It has been a year since the current government announced its so-called May 15 Plan for the realization of the creative economy through the promotion of venture firms and startups. During the past year, various policy measures have been poured out for the revitalization of angel investment and M&As, resulting in a rapid increase in the number of newly-established corporations and the concentration of capital into the venture and startup market. However, it has also been pointed out that the investment recovery and support functions need to be further reinforced.
These days, an increasing number of startups are benefiting from the policy. More and more young entrepreneurs are dreaming of turning their businesses into a second KakaoTalk. According to the Korea Venture Investment Corporation, the number of those younger than three years and invested by the investment associations based on the government’s fund of funds increased from 185 to 351 between 2011 and last year. At the same time, more born-to-be-global startups are doing successful business abroad. Global venture investors are paying greater attention to them instead of their traditional clients in Silicon Valley, Israel, and other places.
The government completed the introduction of most of the 42 policy packages proposed on May 15, with some exceptions such as the initiation of equity-type crowd funding, and these have been in place since the end of last year.
For example, the tax deductions for angel investment has been expanded to 50 percent, and companies invested in by angel investors have been allowed to be recognized as venture firms. A series of tax-related policies have been adopted in the form of tax benefits for tech-oriented M&As. The reinforcement of policy finances in the form of the Future Creation Fund and Growth Ladder Fund is already showing some tangible results. The Future Creation Fund is approximately 500 billion won (US$487 million) in size, including resources from the private sector, and it has been spent for the promotion of early-stage firms. The Growth Ladder Fund, which is to supply financial resources for the conversion of startups into enterprises of middle standing, has reached two trillion won (US$1.9 billion) through private-public matching.
The Small & Medium Business Administration and Korea Venture Investment Corporation announced on April 25 that they would raise venture funds worth two trillion won (US$1.9 billion) this year for greater venture and startup investment. The amount is about 30 percent larger than last year’s 1.5374 trillion won. The government will invest 574 billion won (US$559 million), 32.6 percent up from a year earlier, via its fund of funds. In addition, the Secondary Fund of 120 billion won (US$116 million) will be raised to assist in investment recovery and create a virtuous cycle of corporate foundation, growth, recovery, and retry.
Venture investment in Korea amounted to 1.3845 trillion won (US$1.3485 billion) as of the end of last year, showing a 12.26 percent year-on-year gain. The upward movement is continuing this year, too. Quarterly venture investment totaled 268.8 billion won (US$261.9 million) with a year-on-year growth rate of 25.2 percent. In other words, the shortage of funds in the venture and startup market has been addressed to a large extent.
Investment Recovery and Startup Assistance Functions Still Weak
That being said, the sector still has a long way to go to foster the ecosystem of smooth investment circulation.
Although the quarterly number of newly-established corporations exceeded 20,000 for the first time in the first quarter of 2014, corporate foundation by the young generation is still slow in view of the wide variety of support measures. “Things have been improved a lot than in the past, and sufficient financial resources are now available for promising future entrepreneurs,” said Ko Yong-ha, chairman of the Korea Business Angel Association, adding, “Nevertheless, the pool of excellent human resources is still shallow.”
Other urgent issues include the flow of capital to actual investment and the reinforcement of the recovery side. This is why venture capital stresses the importance of policy finance, Korean firms’ overseas market penetration and investment, and boosted M&A activities. Investment recovery is one of the most important links for reinvestment and re-foundation. However, the KOSDAQ, a prototypical venture investment tool, is moving sideways. So is the Korea New Exchange (KONEX) for pre-KOSDAQ companies.
Under the circumstances, venture capital firms prefer recovery through direct listing on KOSDAQ to KONEX, though this takes more time due to the latter’s low trading volume and weak recovery function. “The government has yet to come up with its final stance as to the various issues ranging from the listing of preferred stocks to the designation of common advisors of securities companies and venture capital,” an industry source explained, continuing, “How can we go for listing with the uncertainties as they are?”
Expert consensus is that the government should be more involved to raise the effectiveness of its market policy. Capital Market Institute Research Manager Kim Kap-rae remarked, “The May 15 Plan has a significant meaning as a set of comprehensive policies promoting the smooth circulation of venture funds and defining what the creative economy is.” He also advised, “What matters now is continuous feedback to ensure the intended results of the systems, that is, solid growth of the invested companies and subsequent finding of new beneficiaries.”
Korea Venture Investment Corporation representative Jeong Yu-shin agreed by saying that qualitative rather than quantitative growth by means of M&As, overseas market penetration, and investment should be the center of the focus from now on. “The fact that venture investment reached a new high last year implies that qualitative growth has been made to some extent,” he mentioned, continuing, “If the policy up to this moment was to boost investment in ventures and startups, those for the future should concentrate on investment recovery and re-investment.”
In this vein, the Small & Medium Business Administration has carried out a performance evaluation on the government policy with the Korea Venture Business Association, the Venture Capital Association, and end users of the related policy. It can be considered as a post-evaluation of the May 15 Plan, through which the degree of progress of the measures can be quantified. The government, well aware of this point, is paying much attention to the assessment result. The administration is also planning to put forth follow-up venture promotion programs in late May based on the result.