Surrounded by the Yellow Sea to the west, the East China Sea to the south, and the Sea of Japan to the east, South Korea forms the southern part of the Korean peninsula, just south of its controversial North Korean neighbour after the nation’s sundering in the 1950s Korean War. With a land area of just over 100,000 square kilometres, including 3,300 mostly desert islands, more than 60% of its territory is covered by forest.
Despite the forest cover, and similarly to Japan, South Korea has become one of the world’s high-tech hubs, having birthed conglomerates, called chaebols – literally “wealth cliques” – in the form of Samsung, LG and Hyundai Motor. With most of its wealth coming from manufacturing and services, South Korea was recently classified as the third-largest exporter in Asia after China and Japan, and the seventh worldwide, with top exports including computers, smartphones and cars.
Over the past few decades, South Korea has played an increasingly major role on the international stage, and significantly increased its weight in the global economy. Established as a standalone nation only 70 years ago, South Korea is currently considered East Asia’s most developed country, and stands as an example of fast economic expansion.
With a GDP in the region of $1.5 trillion, and a GDP per capita at around $32,000, according to International Monetary Fund (IMF) estimates, South Korea is the 11th-largest economy worldwide – an impressive rank considering the country is ranked only 107th in terms of size, with a population of just over 51 million.
Hicheon Kim, professor of strategy and organisation and director of the Korea University Business School (KUBS) Startup Institute, said: “Few economies in the world have matched the phenomenal economic development of Korea in terms of industrialisation and technological progress.”
South Korea’s industrialisation kicked off in the 1960s, following the military coup orchestrated by Park Chung-hee that led him to become the country’s president. In power for 16 years, Park launched a series of five-year developments to drive the country’s economic growth, starting with the agriculture and energy sectors. The most famous of these was the first five-year plan, implemented between 1962 and 1966.
Jay Eum, co-founder and managing director at Palo Alto-based early-stage venture capital firm TransLink Capital, for which he oversees South Korean activities, distinguishes two periods in the country’s economic development. He said: “After the Korean War economic blow [after 1953], the government worked closely with selected corporations to undertake major projects often financed by government-backed loans, laying down the basics of an industrial breakthrough.
“Each company would focus on a specific industry – Hyundai Motors was, for example, in charge of automotive, LG and Samsung of electronics, Korea Oil Corporation [now SK Innovation, a branch of the SK Group conglomerate] of chemicals and refining activities.
“From the 1990s, the government focused on putting the initial infrastructure for mobile and broadband in place, supporting telecoms companies such as Korea Telecom, now KT, and SK Telecom.”
Since 2005, South Korea has also been leading the world’s transition to high-speed internet access. According to the Organisation for Economic Co-operation and Development (OECD), it now has the world’s fastest average internet connection, as well as the highest 4G availability and a broadband penetration of 41.13 per 100 inhabitants.
By 1996, the country’s 30 largest chaebols – including Samsung, Hyundai, LG and the now-defunct car manufacturer Daewoo – accounted for 40% of Korea’s total output, according to Kim.
Their hegemony over the national economy was first called into question in the aftermath of the 1997 Asian financial crisis. The crisis, which hit the entire region, saw South Korea’s GDP fall by 5.8% while its currency faced a sharp decline of 54% against the US dollar. As the situation continued to escalate and an estimated million jobs had been lost, the country had no choice but to resort to a $58bn bailout from the IMF.
Kim said: “The perception of these large and diverse business groups changed dramatically as Korea suffered its worst economic crisis. The Korean economy was described as being hopelessly squeezed by two giants – Japan, equipped with advanced technological capabilities, and China, equipped with low wages.
“Many of the largest business groups in the nation that were once credited with phenomenal growth of the Korean economy ultimately failed [about half of the 30 largest chaebols in 1996 underwent bankruptcy proceedings or bank-sponsored restructuring programs], with the chaebols being blamed for causing the nation’s worst and most humiliating economic crisis.”
Eum said: “After three decades of fantastic development, the crisis acted as a massive wake-up call for the entire country. Up to that point, South Korea had been predominantly dependent on the chaebol, but as the entire economy was shaken up, it turned out that some of them were not sustainable.”
That realisation began to change the national psyche, Eum added, so much so that when President Kim Dae-jung took over in 1998, a major push was made to reduce the country’s dependence on conglomerates and to support startups and entrepreneurial development.
