Early-Stage Startup Investments Decline... "Exit Ecosystem Needs to Be Established"

Impact of COVID-19 Increases Preference for Stable Investments
Dependence on Overseas VC Mega-Investments... Domestic Capital Market Vulnerable
"IPO or M&A Will Be a Challenge for All Startups Going Forward"

Asia Economy DB=Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Kim Cheol-hyun] #Despite the impact of COVID-19 last year, the number of startup companies increased significantly. According to the 'Startup Company Trends' recently announced by the Ministry of SMEs and Startups, 1,484,667 companies were established last year, marking a 15.5% increase compared to the previous year.

#From the first quarter to the third quarter of last year, the global investment attracted by Korean startups amounted to 1 billion dollars. This represents a 37.9% decrease compared to the same period the previous year. Investments in seed, early, and late stages all declined, with a particularly large drop in early-stage investments, which had increased significantly the previous year.

While startups continue to increase steadily, the noticeable decline in investment amounts in the global market starkly illustrates the current status of Korean startups. Considering that many Korean startups have entered the unicorn club through large-scale investments from overseas venture capital (VC), the likelihood of becoming a unicorn has decreased, and competition has become fiercer. Industry experts pointed out that rather than fixating on unicorn status, it is important to create an investment ecosystem where exits, whether large or small, are realized.

◆Decrease in Early-Stage Investment= For domestic startups to make a 'quantum jump' to unicorn status, they must go through large-scale investment rounds. This mostly occurs in the global investment market. Currently, over 90% of the investment funds raised by domestic unicorn companies come from overseas capital. This indicates that Korean startups' rise to unicorn status is closely linked to global investment market trends.

Since the COVID-19 outbreak, global startup investments have tended to prioritize stability, focusing on late-stage investments and developed countries. According to the 'Global Startup Investment Trends and Implications in the COVID-19 Era' report recently published by the Korea International Trade Association's International Trade and Commerce Research Institute, the proportion of early-stage investments (25.2%) in startup investments to Korea from the first to third quarters last year decreased by nearly 20 percentage points compared to 45.1% during the same period in 2019. In contrast, the proportion of late-stage investments (72.9%) increased by 19.4 percentage points. Startup investments are classified by amount: under $3 million as seed, $3 million to under $15 million as early, and $15 million and above as late stage.

Investment amounts in early-stage companies amounted to only $253 million until the third quarter last year, a decrease of more than 65% compared to $728 million in the same period the previous year. Although late-stage investment amounts also decreased, the decline was limited to around 15%. Researcher Yoo Seo-kyung of the Korea International Trade Association, who authored the report, diagnosed that "there is a clear conservative investment tendency focusing on stable late-stage investments."

◆Need to Revitalize the Exit Ecosystem= The startup industry believes that to overcome this situation, the focus should shift from unicorns to revitalizing exits. Startups grow through investments, and investors aiming to generate investment returns have no incentive to invest if startup exits are not active. Rather than being obsessed with the unicorn valuation of 1 trillion won, it is important that, depending on each company's situation and conditions, exits such as initial public offerings (IPO) or mergers and acquisitions (M&A) occur, where corporate value is officially evaluated and recovered in the market, whether the amounts are large or small.

There is also a call for a change in perception regarding exits in the global market. Many startups that have grown beyond a certain scale have received foreign capital investments, and in the case of unicorns, due to domestic conditions, one of the viable exit strategies is inevitably considering M&A with overseas companies. Jung Mina, Policy Director of the Korea Startup Forum, emphasized, "IPO or M&A will be a challenge for all startups going forward."