Experts Say "Global and Private Investment Must Increase to Promote Capital Inflow" [Early-Stage Ventures in Crisis]③

"Urgent Need to Revitalize the Market"
Calls for Improving '3% Foreign Investment'

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 only in terms of growth opportunities but survival itself. The sluggish 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 screaming over drying funding sources

② Driven into a corner by 'Low Risk Low Return' investment policy

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

Experts and industry insiders suggest that to stimulate investment and growth in early startups and increase incentives for entrepreneurship, it is urgent to revitalize the venture investment market itself. To achieve this, experts agree that policies attracting private capital into the market are necessary.

Lee Jong-ik, CEO of Korea Social Investment, said on the 12th, "To create a healthy startup ecosystem, investment in early-stage companies must increase," adding, "With expanded private investment inflow, unicorn companies with global competitiveness can emerge through competition." He continued, "For startups to grow, it is necessary to activate the mergers and acquisitions (M&A) market and support increased attraction of overseas investment."

◆ Foreign investment only 3%... Need for incentive policies = Last year, private sector contributions from individuals, general corporations, and venture capital (VC) in newly formed venture funds amounted to 8.1324 trillion KRW, a 19% decrease compared to the previous year. In contrast, policy finance accounted for 2.4226 trillion KRW, an 11.3% increase. Government-led investments are evaluated to have limitations as they may be concentrated in specific industries or have restricted investment autonomy.

The proportion of foreign capital in domestic venture investments remains negligible. According to Preqin, a global private equity and venture capital market research firm, foreign contributions to domestic venture funds last year were only 3%. This is significantly lower compared to Singapore (84%), the UK (74%), and Germany (66%). This implies that Korea's venture market does not appear attractive to global investors.

The industry points out that domestic investment regulations are blocking the inflow of global venture capital. Jindallae, an analyst at the National Assembly Budget Office, noted, "The government is trying to support investment procedures such as introducing conditional equity conversion contracts, but fundamentally, it is necessary to expand global networks and solidify policy fund support linked with overseas VC global funds."

◆ Need for policy support such as easing CVC regulations = Easing regulations on Corporate Venture Capital (CVC) is mentioned as an alternative. CVCs can utilize the parent company's abundant capital to provide stable funding to the venture market. Recently, the government partially relaxed restrictions on CVCs selling shares of invested companies to affiliates through amendments to the Enforcement Decree of the Venture Investment Promotion Act, but regulations such as contribution ratio limits remain. Currently, only 60% of funds raised by CVCs can be contributed by affiliates.

Jeon Hwa-seong, chairman of the Early Investment Accelerator Association, said, "Usually, CVCs are smaller than affiliates, so creating a flexible structure that allows affiliates to easily contribute is advantageous for revitalizing venture investment."

There are also calls for the urgent introduction of Business Development Companies (BDC). BDCs are publicly offered funds that can be listed, allowing individual investors to invest indirectly within the institutional framework. The US and Europe have introduced systems called BDC and VCT, respectively, which provide strong tax benefits to individual investors.

Expanding tax benefits for limited partners (LPs) is also cited as an incentive for investment. Chairman Jeon diagnosed, "One reason private investors (LPs) are not actively investing currently is the reduction in tax benefits such as corporate tax, which has ironically tightened the already sluggish investment market."

◆ Investment flowing into AI... Government must actively nurture it = Expanding support for startups in the artificial intelligence (AI) sector is also an urgent task. Currently, the global venture investment market is being reorganized around AI, but domestic AI startups are struggling to attract investment due to lack of global competitiveness.

According to global accounting and consulting firm EY, US venture investment last year reached $180.8 billion (approximately 259 trillion KRW), a 27% increase from the previous year. Of this, IT-related investments accounted for 66% of the total, and 74% of all deals were 'mega-round' deals with investments exceeding $100 million. EY analyzed, "Massive investment funds are flowing into AI startups."

In contrast, Korea is losing global venture capital interest as it fails to secure competitiveness in the AI industry. Lee Gi-dae, director of Startup Alliance Center, explained, "The median size of early startup investments in the US has more than doubled over the past 10 years," adding, "Especially in the AI sector, the scale of investment is increasing."

He emphasized, "Although the venture investment market has contracted compared to 2021, this can also be seen as a normalization of the bubble that was concentrated on platform startups," and added, "Investment policies should be restructured not just for simple market activation but in ways that provide real benefits to the national economy."