[Insight & Opinion] Why We Should Invest in Startups in the Dead of Winter

[Asia Economy] In the season of heatwaves, the startup ecosystem is deeply concerned about surviving the winter. Early this year, news of "winter is coming" spread from Silicon Valley, and now the situation in Korea is also worrying as the cold approaches. Since the second quarter, signs of declining investment have appeared, with startup IPO schedules being postponed one after another and a chilly atmosphere prevailing in the mergers and acquisitions (M&A) market.

Park Jae-wook, CEO of Socar and chairman of the Korea Startup Forum, recently advised at a startup workshop, "We must tighten our belts and prepare thoroughly. This winter could last longer than expected. We need to devise measures to survive for at least two years and focus on generating numbers like sales to prove value. When investment is necessary, we must be willing to boldly lower valuations." From the startup perspective, this is clearly a crisis that requires preparation. It is becoming increasingly difficult to secure investment, and company valuations are inevitably becoming more stringent.

However, it seems that few investors worry that this cold snap will bring an 'ice age' that wipes out the startup ecosystem. Just as spring follows winter in the cycle of seasons, experienced venture investors believe that the current investment contraction is actually a golden opportunity to invest in promising startups.

Historically, recessions when everyone is reluctant to invest have been good opportunities for startup investment and growth rather than times when investment is active. During the 2008 global financial crisis, startups that grew into global companies such as Airbnb, Uber, Slack, and WhatsApp were founded. Amazon and Google, established just before the 2001 dot-com bubble burst, not only survived but rose to become leaders of the digital economy. Although recessions temporarily reduce investment, they also serve as opportunities to expand and systematize the startup investment sector. According to a survey by Korea Venture Investment Corp., the fund formed in 2008 had the highest total value relative to its paid-in capital among domestic venture funds.

Why should startups be invested in during recessions? While large corporations also experience declining valuations, recommending investment in riskier startups is due to their intrinsic characteristics. Recessions or economic crises are periods of increased volatility and uncertainty. Startups, however, are characterized by speed and flexibility, which are their greatest competitive advantages.

When survival is critical, large corporations must undergo lengthy and controversial restructuring, but startups can swiftly implement cost-cutting and crisis management. During economic recovery phases, they can quickly seize growth opportunities. Startups identify problems and solve them innovatively, and important new problems inevitably arise during economic downturns and recoveries. Additionally, situations like workforce reductions in large corporations can be opportunities to acquire talented personnel. For example, travel startup MyRealTrip saw a 98% drop in sales during the COVID-19 crisis in 2020 but persuaded existing investors to provide follow-up funding and secured a large number of talents laid off from major travel agencies.

Although some startups will be weeded out, those that survive can absorb competitors' capabilities and expect greater growth. In short, overcoming crises is an essential gene for startups, so they can demonstrate their true value not in a warm spring where everyone survives, but in the harsh midwinter.

The current crisis can be an opportunity for the startup ecosystem to grow further. However, winter is naturally cold, and many promising startups may perish. To turn this crisis into an opportunity, strategic partnerships between startups and investors must strengthen, and ecosystem support policies that help capable startups survive the winter are necessary. The entire ecosystem must unite to endure the winter so that startups can become the main drivers of our economic growth.