[Insight & Opinion] Blocking Startup 'Exits' for Platform Regulation Is Misguided

[Asia Economy] Since the Kakao service disruption caused by a data center fire, both ruling and opposition parties have increasingly voiced a unified stance on ‘platform regulation.’ While regulations such as incorporating platform companies’ data centers into the national disaster management system may have some relevance, various regulations pushed under the pretext of preventing platform monopolies are misguided in both diagnosing the cause and proposing solutions.

In particular, the push to make mergers and acquisitions (M&A) of platform companies more difficult is highly likely to backfire on startups rather than the companies themselves, thereby stifling the ecosystem. Nevertheless, the Fair Trade Commission plans to establish the ‘Online Platform Monopoly Review Guidelines’ within the year to raise the standards for reviewing corporate mergers, and the opposition party intends to go further by proposing the ‘Online Platform Monopoly Prevention Act’ within the year to regulate M&A deals exceeding 30 trillion won by platform companies.

Platforms are the core of the digital economy, with low entry barriers allowing various platforms to emerge, compete, and grow. Among them, monopolistic platforms sometimes arise by consumer choice, and M&A activities are also active. Moreover, startups continuously emerge in new areas.

The startup ecosystem has grown more than eightfold in domestic investment over the past decade and continues to grow globally. There are now over 1,000 ‘unicorn’ startups?privately held companies valued at over 1.3 trillion won?making them quite common. The secret to this growth lies in the diversification of growth paths different from the past. From the very early stages of companies, venture capital (VC) investment has been activated, diversifying capital-raising methods for growth. Therefore, it has become possible not only to aim for listing through an initial public offering (IPO) as soon as possible but also to significantly expand innovative business models. However, a stable exit market is essential for diverse and innovative startup challenges to be possible. Through exits, VCs can recover investment profits and reinvest, while founders and team members receive rewards and can take on greater challenges. The main exit methods for startups are IPOs and M&As, with M&A being a more common method in major countries like the United States. For acquiring companies, M&A allows them to inject innovative momentum, and startups can achieve a quick exit.

In Korea, startup exits are difficult, acting as a barrier to ecosystem activation. IPOs are challenging, and M&As are not only hard to complete but also difficult to achieve fair valuations. Amid this, active startup investments and acquisitions by big tech companies like Kakao and Naver, which originated from startups, have played a positive role. The market evaluates that not only the number of M&A deals but also relatively fair corporate valuations have been achieved. The tightening of platform regulations has already begun to shrink the M&A market. This impact has immediate adverse effects by blocking the ‘exit’ for startups currently experiencing an investment winter, as well as long-term effects that make it harder for diverse startups to emerge.

Last year, major U.S. big tech companies Microsoft, Amazon, and Google recorded 107 M&A deals, while Kakao and Naver recorded 20. YouTube and Android also grew by acquiring startups. M&A by platform companies is important not only for platform growth but also for the startup ecosystem. The Yoon Suk-yeol administration has adopted ‘rapid review of innovation-promoting M&A’ as a national agenda. It is hoped that they will reconsider policies that go against their own promises and the wishes of the startup ecosystem.

Choi Sung-jin, CEO of Korea Startup Forum