VCs Facing Capital Erosion, Will They Return Their Licenses?

6 Companies Including TwoSun Invest and Unicorn Nest Startup Investment Receive Correction Orders
If Management Soundness Is Not Met, Hearing Will Review Whether to Deregister Venture Capital Firms

[Asia Economy Reporter Kwangho Lee] The number of venture capital (VC) firms experiencing capital erosion is increasing. Although they are being urged to improve management, it is evident that they are struggling to escape the crisis. In the worst case, attention is focused on whether they will have to return their startup investment company (Changtu company) licenses due to failure to recover from capital erosion.

According to the Small and Medium Business Startup Investment Company Electronic Disclosure (DIVA) on the 1st, a total of six venture capital firms?TwoSun Invest, Unicorn Nest Startup Investment, Darwin Investment, NPX Ventures, TGC K Partners, and P&P Investment?received corrective orders from the Ministry of SMEs and Startups (MSS) in 2022 due to 'capital erosion.'

According to Article 41, Paragraph 2 of the Act on Promotion of Venture Investment (Venture Investment Act), startup investment companies must meet management soundness standards. The Enforcement Decree of the Venture Investment Act sets the management soundness standard as a 'capital erosion ratio below 50%.' The MSS can impose necessary management improvement measures such as ▶capital increase ▶restriction on profit distribution on operators who fail to meet the standard.

They must reduce the capital erosion ratio to below 50% within three months. If they fail to meet the deadline for the first corrective order, they will receive a second corrective order for up to six months. They will also face penalties in attracting funds from limited partners (LPs). If they still fail to meet the management soundness standards during this period, a hearing will be held to review whether to cancel the registration of the startup investment company.

However, TGC K Partners and P&P Investment lowered their capital erosion ratio within the first three-month deadline and avoided the second corrective order. The problem lies with the remaining operators. Darwin Investment and NPX Ventures have already exceeded three months and are in a situation where they must receive additional corrective orders. The remaining TwoSun Invest and Unicorn Nest Startup Investment also do not have much time left.

Particularly, attention is focused on the fate of TwoSun Invest. Previously, TwoSun Invest was found to have violated two laws during the MSS’s regular inspection. TwoSun Invest received corrective orders and warnings for transactions with related parties and office issues, respectively. Related parties are prohibited from engaging in transactions such as investment or lending with related parties under Article 25, Paragraph 3 of the Enforcement Decree of the Act on Promotion of Venture Investment.

TwoSun Invest is a house established by former CEO Jonghyun Lee of the game company Actoz Soft. Former CEO Lee, a former venture capitalist, attracted attention in 2004 by selling Actoz Soft to China’s Shanda, earning a capital gain of about 70 billion KRW at the time. Although he returned to investment business afterward, the recent situation is not easy.

Meanwhile, TwoSun Invest is currently managing two venture funds, ‘TwoSun Green Point Mittelstand Fund’ (total commitment of 45.6 billion KRW) and ‘TwoSun QM No.1 Association’ (20 billion KRW), as well as a private equity fund (PEF) called ‘TwoSun P-Jets’ (40.8 billion KRW). The total assets under management (AUM) amount to 106.4 billion KRW.