaughter companies into holding companies for easier acquisition of venture firms by conglomerates is facing strong opposition from some lawmakers and civic organizations. The dissenters are claiming that the government’s plan, in which venture or small firms with an R&D investmentto-sales ratio of at least 5% acquired by large corporations, are allowed to be out of the group of subsidiaries for three years, could be abused for reckless business expansion. Meanwhile, small companies and venture firms are demanding that the regulations be eased for more acquisitions by leading companies.

At first, small and midsize enterprises (SMEs) and venture firms expected that they will be able to enjoy a greater inflow of investment thanks to deregulationplans and tax benefits. However, they are now finding it inevitable to alter their business plans for next year’s set up on the assumption of investment inflow.

According to industry sources and the National Assembly, the delay in policy implementation is causing difficulties in about 30,000 innovation-centered SMEs. The political conflicts between the ruling and opposition parties have put a brake on the processing of bills, hindering new investment attraction and M&A.

The government’s plans are expected to increase venture investments from 6.3 trillion won (US$5.9 billion) to 10.6 trillion won (US$10 billion) for five years to come, while raising venture sales and employment by 1.7 and 0.8 percentage points, respectively. The thing is, the rosy picture can be drawn only when the plans go as scheduled.

Bottleneck Phenomenon Aggravating Venture Ecosystem

It is also being pointed out that the local venture ecosystem is still very vulnerable, though the size of venture investment is increasing with the government’s focus laid not on financing but investment. A venture industry ecosystem is made up of various elements like technology, manpower, and financial resources, but one of the most important is the system in which investment and profits can be recovered. Experts are saying that the system is not operating normally, which exacerbates the weakness.

The bottleneck phenomenon in the venture industry is becoming worse this year as the IPO market is in the doldrums. In short, investment recovery is slow while investmentsare surging.

The number of new IPOs this year stood at just 32 as of November 17 this year. The new listings on the KOSDAQ market, which is the IPO channel for venture firms, is no more than 25. It is the lowest figure since 2012, when it was 22. The lack of new listings is likely to continue until the end of this year.

According to industry experts, the figure should be at least 50 to 60 if the venture investment ecosystem can function as desired. Venture investment has soared though since last year, owing to promotion plans. Investment resources are expected to increase a couple of years down the road, too.

An imbalance in the venture ecosystem is inevitable, with investment and recovery moving in opposite directions. The market is showing few signs of change, even though the government opened the Korea New Exchange (KONEX) market in July and came up with the May 15 plans.

“Investment and recovery must move in tandem with each other if the venture investment can be continuous,” said a venture capital industry insider, adding, “If the current imbalance goes on, the venture capital market as one of the important pillars of the venture ecosystem could collapse.” He went on to say, “The fundamental problem is that the Korea Exchange applies almost the same listing qualification, that is, approximately 50 billion [won, US$47 million] in sales, to KOSPI and KOSDAQ companies, and it needs to reconsider the intent of the KOSDAQ market for innovation-centered firms.”