A first wave of change hit the country at the turn of the century, with the government introducing tax incentives for the VC industry, reducing VC firms’ taxes on profits to much lower levels and making certain VCs eligible for government help in the form of long-term low-interest loans and equity funding.
A new stock exchange modelled on Nasdaq was established to facilitate the listing of entrepreneurial ventures. Soon enough, South Korea witnessed its first “startup boom”, to quote Hicheon Kim. Between 1997 and 2000, the number of active VC firms jumped from fewer than 50 to 150, while 261 limited partnerships were created in 2000 alone, totalling around $1.9bn of investable funds, according to Kim.
Fast-forward to a dozen years later, and a second government-sponsored movement of support towards venture and innovation took birth under the rule of Park Geun-hye – South Korea’s first female president from 2013 until her impeachment in 2017, and incidentally the daughter of former head of state Park Chung-hee.
Launched in 2013, Park’s Creative Economy Action Plan was presented to the nation as a project that would help it achieve a “second miracle on the Han river”, as referenced by Robyn Klingler-Vidra and Ramon Pacheco Pardo, professors at King’s College London, in an academic paper – An Evolving Developmental State: What is the perceived impact of South Korea’s Creative Economy Action Plan on Entrepreneurial Activity? The plan also came as a response to the employment crisis hitting college graduates in particular, with goals to boost their hiring by new startups.
According to Klingler-Vidra and Pacheco Pardo, as part of the plan, 18 centres for creative economy and innovation were opened, each of them partnering a chaebol. A series of funding initiatives followed to provide more diverse financing opportunities for entrepreneurs, while new tax incentives were introduced to stimulate angel investment and reinvestment by successful entrepreneurs.
The government also committed to investing $3bn annually in the startup ecosystem, as well as to increasing basic research funding by 40%. It also promised to redirect 18% of publicly-funded research and development towards small and medium-sized enterprises.
Other investment initiatives arose in the years to follow. A $1.5bn investment from the Ministry of Science, Information and Communications Technology and Future Planning was, for instance, dedicated to local telecoms companies, aiming to boost their progress on 5G mobile network technology.
In 2015, Korea’s Institute for Startup and Entrepreneurship Development was also launched, aiming to support 50 Korean startups through three-month immersion programs overseas. And a year later, the global accelerator program K-Startup Grand Challenge was set up to attract foreign entrepreneurial teams to Seoul’s Pangyo Techno Valley, offering them help with visas and mentoring, and facilitating their introduction to relevant chaebols.
These are just a few examples of the many measures implemented by the South Korean government to expand the local ecosystem. Klingler-Vidra said: “Broadly speaking, in South Korea the government has a much more parental role than in other more developed ecosystems. Historically, the Korean economy represents the archetypal development state where the government is central to helping firms grow by providing funding, access to equity, professional tax treatment and so on.”
Looking back on the country’s economic development in recent years, she said: “If you were to ask me what has been driving activity and growth over the past few years in Korea, I would say the plan probably had a key role. First of all because it has helped normalise the ideas of entrepreneurship, of being creative, of taking risks, which are now all part of everyday conversations. Somehow, it has become much more okay – and even desirable – to be an entrepreneur in Korea than it used to be. Today, if you drive around Seoul, you see venture-related ads on billboards all around the city.”
According to the Korean Venture Capital Association, startup funding has been consistently on the rise under the Park plan, growing successively from with ₩1.6bn ($1.4bn) in 2014 to $1.9bn in 2015, to reach roughly $2bn in 2016. A total of 901, 1,045 and 1,191 startups were funded respectively in those years.
The rise of South Korean corporate venturing
As they witnessed the rise of a new kind of activity in the country, South Korean corporates were forced to respond. As Kim wrote in one of his papers: “The growth of these new ventures placed further pressure on large business groups as they not only faced a declining domestic market, but also numerous new competitors attracting key personnel.”
By 2014, a California-based seed fund for Korean entrepreneurs, Strong Ventures, had already identified as many as 10 unicorns – companies worth at leat $1bn – which it referred to as the “Korean Unicorn Club”. More recent unicorns include Yello, which received a $100m commitment from VC firm Formation 8, and was valued at an estimated $4bn as of 2016.
