[In-Depth Review] The Importance of the New Normal and Scale-Up

It has been four months since the first confirmed case of the novel coronavirus infection (COVID-19) occurred in South Korea, but the COVID-19 crisis remains an ongoing issue with no end in sight. According to Statistics Korea, the number of new employed persons last month decreased at the largest rate since February 1999, right after the foreign exchange crisis, highlighting the severe impact of COVID-19 on the economy.

The domestic venture industry is no exception to the effects of COVID-19. According to a survey conducted by KOTRA, over 90% of venture companies have suffered damages, facing significant difficulties such as decreased sales and delayed investments. However, as our industrial and venture sectors have been increasing research and development in new growth industries like 'DNA (Data, Network, Artificial Intelligence)' and 'BIG3 (System Semiconductors, Biohealth, Future Cars)' in preparation for the arrival of the Fourth Industrial Revolution era, COVID-19 is more likely to present an opportunity rather than a crisis. This is even more convincing considering that the non-face-to-face (untact) service industry and health industry, which are gaining attention in the post-COVID era, are based on ICT technologies such as AI, big data, cloud, and bio technologies.

However, more consideration is needed as to whether South Korea’s venture ecosystem is adequately prepared for the post-COVID era. The number of domestic venture companies has increased by an average of 7.7% annually since 2000, surpassing 37,000 as of the end of March this year. The total amount of new venture investments also recorded 4.3 trillion won in 2019, nearly tripling over the past five years. Nevertheless, despite this quantitative growth, Seoul remains in the 30th rank range in the global startup ecosystem rankings as of last year. In particular, the growth rate of initial investment amounts in startups and the growth potential of startups have been relatively sluggish. This is also proven by statistics. The average investment amount per company was 2.7 billion won last year, only one-sixth of Silicon Valley’s 15.4 billion won (based on 2018), and the survival rate after 4 to 5 years of founding is only about 30%, falling short of the 50% range of major European Union (EU) countries.

To address this, investment in venture companies must not remain limited to early-stage startups but should consistently pursue follow-up investments to help them grow into scaleup companies, while also increasing the investment scale. Scaleup companies are defined as startups that employ more than 10 people and achieve an average annual growth rate of over 20% in sales or employment for three consecutive years. In the UK, which recognized the limitations of manufacturing growth earlier than us and focused on nurturing startups, scaleup companies account for only 6% of all companies but have created more than half of new jobs, according to research. Furthermore, in the corporate evolution stage, startups grow into unicorns valued at over 1 billion dollars through scaleup, and as seen in the precedents of global unicorns, the scaleup stage is an essential prerequisite for growing into a unicorn.

Considering what is necessary to foster scaleup companies, which have significant effects on job creation and production increase, the following points emerge. First, potential unicorns should be selected and intensively nurtured. In line with recent government initiatives such as the Innovation Company National Representative 1000 and the K-Unicorn Project, which serve as catalysts for nurturing potential unicorns, private venture capital investments should also be actively promoted. Second, linking startup-scaleup programs to actively expand follow-up investments in promising startups is necessary, and the fund size should be increased to enable mega investments exceeding 100 billion won, which have been almost monopolized by foreign capital until now. Third, various financial products linking investment and loans should be provided to startups. In this process, regulations that act as constraints need to be actively eased.

The next two to three years, during which a new industrial landscape will be completed due to the new normal triggered by COVID-19, will be an important turning point for the domestic venture ecosystem as well. While continuing policy support to maintain the startup creation boom, it is now time for the government and the private sector to work together to ensure that scaleup companies, which will create quality jobs and serve as a pillar of sustainable growth, can spread within the venture ecosystem.

Jang Byung-don, Vice President, Innovation Growth Finance Division, KDB Industrial Bank