[UP&DOWN] Native OTT Watcha Faces 'Red Light' on Funding... Sale Also Uncertain

[Asia Economy Reporter Kwangho Lee] The valuation of the native OTT (online video service) startup Watcha is plummeting at a frightening pace. Once attracting market attention with a valuation in the 500 billion KRW range, it has now sharply dropped to below 100 billion KRW. Although it was considered a major OTT player, the possibility of it being put up for merger and acquisition (M&A) has increased.

According to the investment banking (IB) industry on the 16th, Watcha recently secured 3.8 billion KRW in funding. This investment did not involve venture capital (VC) firms, which are typical financial investors (FI) for startups, nor strategic investors (SI) such as general corporations. It is known that Park Tae-hoon, Watcha’s CEO, raised the funds using his personal network rather than through conventional investment firms.

With this 3.8 billion KRW investment, the recognized valuation is around 78 billion KRW. This marks a significant retreat compared to previous funding rounds. Watcha had pursued a pre-IPO (pre-initial public offering equity investment) in the first half of this year, aiming to raise 100 billion KRW at a 500 billion KRW valuation. However, it faced difficulties in attracting investment and had to urgently secure 3.8 billion KRW. As a result, the current valuation has fallen to about one-sixth of the expected corporate value from the first half of the year.

Watcha was founded in 2011 by CEO Park Tae-hoon, a graduate of Seoul Science High School and Korea Advanced Institute of Science and Technology (KAIST), who teamed up with Chief Operating Officer (COO) Won Ji-hyun and Chief Technology Officer (CTO) Lee Tae-hyun. The following year, in 2012, it gained industry presence by receiving an 800 million KRW investment from Kakao Ventures. From then on, it began to receive ‘love calls’ from financial investors (FIs) such as VCs.

In the 2013 Series A round, Mega Investment and Samho Green Investment invested 2.7 billion KRW. Subsequently, in the 2016 Series B round, it secured 5.5 billion KRW. Starting in 2018, the scale of investments increased. The Series C round recorded an investment of 12 billion KRW. Then, in 2020, it successfully raised 36 billion KRW in the Series D round, demonstrating its growth trajectory.

The valuation recognized at the time of Series D was around 300 billion KRW. This was a 25-fold increase compared to the Series A valuation of 12 billion KRW, heightening expectations among FIs. Early investors especially anticipated a jackpot with multiples exceeding 10 times. The plan was to naturally proceed to an IPO after the pre-IPO and then exit (recover investment funds).

500 Billion KRW Valuation Falls Below 100 Billion KRW
Financial Market Tightening and Unstable Financial Structure Hit Hard
CEO Park Tae-hoon’s Network Used for Urgent 3.8 Billion KRW Injection
Financial Investors Feeling Crisis Explore Sale Options
Possible Final Card: Par Value Capital Increase

Industry insiders agree that such hopeful scenarios were reasonable, as Watcha also secured bridge funding in 2021 after Series D. The bridge round included existing shareholders such as Kakao Ventures and Company K Partners, as well as Samsung Securities, injecting funds into Watcha. It secured an additional 49 billion KRW, continuing its upward momentum. Expectations for an IPO intensified.

In the same year, Watcha selected NH Investment & Securities as its IPO underwriter and began full-scale IPO preparations. It then started pre-IPO fundraising earlier this year. However, due to the tightening of the global financial market and the spotlight on Watcha’s unstable financial structure, it faced a crisis. The situation of difficulty in attracting additional investment persisted.

According to Watcha’s audit report as of 2021, it has been in a state of capital erosion for two consecutive years. Operating losses have continued to increase, signaling red flags in profitability. Falling into a deficit trap, accumulated losses have already exceeded 200 billion KRW. As of the end of last year, Watcha’s deficit reached 201.7 billion KRW. Its total equity was also negative 32.5 billion KRW, indicating a state of complete capital erosion.

Feeling the crisis, FIs have explored the possibility of a sale. If Watcha ceases operations, the invested funds could evaporate. Potential acquirers mentioned include competing OTT platforms Wave and Coupang Play, as well as webtoon and web novel platform RIDI, but no concrete actions have yet emerged. Industry insiders explain that Watcha is barely surviving by securing the recent 3.8 billion KRW investment while searching for buyers.

A VC official said, "The recent 3.8 billion KRW investment is only short-term operating capital. While it has temporarily put out the fire, if additional investment cannot be secured, it could become very difficult." He added, "We see acquisition by an existing OTT as the best option, but given that the OTT market itself is not what it used to be, it is questionable whether they have the capacity."

As Watcha struggles with fundraising and potential sale, there is speculation that it may play its final card soon. There are opinions that it might proceed with a par value capital increase. A par value capital increase literally means increasing capital at the par value of 500 KRW. If Watcha conducts a capital increase based on 500 KRW par value, its pre-valuation would be around 7 billion KRW. Both early investors and recent late-stage investors are expected to inevitably incur losses.