New Venture Fund Commitments Down 41% Last Year... Improvement Expected in Second Half

VC Investment Slows... Cautious Approach with Increased Late-Stage Investments
8 Companies Ordered to Correct Capital Erosion... Rising for 3 Consecutive Years
New Investments in Q3 and Q4 Last Year Increased Compared to Same Period Previous Year

Due to the global economic recession and high interest rate policies, the investment market froze last year, resulting in a roughly 40% decrease in new investment funds by domestic venture capital (VC) compared to the previous year. However, with an increase in new VC investments confirmed in the second half of the year, a turnaround in the market sentiment is expected this year.

According to the Korea VC Association on the 29th, last year, 290 new investment partnerships were formed, with a total new commitment amount of 6.533 trillion KRW. Compared to 380 new partnerships and a new commitment amount of 11.0836 trillion KRW in 2022, this represents a decrease of approximately 23% and 41%, respectively.

As the number of newly formed funds decreased, the amount of new investments also declined. Last year, a total of 2,281 companies received new investments, with a total investment amount of 5.3977 trillion KRW. This is about a 20% contraction compared to 2,474 companies and 6.764 trillion KRW in 2022. This marks a decline for two consecutive years since 2021, when 2,438 companies received 7.6802 trillion KRW. It appears that high interest rates due to monetary policy and a reduction in initial public offering (IPO) sizes made it difficult for each VC to actively proceed with investments.

VCs’ cautious stance was also evident in the business age of the invested companies. The highest investment proportion was in late-stage companies (over 7 years) at 37.8%. This proportion increased compared to the 30% range recorded from 2020 to 2022. The investment proportion in early-stage companies (under 3 years) decreased from 29.6% in 2022 to 24.6% last year. New investments in late-stage companies last year amounted to 2.0387 trillion KRW, an increase of 10.2 billion KRW compared to 2022. Conversely, investments in early and mid-stage companies decreased by approximately 41% and 26%, respectively, compared to the previous year.

The number of VCs experiencing capital erosion due to accumulated deficits also increased. This indicates that they failed to produce meaningful operational results in their core venture investment activities. According to the Small and Medium Business Startup Investment Company electronic disclosure system (DIVA), eight VCs received corrective orders from the Ministry of SMEs and Startups (MSS) last year due to capital erosion: Neo Insight Ventures, Asia Startup Investment, Alpha One Investment, Tium Investment Partners, GTO Investment, N Ventures, Wadiz Partners, and Kona Investment (with management improvement measures completed for Wadiz Partners and Alpha One Investment). This marks a third consecutive year of increase, following 2 in 2020, 4 in 2021, and 6 in 2022.

According to provisions in the Act on Promotion of Venture Investment and its enforcement decree, the MSS can impose management improvement measures such as capital increase and dividend restrictions on VCs that fail to meet the management soundness criterion of 'capital erosion ratio below 50%.' If the capital erosion ratio is not reduced continuously, VCs may face restrictions in attracting funds from limited partners (LPs) or risk deregistration as a startup investment company. The number of newly registered VCs increased annually from 19 in 2019 to 42 last year but fell back to the 2019 level last year.

By industry, ICT services ranked first in new investment proportion for three consecutive years (▲31.6% in 2021 ▲34.8% in 2022 ▲27% last year). However, the actual new investment amount in ICT services last year was 1.4595 trillion KRW, about 38% less than the previous year. New investment amounts in electricity, machinery, and equipment, ICT manufacturing, and chemicals and materials increased by 213.1 billion KRW (51.87%), 102.5 billion KRW (34.32%), and 50.4 billion KRW (17.55%), respectively, compared to the previous year.

However, VC investment sentiment improved from the second half of the year. Total new investments in the first and second quarters last year were 918.5 billion KRW and 1.3339 trillion KRW, down 58.7% and 30.9% compared to the same periods in 2022. In contrast, the third and fourth quarters recorded 1.4672 trillion KRW and 1.6781 trillion KRW, representing increases of 14.2% and 26.5% year-on-year, respectively. A VC industry insider said, "Having undergone an adjustment period over the past two years, we believe the atmosphere will definitely turn around this year," adding, "Each VC will aggressively invest based on the investment capacity (dry powder) accumulated last year."