[Future Unicorns Leaving Korea]③VCs Rely Solely on Policy Funds... Lacking the Insight to Discover Unicorns

"Government-Led VC Investment Has Limited Effect on Expanding Early-Stage Funding"
Korean Market Size Constraints... Need to Secure a Global Network
Lack of Capability to Identify True Technology... Herd Mentality After One Investment
From Biotech and Blockchain to Platforms... Chasing Trends Raises Investment Risks

Editor's Note
There is a growing call for a major transformation in South Korea's venture ecosystem. Critics point out that the country's venture capital (VC) industry and stock market are failing to foster future unicorns?unlisted startups valued at over 1 trillion won?resulting in a breakdown of the virtuous investment cycle. In reality, the domestic startup market has been on a downward trajectory since peaking in 2021. This is largely because startups with unicorn potential are increasingly leaving for overseas markets in search of better opportunities. As a result, South Korea's prospects for future growth are diminishing. Over the course of five articles, we will examine why Korean startups are leaving the country, the reasons behind this trend, and how large corporations and the government should respond.

"If you bring in an anchor investor, we will consider investing."

This is the phrase most frequently heard these days by early-stage startups knocking on the doors of VCs for investment. The meaning is that if the startup can secure a VC that will take responsibility for verifying its technology and commit to an initial investment agreement, then others will follow with smaller amounts.

The main reason most startups with unicorn potential want to leave South Korea is related to investment. Despite more than 40 years of history, there are growing calls for urgent structural reforms in the still-immature VC industry.

Most VCs rely solely on government-supplied fund-of-funds (MoTae Fund), and many lack the expertise to properly assess technological capabilities. The positive function of venture capital?discovering early-stage companies with innovative ideas and technology?is fading away.

VC Investment Shrinks as MoTae Fund Is Cut, Direct Hit to Startups

The domestic VC industry, which was formalized with the establishment of Korea Technology Development Corporation (KTDC) in 1981 and the enactment of related laws in 1986, has now reached middle age. However, it still remains dependent on government policy funds like the MoTae Fund and has failed to develop the ability to stand on its own.

According to Korea Venture Investment Corp, MoTae Fund investment peaked at 3.9668 trillion won in 2021. However, it dropped to 2.7938 trillion won in 2022 and 2.4987 trillion won in 2023, continuing a downward trend. Last year, it slightly recovered to 2.8039 trillion won, but this is still about 30% lower than the 2021 level.

As the MoTae Fund shrank over the past three years under the Yoon Suk-yeol administration, many VCs reduced or delayed new investments. VC executives say that industry restructuring is now in full swing due to the investment winter. The CEO of Company A said, "These days, it's accurate to say that early-stage unlisted investments in Korea have almost dried up. Early-stage companies are highly sensitive to liquidity, but right now, funds are tied up and there is nowhere for them to go."

As a result, there is a growing consensus that government-dependent VC investment has reached its limit. The CEO of Company B, a major domestic VC, said, "In a structure centered on policy funds, limited partners (LPs) are unwilling to bear the risks of early-stage companies. As a result, once one VC invests, others simply follow, and only follow-on investments are repeated. In this structure, whenever trends change, investment concentration inevitably recurs."

A research paper published last year by Choi Younggeun, a professor at Sangmyung University, and others, titled "A Study on the Effectiveness of VC Market Intervention Policies," also pointed out that South Korea's government-led VC investment has limited effect in expanding early-stage investment. Although government funding for VC funds increased after 2016, early-stage investment actually declined. The paper argued, "For Korea to transition to a private-sector-led VC industry, the government should focus on improving the venture ecosystem from an institutional perspective?such as advanced investment methods and tax incentives?rather than direct financial intervention."

Lack of Differentiated Investment Strategies: "Predictable Investments Hinder Industry Growth"

The CEO of deep tech startup C said, "Out of 10 VCs I visit for investment presentations (IR), maybe only one actually understands what we're doing." Large VCs may have PhD-level evaluators in each field, but even they lack practical experience and industry networks, making it difficult to accurately assess true technology. As a result, if one or two VCs known for their expertise in a particular field invest, others tend to rush in and follow suit. If the market environment changes rapidly, this can lead to a decline in overall VC industry profitability.

After the COVID-19 pandemic began in 2020, VC investments shifted from biotech to blockchain and then to non-face-to-face platform companies. For example, investment in blockchain startups plummeted from 1.0311 trillion won in 2021 to 423.5 billion won the following year. In 2023 and last year, the figures dropped even further, to 30.1 billion won and 12.4 billion won, respectively.

The CEO of Company B said, "The number of VCs has increased dramatically, but their investment styles are excessively similar. When you look at companies about to go public with market capitalizations of only a few hundred billion won, it's common to see more than 10 VCs listed as investors. In the end, the only difference is when and how much they invested?their perspectives and evaluations of startups are virtually identical."

Similar Scale... Only Foreign Investors Step In When Startups Grow

Domestic VCs tend to expand into private equity funds (PEFs), which are more lucrative as company size increases. Both PEFs and VCs receive a portion of their managed assets as management fees and collect performance fees upon fund liquidation, so they naturally gravitate toward managing larger funds. As a result, there are no domestic VCs capable of making a single investment of over 50 billion won.

As a result, promising unicorns that have grown in size inevitably turn to foreign VCs. This is why only foreign VCs like Hillhouse Capital and Sequoia Capital were able to participate in later-stage funding rounds for companies such as Yanolja and Market Kurly.

This year, FuriosaAI, an AI semiconductor company, received an offer from Meta in the United States to be acquired for 1.2 trillion won?a representative example. Although FuriosaAI ultimately declined Meta's offer after much deliberation, even if twenty domestic VCs pooled their resources, they would not be able to match Meta's investment capacity.

Park Daehee, head of the Daejeon Center for Creative Economy and Innovation, said at a recent National Assembly policy forum on strengthening global competitiveness for startups, "Korea's VC market is too small, whereas in the United States, even in the worst market conditions, 20 trillion won is invested in a single quarter. There are also very few overseas partners to connect global VCs with startups, so even if foreign VCs are interested in Korean startups, there are no suitable channels."

He added, "In Korea's small venture investment market, there are about 240 VCs and about 450 accelerators (ACs). While government policy support is necessary, VCs themselves also need to make significant efforts."