Korean Government Geeks Bearing Gifts
December 10, 2015

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Cautious optimism abounds across Korea’s fast-growing startup scene. Following a national policy shift that has recognized the realities and opportunities of the present age, Korean entrepreneurial talent is finally receiving the level of public sector support needed for success. The export-oriented growth formula that helped Korean conglomerates drive economic development for decades following the Korean War is unlikely to continue its impressive historical returns, and the Park administration has sought to replace it with a “sharing economy” that brings together a flexible labor pool, favorable regulation, open markets and an injection of public capital to expand the workforce and lead per capita incomes upward. While these initiatives are a welcome start, it will take much more than taxpayer money to sustain the growth and development of Korea’s startup ecosystem.

To be sure, the government startup financing agenda has been bold in scope and impressive in size thus far. State funding schemes have poured trillions of won into startups across many verticals, including software, e-commerce, biotech and gaming. More than a dozen startup accelerators have been launched across the peninsula, helping to train and advise new entrepreneurs. The government-sponsored Growth Ladder Fund and Future Creation Fund have been widely praised for their contributions to the revitalization of the venture capital market. In 2014 alone, the Growth Ladder Fund committed over 260 billion won of its 2.4 trillion Won funds to acquire equity stakes in 52 companies, according to the Financial Times, with those commitments only increasing in 2015. Officials of state-owned financial organizations administer the fund, and other shareholders include banks and pension funds. More than half the committed funds have been earmarked for “matching” investments by private equity and venture capital firms, a scheme designed to temper taxpayer risk and encourage private investment. Responding to Korean entrepreneurs’ need for paths to “exit” (monetization of early venture investment) while reducing market reliance on tech behemoths like Samsung and LG, Korean regulators are establishing a small-cap stock market.

The goals of this flurry of investment and support activity are as ambitious as they are admirable, but risks abound. Proponents hope to develop Korea’s weak services sector, the traditional bridge that has helped emerging market economies around the world mature into developed ones. Analysts have long cited the low productivity of Korean service providers, and the corresponding low pay of service sector workers, as a major structural impediment to long-term growth. The Korean government believes that scalable software products and ecommerce platforms can be important growth engines, given Korea’s hyper-connected, tech savvy population heavily concentrated around the Seoul-Incheon metro area. But regulatory protections are needed to ensure that business productivity gains are shared equitably between capital and labor, lest these initiatives exacerbate widening wealth inequality and provoke a destructive populist backlash. Thoughtful government support and careful supervision of the growth to follow can ease potential concerns. Liberalizing restrictions placed on banks, insurance companies and pension funds can wean the venture industry from its current overreliance on public funding, while helping pension funds pursue higher yields to meet their mounting pension liabilities. But the public employees whose pension benefits are at stake must be properly informed of the risks.

The early feedback from market participants, along with the lessons learned by governments in other countries, are instructive and worthy of consideration. Venture capitalists in Korea, while applauding the government’s initial steps, have suggested that a control tower be established to ensure consistent and transparent policy across agencies with respect to the deployment of venture capital. Multiple regulators and agencies, however well-intentioned, can sow confusion in the market, compete against each other and breed inefficiency. In sectors where they lack meaningful business or prior investment experience, public VC sponsors should recruit qualified investors to carefully screen investment projects on the basis of objective merit, and be deaf to political expediency; investment decisions cannot be left to the whimsy of bureaucrats. Private investors, fully accountable to their own shareholders or limited partners, should be invited to participate alongside government funding. All investors, public or private, should enjoy the same access to information about potential targets, risk profiles and estimated returns. Lastly, no one should be fooled into thinking that the higher yields often associated with growth equity investments would not be accompanied by significant risks; the maturation of the current market cycle is likely to bring significant volatility and losses, just as the last global tech bubble did.

Ultimately, the maturation of a supportive investor and mentor community, which can provide startups with the guidance, mentorship and connections to allow promising businesses to scale globally, will be most critical to the long-term sustainable growth of the Korean startup ecosystem. Capital goes where it is needed, but stays where it is well treated. Government can and does play a leading role in setting up the system, but the commitment of qualified advisory and relationship capital from the private sector will be the real game changer for Korea’s entrepreneurial future. Investors are looking to maximize returns, but they are also looking for entrepreneurs who are receptive to the intrinsic value they can add. In turn, entrepreneurs want more than just an equity check; they are looking for the skilled know-how, introductions and credibility that only a global entrepreneur or experienced angel investor can bring. Korea should explore additional fiscal, regulatory, labor and visa policies to invite these private sector participants to enter the market and encourage them to make Korea their permanent investment home.

Editor's Note: Patrick Monaghan is a principal equity investor, an advisor to several startup companies, and a senior foreign legal consultant at one of Korea’s largest law firms. His legal practice includes cross-border private equity, venture capital and technology. He can be reached at patrickjmonaghan3@gmail.com. Any opinions expressed herein are his own.

Image Source: Virgin Entrepreneur

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