[Future Unicorns Leaving Korea] ⑤ Numerous Policy Gaps: "Major Overhaul Needed for Startup Policy"

PEs Make Multi-Trillion-Won Investments,
While VCs Struggle to Raise Even Hundreds of Billions
Investment in Unicorn Startups Becomes Playground for Foreign Capital
Ministry of SMEs and Startups Handles "Nurturing,"
Financial Services Commission Manages "Exit" ?
Policy Misalignment Persists
Need for Comprehensive Policy Control Tower
Over the Entire "Nurturing-Growth-Exit" Process

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 nurture future unicorns (unlisted startups valued at over KRW 1 trillion), resulting in a breakdown of the virtuous investment cycle. In fact, the domestic startup market has been on the decline since peaking in 2021. This phenomenon is driven by startups with unicorn potential increasingly seeking opportunities abroad. As a result, South Korea's future growth engine is effectively shutting down. 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.

"Time keeps changing, but our systems remain stuck in the past."

At a recent startup roundtable held in the National Assembly, Kim Sunghoon, managing attorney at Mission Law Firm, stated, "Our venture investment ecosystem, for better or worse, is government-led," making this observation.

In countries like the United States and Israel, private and global capital dominate the market, while the government focuses on mitigating early-stage risks, which has enabled them to become global leaders in startup and venture investment. In contrast, South Korea's startup and venture investment ecosystem remains heavily dependent on the government, with policies stuck in the past, failing to foster future unicorns.

Within this government-led ecosystem, the responsibilities for "startup nurturing" fall under the Ministry of SMEs and Startups, while "investment exit" is managed by the Financial Services Commission, resulting in disjointed and uncoordinated policies. Although candidates from various political parties are rolling out related policies ahead of the 21st presidential election, there is no sign of long-term unicorn development strategies that can compete in the global market.

Blind Spots Created by a Fragmented Investment and Policy Structure

In recent years, a "strange" phenomenon has emerged in the domestic capital market. Private equity funds (PEFs), with tens of trillions of won in investment capital, have been making multi-trillion-won investments in "domestic" industries such as industrial gas companies and waste recycling firms. Meanwhile, VCs have been unable to make even several hundred billion won equity investments in "global" deep-tech companies with competitive advantages in fields like artificial intelligence (AI) and biotech. A prime example is FuriosaAI, one of Korea's leading AI semiconductor startups, which nearly ended up being acquired by Meta in the United States due to a lack of timely investment.

Although some PEFs have started investing in deep-tech companies, most PEs that receive funding from pension funds and mutual aid associations are unable to invest in "high-risk" industries. Domestic VCs, facing a decline in policy funding over recent years, have not even considered investing in deep-tech companies. As a result, startups that have scaled up to become prospective unicorns are forced to turn to foreign VCs such as Hillhouse Capital, Sequoia Capital, and SoftBank Ventures.

When it comes to the supply of policy funds for startups, the system is split between the Fund of Funds managed by Korea Venture Investment under the Ministry of SMEs and Startups, and the Growth Support Fund, heavily influenced by Korea Growth Investment Corporation under the Financial Services Commission. The Growth Support Fund has, in recent years, prioritized stable returns by channeling funds mainly into PEFs targeting general companies, making it more difficult for technology startups to attract investment.

Even if the investment market is sluggish, if prospective unicorns were to go public on the KOSDAQ market through IPOs, VCs would be willing to take risks and make significant investments. However, according to the consensus in the VC industry, the threshold for KOSDAQ's technology special listing?once a key gateway for deep-tech startups?has only become higher in recent years. With the Ministry of SMEs and Startups in charge of "nurturing" (such as budget allocation for startups) and the Financial Services Commission primarily responsible for "investment exit" (such as listing systems), there is growing criticism of policy misalignment. There is now a pressing need for a policy control tower within the government that oversees the entire process from nurturing to growth to investment exit.

