[The Editors' Verdict] For More "Musinsa" Success Stories

MUSINSA, Yanolja, Viva Republica (Toss), Woowa Brothers (Baedal Minjok). These are representative K-unicorn companies in South Korea. They share the commonality of having received government-led mother fund investments during their early startup stages. It is known that out of the 18 domestic unicorn companies valued at over 1 trillion won, about 15 utilized mother fund investment money as seed capital for their growth.

The mother fund was created and began operation in 2005 under the Roh Moo-hyun administration, pursuant to the Special Measures Act on Fostering Venture Businesses at the time. The government agency leads the formation of a mother fund, then reinvests into multiple child funds that invest in venture companies. Thirteen government ministries participate as investors, including the Ministry of SMEs and Startups, Ministry of Culture, Sports and Tourism, Ministry of Employment and Labor, Ministry of Science and ICT, Ministry of Education, Ministry of Environment, Ministry of Oceans and Fisheries, and Ministry of Land, Infrastructure and Transport. Korea Venture Investment Corp. manages the fund.

The direct and indirect performance of the mother fund is outstanding. Since its establishment, Korea Venture Investment has raised a total of 7.2775 trillion won in mother fund capital over 17 years until the end of last year. With this money, together with the private sector, it invested 25.3382 trillion won into 1,015 funds. Through this process, the number of companies that received indirect investment from the mother fund reached 8,373. Most domestic unicorn companies have grown by leveraging this capital.

The investment returns are also excellent. The profit from liquidated funds amounted to 1.75 trillion won compared to the paid-in capital of 1.37 trillion won, resulting in a return multiple of about 1.28 times the paid-in capital. The employment creation effect is also remarkable. Of the 53,000 new jobs created by 37,000 venture companies last year, 13,000 were generated by approximately 2,000 companies that received indirect investment from the mother fund.

It cannot be said that the increase in unicorn companies and employment creation achievements are solely thanks to the mother fund. However, there is little basis to belittle the mother fund’s contribution to the growth of the venture ecosystem as government waste. At this level, it does not seem excessive to evaluate the direct and indirect achievements of the government-led mother fund as exceeding expectations.

However, recent criticism has emerged that the government-led mother fund alone is grossly insufficient to adequately support the current startup ecosystem. Since the COVID-19 pandemic, a ‘second venture boom’ has occurred, with the number of startup companies exploding and the scale of innovative companies growing. The number of unicorn companies has reached 18, and there are 357 prospective unicorns valued at over 100 billion won.

As the scale of startup companies grows, the amount of investment raised per company is also increasing. The number of companies raising over 10 billion won increased from 75 in 2020 to 157 in 2021. In contrast, the average fund size per fund is only 31.9 billion won, showing limitations in increasing investment amounts per company. Compared to the average fund size of 259.3 billion won per fund in the United States, this is significantly insufficient.

Moreover, due to return issues, the participation rate of private investors in funds is gradually declining. It is analyzed that the government-led mother fund’s focus on social returns rather than financial returns is causing a drop in private participation. Although the Presidential Transition Committee has set a direction to increase the size of the mother fund, it seems difficult to overcome the inherent limitations of a publicly led mother fund by simply expanding its scale.

Therefore, calls for measures to revitalize privately led mother funds are gaining strength. A representative proposal is to increase tax benefits so that the vast cash liquidity held by domestic companies can flow into the venture market. The proposal to grant capital gains tax exemptions on venture equity investments by companies is somewhat radical. However, if dormant corporate capital flows into the startup ecosystem, fostering startups and innovative companies and creating large-scale quality jobs, thereby achieving results beyond the existing mother fund, it would hardly be considered an expensive cost.