South Korea is widely regarded as being six to 24 months ahead of the rest of the world in innovation and technology, and this means government and corporation support for venture capital (VC) firms could become equally prominent in other areas of the world too.
The country’s economic rise since the partition of the country at the 38th parallel in 1953 has been impressive. Although military tensions with North Korea remain, the southern republic has moved from virtually the entire population being below the subsistence line after the war ended (and earnings still less than $100 per person per year a decade later) to personal earnings of more than $17,000 a year by 2009.
South Korea has also recovered rapidly from the global credit crunch, with a near 3% fall in gross domestic product (GDP) in 2009 followed by an estimated 6.1% rise last year as exports recovered.
The country’s shift from reliance on heavy industries, such as steel and chemicals, in the 1970s to conglomerates, called chaebols, diversified into information technology (IT) as one of their largest sectors has driven its more recent growth. South Korean companies have 61% of the memory semiconductor market, 31.6% of mobile phones, 53.6% of displays and 32% of the lithium-ion batteries that power most handheld electronic devices.
Samsung and LG Group posted record profitsin 2009 on more than $160bn in aggregate revenues and the IT industry makes up a quarter of South Korea’s GDP and a third of its exports.
Although technology companies make up 1% of the country’s 2 million small and medium-sized enterprises (SMEs), the Korean government has concentrated its efforts on supporting the technology and venture capital (VC) markets through the downturn.
To counter criticism that Korea’s culture was becoming risk-averse and unsupportive of smaller businesses and entrepreneurs, the World Bank said regulatory reform had made it easier to start new ventures. In one year, the country improved its World Bank rank from 133 to 53 in the ease of starting a business.
This government support for nascent businesses – directed through funds of funds, such as the Korea Venture Investment Corporation – meant more than 80% of local VCs were backed by government money in 2009 with more than $1bn committed, and more was provided last year. Last year’s commitments included about $10m to the Korea Advanced Materials Fund to back plastic electronics and other clean-tech deals and which also included Belgium-based chemicals company Solvay as a limited partner (LP or fund investor).
Institutional money, from pension and insurance funds, has traditionally gone into private equity funds carrying out leveraged buyouts rather than to VCs. This has left 80% of VC firms to be managed or sponsored by local or foreign corporations rather than independent partnerships. Local companies, such as LG, Samsung, SK Telecom, Woori, Doosan, Korea Telecom (KT), Posco and Kookmin Bank, all manage or sponsor large, sophisticated VC firms,while overseas companies International Data Group (IDG), Cisco, Qualcomm, Novartis and Intel invest in nascent South Korean companies from their corporate venturing units.
IDG set up its $100m IDG Ventures Korea Fund I in 2007 for early-stage investments and is preparing to raise its second fund for later-stage deals at $100m later this year with $25m being committed by the sponsor and the rest from third parties.
Matthew Lee, managing partner of IDG Ventures Korea, said: "Korea’s VC industry has been driven by [the] government. The reasons the Korean government has actively supported the VC industry are, first, a weak LP base, second, government policy [for] new growth [and the] creation of employment, and, third, [its] unique VC law."
Government money, however, comes with strings and limits most of the finance to specificareas and types of companies, while in return placing zero capital gains tax on profits.
Lee added: "Government-backed funds of funds affect the goals of the VC firms,but VCs always try to pursue financial returns by maximising the 40% to 50% free room [they have in their] investments. Sometimes, there are a few side effects [as] the VCs with bad track records can survive if they can satisfy government policies."
IDG’s second Korean fund will follow much of the rest of the VC industry by moving towards so-called growth equity deals, which are more mature than more nascent start-ups.
But the VC industry and the country have been helped by the holistic approach taken by all constituents in the innovation ecosystem, from governments, academics and technological infrastructure to corporate support and entrepreneurial desire.
Although Lee said strong trade unions were active in the larger companies – helping to negotiate an average severance pay of 91 weeks for redundant employees – for SMEs there are fewer labour pressures encouraging a more active venture market.
Rob Trice, senior managing director at SK Telecom Ventures in the US as part of the Korean firms $100m corporate venturing fund, said: "Korea has government initiatives and a healthy VC ecosystem but SK is the second-largest conglomerate in Korea and SK Telecom is a lead-ing Korean service provider, so a Korean entrepreneur in telecoms will probably get in touch with SK Telecom.
