Startups on the Menu as Venture Capitalists Shop in Seoul

When South Korean venture capitalist Park Young Ho first visited Kakao Corp., its founders said they didn’t need any money, at least not yet. It was March 2011 and Park admired the company’s messaging app, which was close to passing 10 million users after its roll out 12 months earlier.

“I was convinced about its growth momentum,” said Park, the 36-year-old senior principal at Korea Investment Partners Co., the nation’s biggest venture capital firm. “Given Korea’s population of 49 million, I thought ‘Game over, Kakao’s won.’ I didn’t want to miss out so I stayed continuously in contact with the company and after five months, the deal was closed.”

Park’s persistence paid off. Korea Investment Partners injected 5 billion won ($4.5 million) at about 10,000 won a share. Today, shares of the operator of South Korea’s largest mobile messaging service, with 167 million subscribers globally, are 20 times that after it merged with Seoul-listed Daum Communications Corp. in October.

In Asia’s fourth-largest economy, where neon-lit cosmetics stores and glittering skyscrapers mingle with K-pop and kimchi, venture capital is fast becoming big business. About 13.2 trillion won was committed to early stage funding as of Nov. 30, a record, as President Park Geun Hye seeks to promote small business and innovation while wresting Korean commerce from the grip of its giant family-run Chaebol conglomerates.

Opportunities for Women

“Venture capital can be a catalyst for creating new jobs and adding value as a country’s potential for economic growth decreases with an aging population and low birthrate,” said Chah Eun Young, an economics professor at Ewha Womans University in Seoul. “It’s playing a vital role in building infrastructure for creative new businesses, and it’s increasing opportunities for women, who in Korea have a low economic participation rate despite so many having higher degrees.”

Venture capital funds invested in Korea totaled 1.4 trillion won during the first 11 months of 2014, a 14.6 percent increase from the same period of 2013, according to data from the Korean Venture Capital Association.

Information technology manufacturing and services businesses received the biggest share, at 22.8 percent, followed by biotechnology and medical and cultural enterprises. Early-stage investment, for startups less than three years old, accounted for 31.5 percent of outlays.

Korea’s government, faced with the world’s most rapidly aging society -- average life expectancy is forecast to be 95.5 years by the end of the century -- is trying to develop a ‘creative economy’ via nurturing startups in order to overcome sluggish economic growth and a shortage of jobs for young people and women.

‘Growth Engines’

The government budget for supporting companies in their infancy was about 2.17 trillion won last year and 2.25 trillion won in 2013, according to a report from National Assembly Budget Office released Nov. 10. That’s up from 1.81 trillion won in 2011 and 1.98 trillion won in 2012.

“There’s a recognition that small and mid-sized companies are the growth engines of Korea’s economy and are essential to reviving it,” said Park Jin Taek, a director-general of policy development at the Korean Venture Capital Association. “Facebook and Twitter were also venture capital-backed startups once.”

Samsung, LG

The country has the manufacturing and financial infrastructure to support innovation, KVCA’s Park said. It’s home to consumer electronics and technology giants Samsung Electronics Co. and LG Electronics Inc., and narrowly missed out attaining developed market status for its capital markets last year. South Korea is also streets ahead of the rest of the world when it comes to high-tech, boasting the highest broadband penetration rate outside of Western Europe, Organization for Economic Cooperation and Development data show.

The return on investment for venture capital exits increased to 8.72 percent in 2013, versus 4.06 percent in 2012 and 2.54 percent in 2011, data from the KVCA show. The yield on 10-year government bonds has fallen from 3.63 percent at the start of 2014 to 2.55 percent as the Bank of Korea cut its benchmark interest rates twice last year to bolster demand and price gains. Venture capital funds in Korea typically invest for about seven years before exiting, according to Korea Investment Partners’ Park.

Depressed bond yields are drawing pension funds to venture capital investments as they seek higher returns, KVCA’s Park said. Of the 1.6 trillion won of venture capital funds raised last year as of Sept. 30, pension funds accounted for 30.9 percent, followed by policy funds at 18.1 percent and venture capital firms themselves at 12.3 percent.

‘Once in a Decade’

The aim is to find the “next Kakao,” Korea Investment Partners’ Park said. The company, whose KakaoTalk instant messaging service is on about 93 percent of smartphones in South Korea, was valued at about $3 billion in May when a reverse merger with Daum Communications was first mooted in the biggest coming together of Internet companies in the country’s history. The combined group’s market value is now about 8.4 trillion won.

“Such a company comes along about once in a decade,” Park said, pointing to the previous success of search-engine operator Naver Corp., which listed in 2002 and now owns Line Corp., Japan’s most-popular messaging service. “The Kakao success story became possible because there was a paradigm shift from PC Internet to mobile at the time. The government’s promotion does have an effect. It looks similar to that of former President Kim Dae Jung’s administration in 1998.”

Google Campus

It’s not the first time Korea has turned to startups to reinvigorate a flagging economy. Naver was founded in 1999, when former President Kim provided early-stage businesses with capital to kickstart the recovery from the 1997-1998 Asian financial crisis.

Israeli venture capital fund Yozma Group plans to establish a 1 trillion-won fund within three years in South Korea, the Finance Ministry said in October, while Google Inc. said in late August it’s going to open a campus in Seoul specifically for startups.

VCNC Inc., whose ‘Between’ mobile app allows couples to chat or share photos, received 1 billion won of seed funding in November 2011 from SoftBank Ventures Korea Corp., a unit of Japanese billionaire Masayoshi Son’s SoftBank Corp., even before launching the service. The free app scored 10 million downloads globally by Dec. 10. VCNC also netted a strategic investment from DeNA Co., the Japanese social-media service, last February.

‘Death Valley’

“SoftBank watched us for about one year in our planning stages and helped us to map out our vision,” said VCNC Chief Executive Officer Jaeuk Park, who established the company with four friends after graduating from Seoul National University in 2011. The app ‘Between’ was born as a response to what Park terms “network fatigue” and is designed to provide a private space for couples to interact outside of social networks such as Facebook.

“Venture capital is essential especially for information technology startups because we typically struggle while attracting a certain number of users without revenue,” VCNC’s Park said. “We can hand over shares with relatively low risk to a venture capital fund rather than get a loan. They’re helping startups preserve strength when we’re passing through death valley,” he said, referring to the difficulty of managing cash burn before any sales revenue is generated.

Kakao turned a profit for the first time in October 2012, Korea Investment Partners’ Park said. His firm sold part of its holding in 2013 to get its principal back. Daum Kakao Corp. is now investing in Southeast Asia, including Indonesia, the Philippines and Malaysia, Chief Executive Lee Sirgoo said in an interview in April.

“I hope the government will continue to focus on promoting existing small businesses because most find it really difficult to compete with Chaebols,” Korea Investment Partners’ Park said. “Startup founders rising to the ranks of Korea’s richest, that’s my wish.”

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