Second Boom Emerging in Korean Venture Landscape

The number of venture start-ups has been rising sharply, totaling 24,842 as of February 27 this year according to the Korea Venture Business Association, an increase of 5,000 in just eight months. At the end of December of 2010, the number of venture start-up stood at 24,645, a record high. “Venture start-ups are quickly adapting to recent changes in the market,” said one industry expert, adding, “Although there are uncertainties in the global economy, I expect them to continue to grow this year.” Last year, the number of venture start-ups with more than 100 billion won in sales surpassed 240, a 19.8% from 2009, while their operation profit margin increased by up to 6.2% over the same period. Last year 5,752 companies received venture start-up certificates from the government. This figure is the highest since the government decided to nurture promising companies with strong technological power and big growth potential in 1998. The number of venture start-ups totaled 11,392 in 2001, with the figure dropping to 7,702 following the burst of the venture bubble in 2003. However, this figure soared to 24,645 at the end of 2010 due mainly to the increase of software companies such as those dealing with smartphone applications newly growing green technology firms gaining attention. This period deserves to be labeled “the second boom in the venture start-up industry” in Korea. If the first venture start-up boom was based on web 1.0, the second venture start-up boom is on mobile web 2.0. “The second IT boom will be much bigger than the first one” announced Bill Gates. Many experts say that new technologies such as smartphones, cloud computing, social media and web 2.0 are highly likely to be the biggest changes in the history of humanity. According to the Small and Medium Business Administration and the Korea Venture Capital Association, venture capital firms last year invested a total of 1.91 trillion won, up 25.8% from the year before. Furthermore, new venture funds reached 1,583.8 trillion won, a record high. Among 61 KOSDAQ-listed companies, 33 (54%) received investment from venture capital companies. In terms of business sector, manufacturing and IT sectors accounted for 28.4% and 27.1%, respectively, followed by entertainment (24.6%), and bio engineering (7.7%). “Only promising companies survived the financial crisis. Recently, the number of new companies and venture start-ups has been on the rise. The size of venture funds hit a record high thanks to the expansion of investment by the Korea Finance Corporation and the National Pension Corporation,” said Seo Seung-won of the Small and Medium Business Administration, adding, “Furthermore, this increase was affected by expectations of an economic recovery, a recovery in the stock market and the government’s steady support for new companies and the new green growth sector. It is predicted that new investment by venture capital will continue to grow this year. Investment in venture start-ups in January surpassed 100 billion won in January, more than double the year before. If this trend continues, it is expected that total investment in venture start-ups will surpass 1.3 trillion won in 2011. According to a survey regarding the investment plans of 88 venture capital companies, new investments totaled approximately 1.2 trillion won. By sector, manufacturing came first (28.4%), followed by IT (27.1%), entertainment (24.6%) and bio engineering (7.7%). In terms of age, companies three years old or younger were the most with a share of 35.2%, while in terms of the amount of investment, companies that were seven years old or older were the most, accounting for 44.1%. By type of investment, stocks came first with a 59.6% share, followed by corporate bonds (18.9%) and projects (17.8%). This year the government is planning to help raise approximately 800 billion won in new venture funds by investing 228.5 billion won of funds of funds in the new growth and green sectors in order to promote investment in venture start-ups. Accordingly, financial resources for e funds of funds are expected to expand to 1,309.6 billion won, an increase of 40.5 billion. In particular, the government has devised innovative incentive measures, such as lowering the internal rate of return (IRR), in order to promote stronger profitability for new fund management firms and investors investing in such firms. In addition, the government is planning to raise a global common fund so as to help promising small companies branch out overseas and increase the global capabilities of venture capital firms. In terms of funds investing in companies three years old or younger, general funds, funds for the early stages of business and venture funds accounted for 26.8%, 68.0% and 29.3%, respectively. Meanwhile, the government lowered the IRR from 5% to 0% for venture capital companies that manage funds during the early stages of business. The government also decided to distribute 50% of excess profits of funds of funds to investing companies and fund management firms with profits 5% or higher than the basic profitability rate. The government expanded the scope of companies for investment by accepting de-facto beginning companies that are more than three years old, but whose R&D costs account for more than 5% of sales and their sales are less than one billion won. The government also aims to raise roughly US$150 million in common funds with overseas countries with strong financial and technological power, such as Israel and the UAE, while easing business start up regulations regarding overseas investments. In order to activate 200 billion in M&A in secondary funds for small and medium-sized venture start-ups, the government aims to rise the money in cooperation with the Korea Finance Corporation. In addition, the government is planning to support social company investment funds that invest in social companies which offer jobs or services to marginalized people to the tune of approximately 10 billion won. Furthermore, the government aims to expand its portion of investment from 18% in 2010 to 50% in 2011 and its maximum investment ratio from 25% in 2010 to 40% in 2011. The government is also planning to regulate offending venture capital companies more, such as by limiting their investment into funds of funds, while in addition to regular investments in January and May, it aims to establish a flexible fund supply system through constant investment projects. The Small and Medium Business Administration is planning to raise funds in earnest by announcing a business plan regarding its first regular investment valued at 75 billion won and finishing the selection process in mid-March. A venture boom is once again occurring following the burst of the IT bubble in the U.S. in 2000. The first IT boom in Korea was successful thanks to good venture systems. As a result, this boom played a key role in helping Korea graduate from the IMF management system and created a rapidly growing venture ecosystem totaling 200 trillion won, 1.5 times the total sales of Samsung Electronics. Venture companies with more than 100 billion won in sales amounted to about 250, with combined sales of approximately 60 trillion won. Three venture companies posted more than one trillion in sales, while venture companies also created around one million new jobs. However, Korea was last to respond to the second global IT boom. The penetration rate of smartphones of Korea in 2009 stood at just 1.1%, much lower than the 20% verage of the Organization for Economic Cooperation and Development (OECD). This means the system is weakening Korea’s competitiveness despite the nation possessing excellent technologies. This has led some experts to state that the government should strengthen its support for the venture start-up industry through reform