One of the country’s most famous successes is web company Naver, known as “the Google of South Korea”, famous for developing the Japanese instant messaging app Line, which floated on the New York and Tokyo stock exchanges in 2016 and was valued at more than $9bn after the first day’s trading. Currently valued at $22.1bn, both Naver and Line have been active corporate venturers in South Korea.
After Line’s initial public offering raised $1.1bn in July 2016, Naver joined Japan-based telecoms group SoftBank to launch a $43m vehicle, SB Next Media Innovation Fund, to invest in startups and technologies with synergies with Naver-incubated Snow, a Snapchat clone, and Webtoon, a digital comic company.
Naver invested around $90m in Korean entertainment company YG Entertainment last year, and has backed food delivery app Woowa Brothers’ $32m series F round and online logistics company Mesh Korea’s $31m series D round. Recent reports spoke of the group’s intention to make a limited partner contribution to US-based VC Sequoia Capital’s latest venture capital global fund targeting $6bn. Naver is also a limited partner in Golden Gate Ventures’ $60m fund for Southeast Asia.
Line, after its 2016 IPO, committed to two VC firms, US-based DAG Ventures and France-based Korelya Capital. Line and Naver committed €50m ($66m) each to Korelya Capital’s K-Fund 1.
Kakao, the internet services group that in 2010 launched instant messaging app KakaoTalk, now reportedly used by 40 million people worldwide, is another landmark on the Korean startup scene, with a valuation currently peaking at $7bn. The group, which counts the Chinese investment holding Tencent among its early investors, secured another $1bn of funding earlier this year and has been an active investor itself.
In March, South Korea-based artificial intelligence (AI) technology developer Skelter Labs raised ₩10bn ($9.2m) in a round featuring subsidiaries of internet group Kakao and diversified conglomerate Lotte Group. Kakao invested through its AI-focused KakaoBrain division and venture capital vehicle K Cube Ventures.
Similarly, South Korea-based unicorn CJ Games and e-commerce company Coupang, often referred to as “the Amazon of Korea”, have attracted international investment. Currently valued at $5bn, Coupang raised a total $1.4bn, receiving a $1bn investment from SoftBank, $100m from Sequoia Capital and $300m from US-headquartered investment management firm BlackRock.
Chinese peer Tencent acquired a 28% stake in CJ Games for $500m in 2014 in the second-largest corporate-backed deal in Korea so far this decade.
The country’s total deal value brought it to 12th position last year, before France ($799m) and after Canada ($914m), while it ranked 16th in terms of deal volume, sandwiched between the Netherlands (20 deals) and Australia (12 deals).
A distinctive feature of South Korean startups, some local players said, was their capacity to reach a high valuation within their domestic boundaries before setting foot overseas. For TransLink’s Eum, this can be linked largely to the nature of South Korea’s consumer base.
He said: “Thanks to the advanced mobile and broadband infrastructure that was pushed by the government over the years, the public became very familiar with high-speed internet and smartphone technology.
“If you compare it to other markets, South Korea’s per capita spending on technology and tech-related products is relatively high. Equally, if you look at country rankings on the App Store or on Google Play, the country systematically appears in the top four right behind China, the US and Japan in terms of gross spending, which evidences the existence of very tech-savvy consumers.”
Last year, South Korea was ranked sixth worldwide for smartphone penetration, with a rate set to reach 77.7% this year, just before the US (75.6%) and after Hong Kong (84.7%). “If you can succeed in becoming a leader in your sector domestically, then you can create a billion-dollar business model,” Eum continued. “That is how some of South Korea’s leading companies have already attracted foreign capital from landmark foreign investors such as SoftBank, Sequoia, Tencent, Qualcomm and Intel Capital. All have been investing both on the basis of advanced local technologies and a tech-hungry national consumer base.”
A growing number of foreign corporates have already set foot in South Korea. One of them is semiconductor and display equipment maker Applied Materials and its venture arm Applied Ventures. Last year, the unit established a new vehicle – Applied Ventures Innovation Fund I, targeting $40m – alongside government-backed fund of funds Korea Venture Investment Corporation. The fund targets Korean startups operating primarily in semiconductors, display technology, robotics, healthcare and energy storage.
