'Low Risk Low Return' Investment Principle Forces Buying Pressure [Crisis of Early Ventures]②

Investment Focus Shifts to Later-Stage Companies for Capital Recovery
Even Accelerators Choose 'Safe Investments'... The Investment Structure Itself Is Shaking

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

① At the crossroads of survival... Companies screaming over drying funding sources

② Driven into a corner by the 'Low Risk, Low Return' investment stance

③ Experts say "Increase global and private investment to promote capital inflow"

Investment in early startups is shrinking largely due to the structural deterioration of the macro environment, including high exchange rates, high interest rates, and high inflation, which increase economic uncertainty, along with worsening business conditions caused by rising labor costs. As the burden of recovering invested capital intensifies, investments are concentrated on later-stage startups, which are judged to have relatively higher growth potential. This is analyzed as the generalization of the so-called 'Low-Risk, Low-Return' investment stance.

◆ Even ACs opt for 'safe investments'... Early startups neglected = In particular, the investment structure for early startups is being shaken as accelerators (ACs), responsible for investing in and nurturing early startups, increase their investment proportion in relatively stable later-stage startups.

According to the Early Investment Accelerator Association on the 12th, the proportion of early startups in the total AC investment scale in 2023 was 53.6%, down from 62.3% the previous year. The investment ratio in early companies, which reached 85% in 2019, has been declining annually. Although statistics for last year have not yet been compiled, considering the reduced proportion of investment in early companies in the total venture investment scale including VCs, this ratio is expected to have decreased further.

An AC official explained, "Investors tend to allocate more funds to later-stage companies expected to have stable growth," adding, "There is a clear aversion to investing in high-risk, high-growth startups."

Cases of ACs ceasing operations are also increasing. Following a record high of 34 ACs deregistered last year, three ACs?BNG Partners, ABL Technology Business Cooperative, and Invision IP Consulting?have returned their licenses this year. Some ACs are acquiring venture capital (VC) licenses to increase investments in later-stage startups.

The situation is no different for relatively large VCs. According to the Korea Venture Capital Association, the proportion of investment in early startups dropped sharply from 24.7% in January last year to 10.4% this January. During the same period, the proportion of investment in later-stage startups increased from 35.6% to 54.1%.

The Ministry of SMEs and Startups announced that last year's venture fund formation amount recorded 10.555 trillion won, down 19% from the previous year. Although the total investment scale increased, this was due to funds raised during past low-interest periods being deployed. If the amount of new fund formation decreases, the capacity for future venture investment inevitably shrinks.

An industry insider explained, "Overall, it has become difficult to attract funds due to high interest rates, and there is also a strong tendency to avoid risks, so the ticket size (investment amount per deal) has decreased, and club deals (joint investments) where multiple VCs invest together in relatively verified companies have increased."

◆ 'Early investment contraction → Lack of scale-up → Investment difficulties' vicious cycle = The decrease in early startup investment is not simply due to economic uncertainty. The industry points out the underdeveloped exit market in the Korean venture market. Korea lacks an active secondary M&A market, making it difficult for ACs or small VCs to recover invested capital.

Korea relies heavily on initial public offerings (IPOs), which take a long time to recover investment capital. As the timing of capital recovery is delayed, investors tend to flock to later-stage startups that have grown to some extent.

A CEO of an information technology (IT) startup said, "Just as the hiring market increasingly favors mid-level new hires, investment markets also concentrate funds only on companies that have at least produced prototypes and verified marketability," adding, "Especially early startups have long development periods and uncertain timing of revenue generation, so they are losing investor interest."

There is an analysis that the reduction in early startup investment could have a long-term negative impact on the entire venture ecosystem. Talent outflow occurs from early startups that fail to secure funding, and the number of companies that will grow in a few years decreases, potentially shrinking the follow-up investment market.

An industry insider pointed out, "Early startups need to grow sufficiently so that follow-up investments can continue at the scale-up stage 3 to 5 years later, but if early investment itself is blocked as it is now, there will be a shortage of scale-up stage companies in a few years."