Nam Jae-woo, a research fellow at the Korea Capital Market Institute, pointed out in his report "Current Status of Domestic Policy Funds and System Improvement" that "although various ministries operate numerous policy funds for their own policy objectives, concerns are mounting over fiscal inefficiency due to irrational target market settings and the lack of a comprehensive management system."

Meanwhile, some argue that in order to grow startups into global companies, policy perspectives must undergo a major shift to assume "cross-border companies" as the norm. Attorney Kim Sunghoon asserted, "The domestic startup system is thoroughly designed on the premise that startups are founded and operate solely in Korea," and insisted, "All structures must be redesigned to align with a 'cross-border company' strategy, where companies are based in more than one country."

Candidates Lee Jaemyung and Kim Moonsu Both Call for BDC Introduction

Meanwhile, with the presidential election just three days away, each candidate has made venture and startup development a key agenda item. In particular, the major candidates agreed on the need for large-scale capital supply.

Lee Jaemyung, the Democratic Party's presidential candidate, has emphasized large-scale investment and a public-led approach. Lee has pledged to expand and extend the Fund of Funds' budget, allow venture investment by retirement and pension funds, and thereby create a KRW 40 trillion venture investment market. This is a long-standing goal advocated by the Korea Venture Capital Association and others in the industry. Lee has also promised to revitalize the exit market through M&A promotion and to invest KRW 100 trillion in AI.

Kim Moonsu, the People Power Party candidate, advocates regulatory innovation and private-sector-led growth. Kim has pledged to invest over KRW 100 trillion through an AI public-private fund, expand the Fund of Funds to KRW 20 trillion by 2030, and attract global capital by holding direct investment roadshows (IR) during presidential overseas visits. Kim has also focused on improving the business environment by promising to establish a Regulatory Innovation Office, integrate regulatory sandboxes, nurture 20,000 TIPS companies, and make the 52-hour workweek more flexible.

There is also common ground between the two candidates' pledges. Both have supported the introduction of the Business Development Company (BDC), a proposal championed by the Korea Venture Capital Association and others. A BDC is a listed closed-end fund that raises capital through public offerings to invest in unlisted venture companies and similar entities. When the investee companies generate profits, these are distributed as dividends.

Although BDCs are unfamiliar in the domestic market, the Financial Services Commission began discussing their introduction in 2018, but the proposal has yet to pass the National Assembly. In 2022, a bill to amend the Capital Markets Act to introduce BDCs investing in unlisted ventures and innovative companies passed the Cabinet but was scrapped due to opposition from the minority party. The government proposal at the time required BDCs to invest at least 60% in venture companies and at least 10% in safe assets. Each fund was to be established with a minimum size of KRW 30 billion, and eligible investments would include not only early-stage and restructuring companies but also those in the growth stage.

BDCs are already active overseas. They were introduced in the United States in 1980. The United Kingdom has a similar system called the Venture Capital Trust (VCT). Although the two candidates' pledges are not detailed, it is likely that Korea will adopt a model similar to the U.S. BDC. In the U.S., BDCs must invest at least 70% of total assets in eligible assets, and if this ratio is not maintained, investments in non-eligible assets are prohibited. Eligible assets include securities (notes, stocks, bonds, etc.) or loans to unlisted companies and listed companies with a market capitalization of less than USD 250 million.

The venture investment industry expects that, if such funds are introduced, the influx of private capital will increase in the venture investment market, which is currently highly dependent on policy funds, thereby revitalizing investment. In addition, BDCs can serve as "secondary funds" that buy venture shares held by VCs, accelerators, and angel investors, facilitating investment exits. If investment exits become more active, VCs will have more capacity to invest in new ventures and startups, further energizing the market.

An industry insider commented, "Since their introduction, BDCs have played a major role in the U.S. venture capital market, driving the growth of new innovative companies. If a similar system is introduced in Korea, it is expected to inject new vitality into the currently stagnant domestic venture investment market."

-End of series-