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More Measures Needed to Stimulate Virtuous Cycle of Venture Eco-system
Still Long Way to Go
More Measures Needed to Stimulate Virtuous Cycle of Venture Eco-system
  • By matthew
  • May 6, 2014, 08:16
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Lee Jong-gap, chairman of the Korean Venture Capital Association.
Lee Jong-gap, chairman of the Korean Venture Capital Association.

 

Lee Jong-gap is the chairman of the Korea Venture Capital Association, a 25-year-old organization representing over 89 venture capital companies in Korea. The organization aims to promote a better venture capital system and enhance the awareness of the importance of the venture capital industry to the Korean economy. BusinessKorea met with him to talk about the effects of first year of the Park Geun-hye administration’s May 15 Plan and his views on what could be done to further improve the plan to more effectively bolster the Korean venture capital industry.

It has been almost a year since the government announced the May 15 Plan for smooth investment in venture firms and startup companies. Please give an overview of its accomplishments.

The plan was announced last year in order to address the financing problems hindering the foundation and growth of venture companies. The purpose is to foster investment-centered financing systems in each growth stage while ensuring the reinvestment of capital into the next generation of venture firms. In the first quarter of this year, total venture investment increased 25.2 percent yearon-year to 268.8 billion won [US$262 million], a new high since 2000, which implies that the plan successfully led to quantitative growth. The amount of investment is showing consistent growth now as well.

At the same time, various systemic and policy improvements have been in place for the fundamental revitalization of the financing ecosystem. The tax deductions on angel investment have been expanded to 50 percent and companies invested in by angel investors can be recognized as venture firms now. New tax benefits for technology and innovation-oriented M&As have been introduced, too.

However, we still have a long way to go in the aspects of corporate foundation and investment recovery. Today’s venture ecosystem in Korea focuses on growth and investment, rather than founding, reinvestment, and retrying. More measures are required to cover these weaker aspects.

Some experts point out that the KOSDAQ should come before KONEX for a virtuous cycle in the venture ecosystem. What is your opinion?

KOSDAQ and KONEX are fundamentally different. The former has played a central role in investment recovery for a long while, whereas KONEX was newly established as a complementary tool. What matters is not which one of the two should be beefed up, but how to set up and clarify standards suitable for their respective purposes. At present, the Korea Exchange is in charge of the management of both as well as KOSPI, which has resulted in some blurring between the purposes and operation standards. Action needs to be taken so as to deal with this situation.

KONEX, or Korea New Exchange, was founded to supply financial resources required for the growth of small and venture firms, help investors recover their investment and make reinvestment, and assist in the financing of such companies. The system is to promote the trading of the shares of early-stage companies that have yet to be qualified for KOSDAQ. As such, systemic assistance is required for them to settle in KONEX and then to have a chance of listing on KOSDAQ.

It is also pointed out that overflowing venture capital and policy funds are having difficulties in finding investment targets. What solution do you have in mind?

I would like to mention the financial means are not overflowing. Policy funds such as the Growth Ladder Fund are to be invested in a phased manner over a period of three years in the government’s roadmap. The Fund of Funds and the Korea Finance Corporation are public organizations that have been engaged in venture investment for a long time, and thus are not new.

Although a second venture boom is on the horizon, it is unlikely that the quantity of investment in the corporate sector will surge rapidly in the near future. Every venture capital firm raises funds with a size optimized for its investment purposes and portfolio management strategies, and utilizes the human and financial resources suitable for the size to maximize its profits, in view of domestic and overseas economic conditions and its own investment principles, in organizing its portfolio. Therefore, it is not desirable to look forward to any immediate outcome from policy fund investment. A long-term perspective and patience are necessary instead.

I also believe that the division of labor between angel investor and venture capital is highly important in the early stage of business establishment. Additionally, the government and the public sector will have to come up with more tax benefits for individual investors and newly-founded companies so as to mitigate their high investment risks. Venture firms themselves should try as well to sharpen their competitive edge and enhance their understanding of technology finance based on the sense of ethics and technological strength.

Do you have a plan for closer collaboration with global investors?

Global cooperation networks are very important in diversifying LPs and investment targets. Diverse physical elements ought to be input in order to ensure the growth of local venture capital in the global arena and make them more professional.

Collaboration with foreign investors should lead to tangible track records in the global market. For example, policy assistance needs to be provided so that local venture capital firms can be selected as joint GPs with their foreign counterparts when large-scale alternative investors such as the National Pension Service raise global funds. This will be a great boon for the venture capital firms to expand abroad.

Also significant are networking projects for global partnership making use of the Asia VC&PE Council covering the parties concerned of 10 Asian countries like Korea, Japan, Hong Kong, and China. Overseas training and exchange programs will be implemented for working-level experience, enhancement of global competitiveness of Asian venture capital, and introduction of advanced investment techniques. Experts trained in these programs will set the stage for local venture capital firms’ overseas market penetration.

What recommendations or requests to the government do you have for the virtuous cycle in the venture ecosystem?

Recovery of venture investment is the number one link for reinvestment in venture firms. In this context, followups are required so KOSDAQ and KONEX can better act as intermediate investment recovery tools. I would like to propose the revitalization of M&As and increased assignment of policy funds in the Secondary Fund, along with rational improvement of the procedure and requirements associated with M&As based on investors’ trust.

The dependency on policy finance has to be lowered and the financing structure should be diversified for the venture capital industry to enjoy sustainable growth. During the course, financial institutions and private capital have a huge role to play for the soundness of venture funds. Various tax benefits and incentives for the private sector will add to the effect of such measures, too.

In the current legal system, venture capital firms are regarded as a sort of means for backing up the real economy and present on the premise of corporate foundation assistance. This has resulted in various forms of regulations, including the restriction of investment in already listed companies. Venture capital should be considered as an independent industry so that its autonomy can be enhanced on the basis of stable growth.