While Applied Materials has been implanted in South Korea for about 30 years, its venture arm started looking at local opportunities only recently. Joseph Jeong, an investment director managing all Applied Ventures’ investments in Asia, said: “Although we made our first investment here in 2012, we had started taking an interest South Korea a couple of years before that. One of the main reasons we established a regional fund was that we noticed an increasing dealflow in our core sectors and were seeing, and still see, the country as a fertile ground for innovation and technology.”
Since the group closed its first deal in 2012, a new investment opportunity has arisen almost every year. “Our current pipeline tells us it should not be too hard to maintain, or even accelerate, our local investment pace,” Jeong added. “South Korea is a very attractive market in that it has an extremely highly-educated workforce, with high-end manufacturing capabilities and very advanced technologies in the semiconductor and display spaces – two of our core businesses.
“From a purely financial point of view, while China and the US are still the prime places of investment these days, getting good valuations there is increasingly hard because of the high concentration of investors. The same dollar will always go a little bit further in Korea than it does in those places.”
South Korea’s biggest foreign investor is SoftBank, with a total of 14 deals recorded in 2017 alone, according to GCV data. And the activity, as well as deals such as that with Naver to develop a joint fund, has seen Greg Moon effectively promoted from country head of SoftBank Ventures to a partner on the near-$100bn SoftBank Vision Fund.
After SoftBank, US-based semiconductor and telecoms equipment maker Qualcomm has conducted 10 deals. Tencent closed five deals and SparkLabs Ventures, a Korea-focused $50m fund focusing on early-stage startups launched by investment holding SparkLabs Group last year, closed three.
Japan seems to be spreading its wings quickly over its neighbour’s territory, as media company CyberAgent, financial services provider SBI Group, e-commerce and internet company Rakuten, telecoms group KDDI, and game developer Colopl – all Japanese groups – all closed at least one deal each in 2017.
Chaebol response
The chaebols, of which there are around 45, still have a relative monopoly over the domestic market, with the five largest conglomerates – LG, Hyundai, SK, Samsung and Lotte – currently accounting for half the Korean stock index, and Samsung accounting for 30% of it alone, according Bloomberg. The top 10 chaebols, meanwhile, own more than 27% of all national business assets.
Despite some significant changes implemented by the government both at legal and institutional levels, Korea’s conglomerates have so far managed to maintain their competitive advantage over startups. Hicheon Kim said: “Chaebols have unique advantages in financial resources, specialised manufacturing capability, access to distribution channels, service networks, and complementary technologies that are necessary to commercialise and profit from an innovation. That is why, to a large extent, startups in Korea often gain much more by deciding to partner the chaebols than by going it alone.”
In other words, South Korean startups are not quite ready to be fully independent from chaebols. In a recent paper – Only beyond the chaebol? The social purpose of entrepreneurship promotion in South Korea – Klingler-Vidra explained: “Policymakers in South Korea have conceptualised entrepreneurship promotion as embedded in, rather than alternative to chaebol-led economic output and employment. Instead, [they should] continue supporting chaebol innovation alongside job creation and economic diversification.”
Of the big five chaebols, Lotte’s Skelter Labs deal was its first reported, and it has been the slowest to develop corporate venturing. In the past quarter, SK Telecom has invested in a $65m round for ID Quantique, a Switzerland-based quantum cryptography technology spinout from University of Geneva, a $50.6m series C round for SiFive, a US-based fabless provider of customised semiconductors, and a $104m D round for US-based vehicle-sharing platform Turo.
And in relatively rare personnel changes, Dong-Su Kim, one of South Korea-based electronics conglomerate Samsung’s most experienced corporate venturers in the US, has joined electronics producer LG to set up a new venture fund, LG Technology Ventures.
As general manager of Samsung Ventures America, Kim led deals for Samsung in more than 20 companies, including Pure Storage and Netlist, which were floated on the New York and Nasdaq stock exchanges respectively. Henry Chung is managing director of LG Innovation Ventures, a separate fund, while the chaebol’s subsidiaries, such as LG Electronics, also invest directly, as in last month’s Bossa Nova’s $29m round to develop robots to look at on-shelf product data for the retail industry.
Car maker Hyundai has also stepped up activity this year, investing an undisclosed amount in Singapore-based ride-hailing service Grab, and participating in US-based voice intelligence technology developer SoundHound’s $100m round in May.
