Chance for Quantum Jump
As Lee Yong-sung, chairman of the Korea Venture Capital Association (KVCA), has been reappointed, BusinesKorea sat down with him once again to hear about what has been done during his first term as the chairman. He said, “The era of new investment worth 3 trillion won (US$2.64 billion) a year, which I have aimed to achieve since I took office in 2015 is just around the corner,” adding, “This year’s investments in the first quarter reached 400 billion won (US$351.34 million) and the recent venture capital market has been continuously in a boom cycle. In particular, he stressed, “The venture industry still has a high level of dependence on government funds. However, the government should now achieve a proper balance between the government’s role in the market and private autonomy so that the purpose of venture capital will not fade away. Followings are some excerpts from an exclusive interview with him.
Congratulations on your second term of office as chairman of the Korean Venture Capital Association (KVCA). Please give us your thoughts on what have been done during the previous term.
Despite difficult economic conditions, change of U.S. government and domestic political chaos, we addressed numerous concerns and recorded the highest new venture fund arrangements and venture investments during the past two to three years. The era of new investment worth 3 trillion won (US$2.64 billion) a year, which I have aimed to achieve since I took office in 2015, is just around the corner. As various pension funds and mutual aid associations, which had been passive about venture fund so far, have started aggressively raising 3.2 trillion won (US$2.81 billion) to create new association last year due to the expansion of new LP, reaching a new record high.
The venture investment market has been improved in terms of both quantitative growth but also qualitative growth. Investment sources have significantly increased with various financing projects of the government and pension fund, while large venture associations have appeared with the qualitative growth of competitive venture capital. In 2016, various forms of investment has made, such as crowdfunding, accelerator, micro VC and startup venture PEF. The virtuous cycle from the expansion of startup investments to reinvestment of private capital and senior venture has also formed. We still have work to do to ease regulations and advance systems but most regulations, which have shrunk investment, are lifted now.
This year’s investments in the first quarter reached 400 billion won (US$351.34 million) and the recent venture capital market has been continuously in a boom cycle. We will need to create a mature investment market in 2017 with an aim of the era of 30 trillion won (US$26.35 billion) of assets under management and 3 trillion won (US$2.64 billion) of new investment.
During your inaugural speech, you said now is the full-fledged heyday for venture capital. What do you mean by that specifically?
With the change of perception of venture capital and efforts of the government, venture capital and venture industry, the overall atmosphere of the venture industry has been uplifted and the venture capital market has steadily shown a rising trend in the last three years.
In addition, the venture capital industry has shown a more positive signal since the inauguration of the new government. Due to the new government’s policy to promote small and mid-sized venture companies and the fourth Industrial Revolution, which is an opportunity to leapfrog, venture capitals, which seek out and promote companies that will lead next generations, are expected to expand their influences and roles. With a creation of the department for small and mid-sized venture companies, conflicted policies will be addressed, support for small and mid-size venture firms will be more efficient and the venture capital industry, including small and mid-size venture businesses, will gain a momentum further.
How does the KVCA help promising venture companies and startups push into the global market?
First of all, we run global star venture promotion R&D programs in order to foster promising Korean small and mid-size venture companies as global star ventures. We pick out companies with high chance of success in the global market, including overseas investment attraction, global M&A and IPO, from excellent venture capital investment companies and regional recommended companies at home and abroad, support their technical development projects, establish their step-by-step business models from preparation for overseas expansion, market entry and growth, and provide customized support, such as attraction of initial investment and expansion of sales outlets, in order to strategically help competent venture and startups to enter the global market.
In addition, we indirectly help small and mid-size companies go global through the globalization of venture capitals. Currently, domestic venture capitals are not remarkably globalized yet but they are increasing the number of overseas offices and overseas investment, expanding to the global market in earnest. We create a place for exchange between venture capitals at home and abroad and an atmosphere of co-investment fund and build a cooperation channel between LPs and GPs at home and abroad so that they can share pending issues in the industry information about VC investment.
Moreover, we set up a cooperative system between overseas embassies in Korea and the Korea Chamber of Commerce and Industry, promote the domestic venture investment market, expand venture capital exchanges between countries by connecting startups, investors and incubators and help startups to attract investment and enter the global market.
For projects that support inbound of foreign investment institutions, we pursue business collaboration and strengthen network with domestic venture capitals by operating a foreign investment institution council, which consists of about 30 foreign investment institutions based in South Korea, help domestic companies attract more investment by providing information about promising investments and investment market.
How much investments were made in venture capital last year?
In 2016, the amount raised for new venture fund increased by 17.9 percent to 3.2 trillion won (US$2.82 billion) from 2.71 trillion won (US$2.39 billion) at the previous year, reaching the 3 trillion won US$2.64 billion) level for the first time. New investments worth 2.15 trillion won (US$1.89 billion) were made in 1,191 companies, up 3.1 percent from 2.09 trillion won (US$1.84 billion) in 1,045 companies at the previous year. The figure also surpassed the 2 trillion won (US$1.76 billion) mark for a second successive year. In particular, reaching a new record high of venture investments is very meaningful and encouraging in that global venture investments are now shrinking. Venture investments in the U.S. and China decreased by 9.3 percent and 25.4 percent, respectively.
Taking a close look at it, there is change in investment sectors as much as growing investments. The share of investment in startup with three years of foundation or less recorded at 36.8 percent in terms of amount, reaching a record high after 2009. On the other hand, the share of investment in businesses with seven years of foundation and more dropped by 6.5 percent. It shows that venture funds are properly used as venture capital. It also shows a positive growth including the spread of virtuous cycle of the increase in investments in startups, creation large funds worth 200 billion (US$176.13 million) per fund, increase in venture funds raised by private capital and venture funds raised by senior venture companies.
Do you have any suggestions or recommendations to the new government?
As the government has carried out various support policies for small and mid-size venture businesses, the industry expects a second take-off. However, the core functions of the venture ecosystem, such as the self-motivated private investment market and collection market, has not gotten off the ground yet.
First of all, the government should make best use of the newly positioned status of the ministry of small and mid-sized venture companies and seek out opportunities to newly create a large frame of the industry by promoting organic cooperation and efficient functions between relevant ministries. In order for the venture and venture capital industry to make a “quantum jump,” it is important to expand quantitative funds and financial support. However, a bold and market friendly approach to boost the self-regenerating power of the industry and the competence in innovation and systematic supports will be more needed.
There is still a limit in the domestic industry to diversify venture investment funds using private capital due to numerous regulations. So, it still has a high level of dependence on government funds. However, the government should now achieve a proper balance between the government’s role in the market and private autonomy and create a healthy venture ecosystem so that the purpose of venture capital will not fade away.
In addition, the environment of the collection market is one of weaknesses of the South Korean venture ecosystem. The exchange markets, including KOSDAQ and KONEX, need to recover their own function as capital market infrastructure to retrieve the investment of venture investors and raise funds for venture startups. For M&A market, there is a critical shortage of effective demand to pursue M&As of small and mid-size companies and lack of opportunity to retrieve funds owing to various regulations that hamper M&A, weak tax support systems and insufficient supply of funds specialized in M&A.
Accordingly, the government needs to secure a quality secondary market by improving systems in the IPO and M&A market. It also should establish the intermediate collection market, which is complementary, by expanding policy fund allocation for the secondary fund to shorten the time of venture capital payback. A virtuous cycle of healthy startup venture capital ecosystem will be set up only when a quality collection market is activated.