"SK Telecom sees most innovation in Korea and actively encourages it, but SKT is smart enough to see that not all innovation is in Korea and so, through vehicles like SK Telecom Ventures, it taps into Silicon Valley."
Korea Telecom followed SK by setting up a KRW1 trillion ($830m) corporate venturing fund last summer to encourage domestic entrepreneurs in mobile phones and applications.
A corporate venturer said: "Korea is close to saturation point for wireless consumer and so its [companies are] looking for global growth as well as the next big thing.
"There seems to be some correlation between the size of a country’s domestic economy and its openness to exporting its innovation. Whereas Japan has a large enough domestic market, companies from Korea and smaller countries can use their domestic market as a proving ground but then eventually need to be more oriented towards exports to grow into large companies."
Michael Jeon, head of Samsung Venture Europe, who moved to the UK last year to set up the company’s corporate venturing unit in the region, said: "Korea is a very interesting place and its infrastructure is excellent. In the past five years Korea has developed tremendously and now is a global country with leading technology."
According to internet services company Akamai Technologies, Korea’s broadband infrastructure is already the fastest and most actively used in the world and plans to offer 1Gbps access by next year. This connectivity has helped start-ups – such as online gaming company NC Soft, social networking service Cyworld and Suprema for recognising fingerprints – become global leading companies.
South Korea ranks 22nd in the World Economic Forum’s Global Competitiveness Report 2010-11, which said Korea has "the highest rate of tertiary education enrolment in the world … [and] remains one of the world’s innovation powerhouses (12th in the innovation pillar)".
Mike Dolbec, managing director at LG Electronics’ Innovation Ventures unit based in the US’s Silicon Valley, said: "Korea is usually six to 24 months in the future, as far as technology experimentation and consumption goes. Observing Korean internet culture – as it is a function of wired and wireless broadband penetration – helps predict the future and what the rest of the world may want soon.
"Since the 1960s, Korean business culture has built a world-class industrial economy from scratch in an amazingly short time. Korean tech companies have an organisational structure that works for them. The leaders work hard to enter fieldswhere they have or can create an advantage.
"Korea has a mature VC ecosystem, from funds to big companies to government-directed innovation and entrepreneurs. It is a microcosm of Silicon Valley but different, as LG and Samsung are so dominant. The next wave of inno-vation has already started and Korean firmshave entered the clean-tech ecosystem to challenge incumbent players. There is no complacency.
"The past 10 years has led to a reappraisal of growth strategies as major Korean companies are now numbers one to three in their sectors. Being a excellent ‘fast follower’ can no longer be the sole strategy. So, Korean companies have entered a new phase that emphasises engagement with other companies in other innovation centres around the globe, in addition to Korea.
"There is extraordinary innovation in Israel and Silicon Valley but the challenge for large companies is not just to embrace the concept of open innovation but to create a repeatable process for engagement that yields results for both parties. Understanding the culture and practices of start-ups and VCs is key to success.
"Prof Henry Chesbrough’s concept of open innovation helps companies realise the opportunity of embracing innovations developed by others. However, large corporations are now realising there is much more to getting results than changing someone’s job title to include the word ‘innovation’.
"In fact, identifying external innovations is the easiest part of the process. Engagement and mutual benefit often require expertise gained from working in both large and small firms,as well as international business development and VC experience."
Key indicators 2009
Population: 48.3 million
Gross domestic product: $832.5bn
GDP per capita: $17,074
GDP (PPP – purchasing power parity) as share of world total: 1.94%
Korea and US exit markets
Korea’s main technology stock market, the Kosdaq, is one of the most active markets for technology ventures in Asia, with 1,025 listed companies having a collective market capitalisation of $800bn. It has also been more open to venture-backed flotationsthan US peers during the downturn. While there were 13 US flotationsin 2009 (six in 2008), in Korea there were 28 (25 in 2008). An open route for initial public offerings and strong trade sales have allowed venture capital firmsto deliver good returns of 13.2% for the top quartile.
KOREA Year (%)
Route 2007 2008 2009
Trade Sale 48.4 40.5 45.3
Project Fin. 17.7 23.2 16.4
IPO 17.2 17.1 15.7
Bankruptcy 14.1 13.3 13.9
M&A 2.6 5.9 7.1
US Year (%)
Route 2007 2008 2009
IPO 26 3.3 10.8
M&A 74 96.7 89.2
Source: KVCA, NVCA