As well as being the biggest chaebol, Samsung has been the country’s most active CVC, but one undergoing changes. Samsung Venture Investment Corporation (SVIC), its corporate venturing unit, appointed Yong-bae Jeon, senior vice-president of Samsung Fire & Marine Insurance Company, as its new head, a role he took up in April this year. Jeon replaced Sungjong Lee, who had been president of SVIC since 2013.
Founded in 1999, SVIC bases most of its team in Korea, including its investment committee, but it is understood about 80% of its deals by value came from the US.
The economic shadows of China and Japan are looming, forcing chaebols to collaborate more with other businesses and universities and to be more open to innovation.
Canada-based artificial intelligence developer Element.AI was recently chosen as the independent partner of a corporate-backed fund bringing together three South Korean chaebols as limited partners. Speaking at the Intel Capital Summit in May, Jean-François Gagné, CEO of Element.AI, said it had set up a corporate venturing fund to focus on its “main area of business but do more stuff and take some upside”.
He added: “Hanwha was a shareholder in Element.AI but did not want to cover all the fund, so within two weeks we had added Hyundai and SK at $50m each to do 10 to 15 deals.”
The legitimacy of chaebols has been called into question many times in recent years, especially with regards to the close relationship they tend to have with the government. The controversy around this issue peaked in 2017, when Samsung’s vice-chairman and de facto head Jay Y Lee received a prison sentence – subsequently reduced and suspended – following accusations that he had given up to $36m to a friend of former president Park Geun-hye to win government favour. Park was subsequently impeached and sentenced to 24 years in prison over allegations of bribery, coercion, abuse of power and leaking state secrets, while Lotte’s chairman Shin Dong-bin, also found guilty of bribery, received a two-and-a-half-year sentence.
Next steps
These blows to the reputation of the chaebols may give South Korea’s startups a chance to take over the national economy. Klingler-Vidra commented: “Korea has come a long way in making startup and entrepreneurial culture part of its economic development, but some key drivers still need to be worked on to make it a fully functional and blooming ecosystem.” Among those drivers are the need for a more transparent regulatory environment in which entrepreneurs – local and foreign – can operate safely, and a relaxation of migration laws and easier access to the country.
The lecturer added that the country should take advantage of its experienced middle-aged entrepreneurial basis. “Entrepreneurs here are not your typical ‘fresh out of college Mark Zuckerberg’ kind of guy. They tend to be experienced workers in their 30s or 40s, many of whom have spent years working for a big chaebol. As the notion of lifetime employment recedes, these technically-inclined entrepreneurs have the potential to lead disruptive startups in Korea.”
Jay Eum, meanwhile, believes government support will continue to be key for the ecosystem’s development in the near future. He said: “In markets like Korea, where startup culture was originally non-existent, it makes sense for the government to intervene. However, it is all about pace. It takes time to encourage and nurture a startup ecosystem, and so there should always be a sense of continuation from one government to the next. Administrations should be orientated towards long-term rather than short-term results.”
All these elements are, however, not sufficient to blunt Hicheon Kim’s unwavering positive outlook, or his faith in the potential of Korean entrepreneurs. He said: “We now have a number of very successful startup models that can appeal to potential entrepreneurs and their families. I do believe South Koreans have some sort of entrepreneurial spirit in their DNA, which means that all we need to do is keep improving the ecosystem. It will be interesting to observe what happens over the next four to five years.
“One thing I would particularly love to see is more entrepreneurs among the younger generation. Elsewhere, the excitement around CVC first emerged around the year 2012. In Korea, it is happening now, with more and more corporates progressively changing their attitude and engaging in VC activity.
“The scene is definitely picking up momentum right now in South Korea – and once Koreans move, they move fast.”
In a recent Techcrunch interview Tim Chae, a partner at venture fund and seed accelerator 500 Startups and founder and general partner of 500 Startups Korea, analysed the current situation in the following way. “There will be a Silicon Valley type of hub in Asia within the next five years, it is certain, outside of China which stands as another planet completely. Will it be Hong Kong, Singapore, Seoul?
