Interview with VC Expert
The Park Geun-hye administration has busily set about establishing guidelines for the Creative Economy, with a focus on creating an environment conducive to nurturing venture businesses. The slogan “At the heart of the Creative Economy is venture business” has been unanimously agreed upon. The first course of action taken was setting a “Blueprint for Overhauling the Virtuous Cycle of the Venture Ecosystem,” which has excited the venture entrepreneur community at large. In light of this heartening atmosphere, BusinessKorea met with LB Investment’s Vice President Park Ki-ho, the front runner in the world of venture capital, to discuss the prospects that lie ahead.
What are some of the issues that Korea’s venture capital industry faces in the so-called virtuous cycle of the venture business ecosystem?
The key issue is the structure in which the virtuous cycle is set up, from the very point of a business’s foundation to its fruition. While there is a lot of hope in the beginning, venture businesses often run into obstacles and end up being reduced to small businesses and manufacturing houses relying on loans.
As for raising funds, it is important to increase the bandwidth to attract angel investment and the necessary funds in the initial stage of venture formation. However, the average amount of funds invested in a venture startup is 25 percent, compared to the US, which invests nearly 35 percent. That is a meager amount.
We must seek to stop the seemingly endless cycle of angel investment, recoup and reinvestment, and then restart of a failed venture. But it is difficult to recoup the investment from a venture business, as the only channel available is listing on the Korea Securities Dealers Automated Quotation or KOSDAQ, which is a tall order. The number of KOSDAQ-listed venture businesses is decreasing every year.
The Blueprint for Overhauling the Virtuous Cycle of the Venture Ecosystem has been announced. Do you see any problems?
The government’s idea is to structurally design the virtuous cycle of venture businesses, so that the life cycle of a venture business, from the very formation to investment, recoup, reinvestment, and restart, will be streamlined and expedited when necessary. Basically, it is a process of rebuilding our venture industry to mirror the likes of Silicon Valley.
With the lessons from the first generation of venture entrepreneurs, the ground has been set for a system of reinvestment and mentoring, so that the legacy of success can trickle down to the next generation of venture businesses. The idea of funding for startups has been changed as well, as the focus has shifted from borrowing a loan to getting investment.
Moreover, a systematic and step-bystep nurturing system has been set up to bolster angel investment, to streamline M&As, and to establish KONEX, or the Korea New Exchange, along with a blueprint for diversifying strategies, the prevention of technology theft, and the recruitment of enterprising professionals.
So how do you evaluate the current situation?
I think we are headed in the right direction. Apparently, public officials have paid close attention, calling the process of reinvesting and restarting an “ecosystem.” Tax breaks on angel investment are also timely and appropriate, as it has shifted focus from that of lending to investing.
However, I feel that further action could be taken to relax taxation. Those of us in the venture industry feel that too much emphasis has been put on creating startups and not on those that are already in business.
What about plans for attracting venture capital?
As I stressed before, rules must be in place to attract angel investment. In addition, we need to push for the introduction of crowd funding, bolstering the market for Mergers and Acquisitions, or M&As, and rejuvenating the KOSDAQ. Up to this point, M&As between big companies and small and mediumsized companies have often gotten a bad rap, and has often been labeled corporate raiding. But in the US the very goal of venture entrepreneurs is to reach an M&A with a big corporation. Likewise, we need to encourage an environment that is conducive to M&As, especially with technology-oriented companies. However, the KOSDAQ has a relatively high barrier to entry. And the NASDAQ has a lot of companies with negative balance sheets.
Creating a venture-friendly environment is essential in breeding successful enterprises at the global level. Success stories of M&As, much like success stories of world-famous golfer Park Se-ri, breed a series of promising, wanna-be startups like the “Park Se-ri kids.”
Let us talk about your company, LB Investment. It is widely recognized as a leading business in your circles.
LB Investment originally started as LG Startup Investment in 1996, and since then has grown into a private equity fund that has vast interest in venture and medium-to-global scale companies in Korea and China. We changed our name in July 2008 to LB Investment. Our total venture fund amounts to more than 600 billion won [US$555.6 million], and so far we have invested in 340 companies and scored high returns.
Last year, with the National Pension Service, we raised 50 billion won (US$46.3 million), and successfully established a fund totaling 100 billion won (US$93 million). The annual rate of return was 15 percent. Suffice to say that we achieved both a scale of economy and profit at the same time.
You are operating a subsidiary in Shanghai, China, correct?
We established a regional office in Shanghai in 2007. With the aid of Shanghai’s staff, we are currently operating two funds totaling 110 billion won (US$102.3 million). In September 2012 we also formed a subsidiary called LB Investment (Shanghai) Co., Ltd. with five Chinese investors.
The investment market in Korea has reached a saturation point, and it is inevitable that we look at opportunities abroad, with the goal of becoming a company that specializes in global investment. As such, our plan for this year includes accruing a cross-border fund of roughly 150 billion won (US$138.9 million).
We have already sold two Chinese companies and earned 2.8 and 4.9 percent profit, respectively, against investment.
We hear that there are plans to separate the venture capital and private equity businesses.
In 2012 we had already split our company into two divisions, each with its own administration. Next year we will see the births of two companies that will handle venture capital and private equity separately. It is more efficient to operate in two different units, because each area is different, and therefore requires different investment approaches. For instance, venture capital is riskier since it involves investing in emerging businesses that are technology-based, while private equity is geared toward safer investment.
Bio
Vice President Park Ki-ho graduated from Yonsei University with a degree in Business Administration, and received VCT training in Stanford University’s MBA program.
He is in charge of telecommunications, semiconductors, and display products. He has been with LB Investment for eleven years since he started working in 2003, which is rare in an industry that is synonymous with job-hopping. He has said, “Our secret to success is to work with our customers in achieving a win-win result.”
Mr. Park has acquired extensive knowledge and training from working at National Venture Capital Co., Ltd. and Silicon Valley’s VC, or Asset Management Company, for 7 years between 1988 and 1994, when venture capital was a relatively new concept in Korea.
From 1995 onward, he worked for five years as a business team leader in Hyundai Electronics’ telecommunications division on various high-tech projects such as a Global Mobile Personal Communications System, and gained recognition as a leading expert in Information Technology.
He is in charge of overseeing investment as an executive at STIC Investment, which specializes in investment in Information Technology, and has been responsible for helping the growth of renowned IT companies such as Telechips Inc., Topfield, and New C&C, with highly successful results.
Mr. Park won Korea’s Best Venture Capitalist in the category of IT, and won an award cited by the Prime Minister for his achievements in IT investment.