[Startup Struggle ④-1] To Grow a Giant Like in the US, 'Scale-up' Is Essential

Venture Investment Hits Record High but Concentrated in Early-Stage Firms
12 Trillion Won Scale-Up Fund to Be Raised Over 3 Years Aiming for 20 Unicorns in 2 Years
Venture Investment per Deal 7 Times Higher in the US, Scale-Up Firms Rely on Overseas Investment
Narrow Exit Market with Rare M&A... Domestic Startups Suffer from Undervaluation Vicious Cycle

[Asia Economy Reporter Han Jinju] #Coupang, the number one e-commerce company in South Korea, has focused on increasing its market share despite accumulating losses exceeding 3 trillion won. Coupang received a total investment of 3 billion dollars from SoftBank Vision Fund in two rounds in 2015 and 2018. The secret behind Coupang's aggressive push lies in the Vision Fund's philosophy of investing in companies that can secure 50-80% market share rather than focusing on profitability. The Vision Fund has invested at least 500 million to 1 billion dollars per deal in leading companies across various sectors such as Didi Chuxing, Uber, WeWork, Coupang, and Grab. Although controversy has arisen over Chairman Masayoshi Son's investment approach following WeWork's failed IPO, Son argued that "concerns about WeWork not generating proper profits are the same criticisms that emerged during the early days of the internet 20 years ago."

#Woowa Brothers, the operator of Baedal Minjok, was acquired by its competitor, the German company Delivery Hero. This M&A sparked jokes about becoming 'Germanic people.' It was the first case of a unicorn company in South Korea choosing M&A. Unlike the active M&A environment in the United States, negative perceptions about M&A remain strong domestically. CEO Kim Bongjin made this decision to protect management rights while expanding into Asia. He sent an email to employees stating, "As a founder, it is regrettable that we could not directly list the company and that it will be listed in Germany," but added, "Internet services have no borders. It is difficult to survive by doing well only in Korea, as seen from senior companies."

Domestic venture investment amounts have reached record highs, and the number of unicorn companies born in South Korea has increased to 11. Although quantitative indicators related to startup investment have improved, qualitative growth indicators are progressing slowly. While the government is promoting venture investment activation and investment funds are abundant, investments and support are concentrated on early-stage companies. The 'scale-up' process, where startups overcome the valley of death and grow into unicorns, remains a thorny path.

Large-scale investment essential to nurture scale-up companies

Scale-up refers to rapid growth in a company's sales or employment. A company employing more than 10 people and achieving over 20% growth in sales or employment for three consecutive years is considered a 'scale-up company.' In March last year, the government announced the 'Second Venture Boom' strategy, setting a goal to produce 20 unicorn companies by 2022. To achieve this, the direction of venture policy must shift from supporting 'early-stage startups' to scaling up companies with potential. The government announced plans to establish a 12 trillion won 'Scale-up Fund' over three years starting this year.

According to the Ministry of SMEs and Startups, the average investment amount per deal by domestic venture capital (VC) in 2018 was 2.5 billion won, with deals over 5 billion won accounting for only 1.3% of the total. Domestic VCs mainly invest in startups with a company valuation under 100 billion won, and it is rare to invest over 10 billion won in a single company. While many VCs aim to nurture early-stage companies, it is difficult to find VCs that make large bets on potential unicorn companies.

Kim Dongho, CEO of Korea Credit Data, pointed out, "Since the size of domestic VC venture funds is around 50 billion won, most investments over 10 billion won are made through 'club deals' where multiple investors pool funds. When investments are fragmented, the number of shareholders increases, making it difficult for startups to make quick decisions."

Domestic startups also face difficulties in securing follow-up investments. A study by the Korea International Trade Association tracking Korean, American, and Chinese startups that received angel investments between 2013 and 2015 until April 2019 supports this. While startups in the US and China have a Series C investment rate of 33-39%, Korean startups stand at only 15%. This is due to a combination of factors such as a narrow domestic market, regulations, and difficulties in exit strategies.

VCs prefer small-scale investments... Narrow exit market

Comparing venture investment performance with the US highlights the small scale of domestic venture investments. As of 2018, the average venture investment per deal in South Korea was 2.5 billion won, whereas in the US it was 14 million dollars (approximately 15.4 billion won), a sevenfold difference. The total venture investment amount in 2018 was 3.4 trillion won in Korea and 132.1 billion dollars (approximately 152.58 trillion won) in the US, about 40 times larger. As company valuations grow and scale-up companies require large investments, they inevitably rely on overseas investments. Since 2017, funds investing huge amounts in technology companies have emerged overseas, including SoftBank's Vision Fund, and in 2018 alone, 11 funds investing over 1 billion dollars were established in the US.

The slow growth of large-scale investments is also significantly influenced by the underdeveloped 'exit market.' M&A and IPO activities are not active domestically. According to the Korea Venture Capital Association, M&A accounts for only 3% of exit methods in Korea, compared to 43% in the US and 35% in Europe. Negative perceptions of M&A and passive attitudes of large corporations have hindered the activation of the M&A market. Researcher Na Sumi from the Small and Medium Business Institute pointed out, "In Korea, large corporations' M&A activities are often perceived as hostile takeovers of management rights," adding, "Large corporations hesitate to acquire domestic startups, causing market contraction and repeated vicious cycles of undervaluation of domestic startups."

Domestic investors have not stood out among the major investors in Korean unicorn companies. CEO Kim said, "There are 11 unicorn companies in Korea, but among the 18 major investors, only five are Korean investors. Among the major investors of 30 global unicorn companies, there is not a single Korean investor. Although Didi Chuxing attracted investment from Korea Investment Partners and Grab from Hyundai Motor Company, they are not listed among the major investors."

Researcher Kang Junyoung of KDB Future Strategy Research Institute explained, "The average size of venture investments per deal in Korea has widened the gap from one-third of the US in 2013 to one-sixth in 2018. Large-scale investments capable of supplying sufficient funds for corporate growth are necessary," adding, "Furthermore, from the perspective of securing global competitiveness for Korea's economic growth and job creation, attention and response to speed and scale are needed at this time."