Measured Success in Overcoming Financial Hurdles to Venturing

The Korea Venture Business Association (KVBA) has been there for venture capitalists and entrepreneurs through good times and bad for the past 15 years. Its role is growing more vital amid the current administration’s efforts to nurture ventures and startups under various programs such as the “3-year Economic Plan.”

BusinessKorea sat down with Nam Min-woo, chairman of the KVBA, to talk with him about the organization’s achievements, problems, future paths, and suggestions for the government. Excerpts from the interview follow.

It has been almost a year since the current government’s May 15 announcement, aka “Measures to develop a virtuous cycle in the venture and start-up funding ecosystem.” Could you give us an overall assessment as to the measure’s achievements?

Since the May 15 announcement, the overall venturing environment has been reinforced. A capital ecosystem for venture and start-ups has been activated, increasing the expectation to inject capital in earnest.

The current government, under the core agenda of the “creative economy,” is spearheading venture ecosystem restoration so that venture and start-ups can overcome the hurdle of insufficient funds.

We have come to enjoy the expanded income tax deduction to 50 percent on angel investments so that funds can smoothly be flown to ventures.

We now also see tax benefits related to M&As that focus on technological innovation.

Lastly, via the Future Growth Fund totaling 500 billion won (US$488 million) and a Growth Ladder Fund totaling 2 trillion won (US$1.95 billion), the shortage of funds has been relieved to a certain degree for venture and start-up companies to grow into medium-sized companies.

What do you see as the biggest achievement of the May 15 measures?

The measures have contributed to widening the windpipe of funds needed on each phase of the venture company’s capital cycle of birth, growth, and maturity, and aptly provide funds according to phase.

A “crowd funding” system also has been established to smoothly pump capital into companies that are in their infancy.

The Future Growth Fund, 500 billion won in size, evenly distributes its funds to companies in the birth and growth stages.

Investments amounting to 200 billion won (US$195 million) have been injected into birth phase companies that are 0-3 years old with high growth potential.

The rest of the fund is invested in growth phase companies that are 4-9 years old.

The Growth Ladder Fund, with its 2 trillion won, supports small to medium-sized companies at mature phase with 10+ years of history.

In addition, tax benefits that are equal to R&D spending are given to technologically-innovative M&As.

Finally, a legal base has been strengthened to allow the KOSDAQ market to be operated independently for investment recovery of venture firms.

What do you see as a problem or any area that has room for improvement?

We need to reform the venture certification system. It needs to be changed to focus on initial technology development and the diversification of certificates so that investment in technology can be better conducted.

The stock option system was created to secure a quality workforce and wage flexibility for venture companies. Despite partial tax revisions, it still needs improvement in the accounting system since companies and individuals alike are shunning the system for reasons such as accounting standards.

Restoration of the New Technology Exchange Bureau is needed, since it serves as a link between venture companies and conglomerates as well as a platform for M&As.

Loans with no guarantee are being introduced by phase, starting with policy-making financial organizations and staterun banks, but they need to be expanded to the private financial industry.

Also sorely needed is a “fail-safe” culture to be established in the local economy, so that failure can be accepted as a step to success. This is also a core basis of a creative economy.

Is there anything that you wish for the industry?

The venture and start-up environment has come a long way since the May 15 measure and the announcement of the threeyear economic innovation plan. This comes from the efforts of the industry that has been voicing their opinions, pushing for these kinds of changes before the current government’s move.

We need to have interests and put forth policy suggestions continuously to stimulate the venture ecosystem, so that follow-up measures can be implemented soon.

What are the things that you would like to ask the government for?

Since the current administration’s inauguration, many economic innovations have been spearheaded, such as “Measures to develop a virtuous cycle in the funding ecosystem for ventures and start-ups,” the “Five year plan for start-up education,” and the “creative economy town.”

On the back of these policies, the number of start-up companies reached a historic high with 75,574 in 2013. The number of new companies rose from 60,312 in 2010 to 65,110 in 2011, 74,162 in 2012, and 75,574 in 2013. Moreover, venture start-up fervor is rising centering around colleges to increase the intension of college students for startups to 64,7 percent in 2013 from fifteen percent in 2010.

In terms of the directions for start-up policy, in a bid to ignite tinder-box of start-ups and materialize the creative economy, first we need to expand “creative economy town” into an offline “Creative Economy Innovative Center,” so that we can explore and develop ideas and commercialize them.

Along with it, we need to nurture global entrepreneurs that aim at overseas markets right from the beginning of the start-up process by actively seeking local and foreign human resources.

We also need to encourage retirees, who were forced to enter the start-up market due to an economic recession, to start technology-focused startups, not letting them be led to selfemployment business.

According to KB Research data, a survey of individual entrepreneurs from 2001-2012 revealed that three out of four people closed down their businesses within 10 years, and half of them could not survive three years.

On annual average, 370,000 new businesses open up and 347,000 close. Individual entrepreneurs’ debt rise and income deterioration can be another trigger for a worsening economy. Individuals under early retirement programs in large businesses have limited options when choosing the type of business that they can open, so we need to guide retiree entrepreneurs by offering career change programs such as mentoring and connection to venture investment so that they open up a technology-focused business.