The sobering reality of South Korea’s limited natural resources and agricultural land has forced its government to become a major player in tech investment and investment facilitation. Successive political administrations have relied on the exports of some of its largest conglomerates, such as Samsung and LG, the largest and third-largest smartphone manufacturers in the world respectively. But the dominance of these behemoths has become a barrier to further economic expansion because, as large companies, they are slow to innovate.
This is where a creative economy is needed to fill the innovation gap. Unfortunately, the combination of a risk- averse population, outdated legislation and difficult conglomerates has created a start-up aversion.
However, that attitude is rapidly changing. South Korea’s new president, Park Geun-Hye, was elected last year on a mandate to reinvent the economy, and she has been vigorously promoting entrepreneurialism. Apart from government rhetoric and TV game shows about becoming an entrepreneur, her administration is investing billions in incubators and education. The government is leading the way in cultivating a creative economy, and the results have been significant. There is already a Silicon Valley-style tech hub south of Seoul, and the number of entrepreneurs is rising steadily, particularly in certain areas, such as robotics.
The speed with which start ups have begun springing up – the total standing at more than 28,000, double that of 2012 – has attracted attention from foreign tech giants such as Google and Facebook, which are setting up regional offices in the capital.
Law and policy
Venture capital (VC) is in short supply. While VC had a sustained resurgence in the late 1990s, with 29,000 investors injecting $485m of capital in 2000, that figure had dropped to $3m by 2010 – just 3% of total capital invested in South Korea that year. Although VC funding has picked up since 2010, with 417 VC firms now operating in the country, the numbers are in stark contrast to countries such as the UK and US. There are several reasons for this, most notably a risk-averse culture which seems to have informed policy over the past three decades.
There are stringent contractual protections for investors who decide to invest in a South Korean start-up, the
- Rights protecting return of the investment, such as a redemption right or put option.
- Entitlement to a partial refund – amount agreed by both parties – should the business fail or the founder leave the company within five years of the investment.
- Rights to participate in management.
Korean law requires VC funds to be formed as stock corporations rather than the partnership structure more common in the US. Critics have argued that this creates a more short-termist attitude, with investors focusing primarily on quarterly results – an attitude not best suited to the boom and bust nature of start-ups.
This lack of foresight and focus on fast profits leads Korean VC firms to opt for quick exits. Korean firms tend to cash out via initial public offerings (IPOs) about 75% of the time, and via a merger or acquisition 25% of the time.
A lack of VC activity has not necessarily been detrimental to growth of the start up industry – quite the opposite. The government has been forced to pump billions into schemes and initiatives to simulate growth, and acceleerating its participation in investment and financing.
For example, the government is permitted to subsidise VC firms under the Special Law to Promote Venture Capital Companies, passed in 1997. Although well intentioned, there have been reports of firms entering high-tech industries simply to obtain a subsidy. The new administration has extended this law to 2017.
There are also safety nets for entrepreneurs. People who work for public bodies are guaranteed their job back within three years if they leave to launch a start up. And entrepreneurs can receive tax breaks on office space if at least 75% of the building is used by other start-ups.
President Geun-Hye recently announced new tax policies to incentivise start up mergers and acquisitions, and looser regulations for larger companies to engage in deals with smaller, struggling businesses. The government is also keen to increase private individual investment by offering tax cuts and payment deferrals to investors who reinvest their returns into future business ventures. This has worked well, as more successful Korean entrepreneurs are reinvesting in the start up ecosystem.
The president also hinted at introducing a new crowd-funding system for wealthy individuals and a third stock market, the Korea New Exchange, for small business ventures. Experts have predicted that this could lead to a $4bn increase in venture investment over the next five years.
Funds, finance and investment
The government is the largest player when it comes to investment in South Korea. Government spending on research and development (R&D) accounts for 4% of GDP, and the president wants to raise that to 5%.
In March this year, she announced a three-year $4bn spending package on start up initiatives, with the pre-diction that “unless we change the fundamentals of the economy and break from the trap of slow growth, there will be no future for us”.
This funding is being distributed as direct grants and investments, the creation of innovation centres connected with national universities, and through agreements with many of the leading VCs and accelerators. Currently, 10 private organisations have an agreement for 1:5 matched government funding, meaning that by the end of this year, 50 Korean start ups will have received $600,000 under the programme.
At the heart of South Korea’s start up drive are three government agencies primarily concerned with investment and R&D – the Ministry of Science, ICT and Future Planning (MSIP), The National IT Industry Promotion Agency and (NIPA) and the Korea Evaluation Institute of Industrial Technology (KEIT).
Both the NIPA and the MSIP are responsible for creat-ing and investing in schemes that promote entrepreneurialism and start up technology. Late last year, the MSIP launched the Born Global Start-ups programme, which offers start-ups business advice on attracting investment and business strategy planning on entering the global market. It has a specific focus on companies working in the areas of 3D printing, medical devices and active touch screens. The 20 chosen start-ups for the programme receive between $28,000 and $93,000 in government funding.
The MSIP also launched three start up incubators, each with a $465,000 war chest to train and invest in 10 promising start-ups. The incubators collaborate with overseas accelerators for further investment and advice. Two more incubators, under the Global Business Incubator programme, were launched with the mandate of funding and training successful companies seeking to expand globally. Each centre was given more than $230,000 to fund more than 60 Korean people or businesses at home or abroad.
The NIPA is primarily an advocacy agency that supports the information and communications technology (ICT) industry by conducting policy research and promoting Korean businesses to foreign investors. It takes an overarching view of the future of the industry – trends and the support businesses need. It also participates in investment to foster growth in innovative companies and produces policy documents for the government. It has an investment remit of $300,000 for ICT growth technology development and $500,000 for applied technology development.
Investments and deals
The government has in the past backed start-ups that have become successful, including gaming companies Naver Corporation and Nexon, as well as anti-virus company AhnLab. However, the exact level of support has not been disclosed.
Mobile communications app company Kakao signed a deal with the Korean government last year to create a $27m entrepreneur fund that supports and invests in promising tech start-ups that are working on the next generation of mobile technology.
A large portion of the increased R&D funds will be spent on robotics. When the president announced the start-up stimulus, she acknowledged that South Korea’s ageing population amounted to a “silent, looming disaster”.
The government believes service industry robotics will become a lucrative sector, with the added bonus of addressing issues arising from an ageing population. Mil-lions have been thrown at robotics research and one of principal government departments involved in this initiative is the KEIT.
Although the demand for service industry robots is currently minimal, the government is preparing for what it believes to be the inevitable widespread development and production of cheap domestic robots. The KEIT has already pumped research money into companies that have produced robots with artificial intelligence judged to be equivalent to a child’s, but it also working on robots that can perform two or three simple tasks, and on making them as cheap as possible.
The KEIT has five core R&D programmes. One specifically supports development of small and medium-sized enterprise technology and has a budget of just over $276,000, 13.9% of the KEIT’s overall budget.
In another government-driven initiative, the Gyeonggi Province Council has built a tech hub called Pangyo Techno Valley in the city of Seongnam. Conceived in 2005 and opened in 2012, it now houses 44 tech companies, including instant messaging start-up KakaoTalk, which is soon to submit its IPO, AhnLab and green-tech company SK-Chemical.
Global Corporate Venturing has covered these innovative regions round the world. To see the state of venture investing and the broader innovation landscape in each region check out www.globalcorporateventuring.com