At the Crossroads of Survival... Startups Screaming Over Drying Funding Sources [Early-Stage Venture in Crisis]①

More Than Half of Last Year's Investment Went to Late-Stage Startups
Tightening Investment Leads to Increase in Closures
Number of New Startups Down 4.5% Year-on-Year

Editor's NoteCompanies that have ventured into startups with innovative ideas and passion are facing frustration at the wall of funding. Amid worsening domestic and international conditions such as high exchange rates, high interest rates, and rapid increases in various costs, an increasing number of early startups are being pushed out of the market, threatened not just in growth opportunities but in survival itself. The sluggishness in early-stage investment is not merely a problem of individual companies but is directly linked to the sustainability of the entire venture ecosystem. Asia Economy analyzes the reality faced by early startups and the causes of investment contraction, seeking solutions for the growth of the domestic early startup ecosystem.

① At the Crossroads of Survival... Companies Crying Out as Funding Dries Up

② Driven into a Corner by 'Low Risk, Low Return' Investment Policy

③ Experts Say "Increase Global and Private Investment to Promote Capital Inflow"

#About two years ago, manufacturing startup Company A, which opened in the metropolitan area, has recently faced a severe funding crisis to the extent that it must consider closure soon. Last year, it repeatedly faced rejection in investment screenings by venture capitalists (VCs), drying up its funding sources. Company A, which develops IT peripheral devices, planned to specialize in producing molds for mass production of its products to establish a market position. In reality, making this product is essential for full-scale sales, but the business itself is now in crisis without even reaching that stage. Company A's CEO Kim (44) said, "Unlike information and communication technology (ICT) companies, manufacturing often requires sales to secure investment," adding, "Investment is needed during the mass production process, but paradoxically, investment tends to come only after sales occur." He also questioned, "If sales are good, why would we be desperate for investment instead of leveraging that for financing?"

#Game development startup Company B recently received unexpected advice from a consulting firm. The suggestion was that it might be better to consider closure and re-establishment. The company has been trying to maintain itself properly, refining ideas while securing necessary funds and time by taking on outsourced work. However, this effort could potentially damage the business portfolio, making it harder to attract investment. Company B's CEO Park (38) lamented, "We are struggling to create conditions favorable for investment, but how can this actually hinder investment?" He added, "Until two years ago, thorough preparation like this was advantageous for investment, but now the atmosphere has strangely changed, and we must present something immediately. Seeing companies that were in worse conditions than mine but managed to secure investment and grow their business makes my heart ache."

As the venture investment market freezes, early startups are facing survival limits. After the COVID-19 pandemic, liquidity that had been abundant sharply decreased, and the market contracted, causing rapid changes in the market environment surrounding early startups.

According to related organizations such as the Ministry of SMEs and Startups and the Korea Venture Capital Association on the 12th, domestic venture investment last year totaled 11.9 trillion won, an increase from 10.9 trillion won the previous year, but more than half (6.3663 trillion won) was accounted for by late-stage startups older than seven years. Investment in early startups within three years was 2.2243 trillion won, only 18.6% of the total?the lowest ratio in the past five years.

In the venture industry, the first three years are called the 'Death Valley.' This refers to the period when early startups, even after successful research and development (R&D), often fail to commercialize due to lack of funds and other reasons.

As investment tightens, the number of companies that fail to overcome this period and close is increasing. As of 2023, startups under three years accounted for 13% (5,021 companies) of all venture companies, but as of January, this decreased to 11.3% (4,283 companies). A representative from a venture verification agency explained, "Not only are closures increasing, but the number of newly established startups is also declining."

Last year, the number of domestic startups decreased by 4.5% (55,712 companies) from the previous year to 1,182,905 due to economic slowdown and high interest rates. Especially in the software industry, which attracts concentrated venture investment, new startups have struggled significantly as investment decreased due to global economic slowdown.

Since the 2000s, our economy has leapt forward through the growth of ventures and startups based on bold challenges and innovation. Many companies that are now naturally recognized for their positions, such as Toss, which started in 2013 with capital of 50 million won and is rewriting the history of the financial industry, and Celltrion, which entered the market in 2002 with 500 million won as seed money and has become a leading company representing Korea in the global market, overcame the early-stage Death Valley and grew. Venture investment began with the purpose of supporting the emergence and growth of such companies to enrich the entire economy, but this purpose is increasingly fading.

Among about 1,200 global unicorn companies compiled by U.S. business analytics firm CB Insights, only 14 are Korean companies. Since 2022, no new unicorn companies have emerged domestically. A venture industry official emphasized, "The long absence of unicorn companies is a serious problem," adding, "The government needs to refine policies more precisely to foster ventures and support more companies to take risks."