“Regionally, the support from the government, combined with the pali-pali [“hurry up”] culture and the first-of-its-kind mobile and internet infrastructure all help differentiate from nearby markets. Japan still has stronger brands, although they have been sidelined for a while, and China is strong both on prices and now on innovation. Will South Korea be able to step up and become the convergence capital of the world, acting both as a test-bed for the future of mobile and a launchpad for Asia?”
University venturing in South Korea
An estimated 60 corporate-backed accelerators are currently active in the country, including -Naver’s D2 Startup Factory, investing in artificial intelligence (AI), machine learning and the internet of things, Kakao’s AI-focused Startup Nomad, and pharmaceutical group Bayer Korea’s Grants4Apps, founded in partnership with the Korea Trade-Investment Promotion Agency.
In 2015, Google opened its first Asian campus, Campus Seoul, offering local startups a space to work and expand, along with perks and free or low-cost services. In 2015, Samsung launched its in-house startup incubation program Samsung Creative Lab, which has supported around 34 projects to date, including three AI companies – Toonsquare, Aurora and Gadget – earlier this year.
FuturePlay is one of the country’s landmark incubators, working in collaboration with public research university Korea Advanced Institute of Science and Technology (KAIST) and some of the country’s top chaebols.
South Korea’s overall venture ecosystem is boosted by world-class universities. According to the Organisation for Economic Co-operation and Development’s most recent ranking, Korea is the fourth most-educated country worldwide behind Canada, Japan and Israel – 46.86% of people aged 25 to 64 have completed tertiary education in the form of a two to four-year degree, or a vocational program.
In the Times Higher Education World University Rankings 2018, Seoul National University, KAIST, Sungkyunkwan University and Pohang University of Science and Technology were designated the country’s top four higher education institutions. Korea University, Ulsan National Institute of Science and Technology and Yonsei University were all in fifth position.
Graduates of these universities are frequently recruited by the country’s top chaebols, some of them taking an entrepreneurial path later in their career. For example, of the 10 unicorns identified by Strong Ventures in 2014, five had founders who were graduates of either Seoul National University or KAIST.
Hicheon Kim, in a recent article published by Global University Venturing, said the government had recognised the importance of the role played by universities in expanding the ecosystem, and had relaxed regulations and introduced new initiatives to facilitate the creation and funding of university spinouts. Kim said that over the past four years, the number of entrepreneurship courses in Korea had more than doubled, while the number of student entrepreneurship clubs had increased more than fivefold.
At Korea University Business School in Seoul, the KUBS Startup Institute incubator was launched in 2016 and has since helped incubate 20 new businesses, all of which are still active. Kim said much funding was being provided by university alumni willing to support young entrepreneurs. He said: “Students in South Korea have traditionally been quite risk-averse, preferring to work for big enterprises or conglomerates. This seems to have changed in recent years, with many students now showing an interest in becoming entrepreneurs.”
Ten years ago, Kim said, the government changed the law to allow universities to create technology holding companies to commercialise their technology and research, thereby also facilitating the formation of university spinouts. As a result, in 2008 Seoul National, Hanyang and Sahmyook universities all launched their own holding companies, taking as their examples University of Oxford’s tech transfer office Oxford University Innovation and Stanford University’s research institute SRI International. As of 2016, 48 university holding companies owned as many as 435 subsidiaries in South Korea.
Until recently, universities were allowed to invest in spinouts only through holding companies and were required to own stakes of at least 20% in them – obligations that have since been lifted. Universities are now able to raise venture funds and own accelerators, some of which may qualify for government help.
“More should be done than deregulation and funding initiatives,” Kim said. “The supply of money and the amount of quality startup companies cannot grow dramatically overnight. That is why the role of universities should be expanded, and universities themselves should try to increase the number of startups created within their walls. They should try to promote innovation, and at the moment, I am not sure they have that mindset.”
TransLink Capital’s Jay Eum added: “Universities and colleges should really provide entrepreneurial courses and internship opportunities, so that students know what they are getting themselves into should they decide to go down the entrepreneurial path.
“Some universities in Singapore and the US have already adopted this, which to me makes complete sense and benefits the ecosystem as a whole, as it gives students a chance to graduate as fully-educated entrepreneurs.”
Although university venturing has taken its first steps in South Korea, a shared feeling among local players seems to be that higher education institutions could make more effort to adapt to the growing venturing space and try to contribute more to the ecosystem’s development.
