The Economy of South Korea model has relied for decades on export-driven manufacturing operated by family-owned giants. A 2015 report from McKinsey outlined how the country would need small businesses to drive an innovative model in preparation for the next phase of economic growth. “The key to fostering such innovation is a vibrant startup community. … Currently, the Korean startup community falls short of this ideal,” the report said.
South Korean conglomerates such as Samsung, LG and Hyundai still play an important role in Korea’s primary economic growth; most of them, once focused on manufacturing, are now technology-driven companies.
Along with South Korea’s Big Tech giants, the country’s startup ecosystem has grown tremendously compared to 2014, as have startups in other Asian countries such as China, India, and Southeast Asia.
Back in 2014, there goods just 10 unicorns — including Coupang, Naver, Kakao, Line (which moved to Japan), and game companies such as Nexon and NC Soft — among 29,561 startups. From 2022 Korea had 22 unicornswith a valuation of 1 trillion won (about $744 million), up from 18 unicorns in 2021. It may not sound like a huge leap from 2014, but the increased number of unicorns is a testament to the hard work of Korean startups.
After the recent pandemic fueled the startup boom globally, startup valuations in South Korea skyrocketed unrealistically, as they did globally. Jumping to the present, the startup funding landscape has shrunk and valuations around the world have fallen due to uncertain macroeconomic conditions. Venture finance in Asia fell 33% in the first quarter of 2023 from the fourth quarter of 2023 and 57% from the first quarter of 2022, according to a Crunchbase report.
We spoke to select investors investing in the South Korean market to hear their 2023 predictions, their investment strategy, which sectors appeal to them and more.
All the investors we spoke to said there are hardly any changes to their investment strategies, but due diligence approvals from committees have become stricter.
“The days of ‘swiping right’ on a deal are long gone, and the level of due diligence required has also returned to historical norms, taking three to four months instead of three to four days,” said Yeemin Chung , general manager of BRV Capital Management.
The investors are now advising startup founders and executives to put profitability before growth, extend their runway and prepare to remain agile amid fears of a potential recession.
And startups are now seeing a drop in valuations compared to the previous two years. Still, it’s healthy in a sense because “people approach it more rationally,” said Han Kim, general partner of Alots Ventures.
“I think the current environment might feel a bit harsh for entrepreneurs, but in a way it’s a favor to the founders who can realistically map out their growth path,” said Eunse Lee, founder and managing partner of 541 Venture.
We spoke with:
- Han Kim, Managing Partner, Altos Ventures
- Tim Chae, Managing Partner, 500 Global
- JP Lee, CEO and Managing Partner, SoftBank Ventures Asia
- Yeemin Chung, General Manager, BRV Capital Management
- Eunse Lee, Founder and CEO, 541 Venture.
(Editor’s note: The following surveys have been edited for length and clarity. These answers are strictly limited to South Korea and do not include all of Asia.)
Han Kim, General Partner, Altos Ventures
We see a significant drop in venture capital funding in Asia’s first quarter this year. How has your VC investment strategy changed along with market conditions?
Our strategy has not changed much. We’ve been investing more in our existing businesses since the second half of last year, so there’s more investment dollars overall. It is slightly different from other investors. I think it’s because some funds don’t invest much (these days). In a sense, we have more opportunities to invest more. (But those are not new startups, they are existing companies in our portfolio.) Usually we invest between 1 billion won and 10 billion won ($750,000 and $7.5 million) in new companies and sometimes we invest up to 100 billion won ($75.5 million) in existing portfolios.
What caused Asia’s lowest funding since 2021? and do you think venture capital funding will continue to decline this year? What are your outlooks on funding volumes in Asia in 2023 and 2024?
If you look at the data, including China. I think that’s a little influenced by China. Chinese VCs have faced some big business (investment) regulations, and now the US is also regulating investment in Chinese companies. There are many checklists (for investments in China). It’s my guess, but at least this year, I think until tensions between the US and China ease or subside, this challenging atmosphere won’t be easy to rebound.
How does the investment trend in South Korea differ from other regions such as the US and Europe?
Now the trend is profitability before growth. I think this trend is becoming more and more important in South Korea. The US used to be growth over profitability, but now it has changed to profit over growth, but the US has more leeway than Korea. In other words, US investors are more patient than investors in South Korea.