[Future Unicorns Leaving Korea] ② Startups Considering Departure From the Very Beginning

"Venture Capital Without 'Adventure':
Investments Only for Companies Near IPO"
Early-Stage Startups Miss Out Despite Strong Technology
Even After Success, Exiting Through M&A or IPO Is Nearly Impossible
Attracting Foreign Investment Is Tough:
"Better to Start Overseas from the Beginning"

Editor's NoteThere is a growing call for an urgent transformation of South Korea's venture ecosystem. Many point out that the country's venture capital (VC) sector and stock market are failing to nurture future unicorns (unlisted startups valued at over 1 trillion won), preventing a virtuous cycle from taking hold. In fact, the domestic startup market has been on a downward trajectory since peaking in 2021. This is largely due to startups with unicorn potential seeking survival by moving abroad. As a result, South Korea's future growth engine is at risk of shutting down. Over the course of five articles, we will examine why Korean startups are leaving the country, the underlying reasons, and how major corporations and the government should respond.

This year marks the third anniversary of the founding of content platform startup A. Its CEO is now considering relocating the company's headquarters overseas. The reason is that, after securing initial seed funding?the first investment necessary for startup growth?the company has been unable to attract additional investment. If the seed capital dries up in the next few months, business operations will inevitably be disrupted. The CEO of A said, "Our business has started generating revenue, but we lack the resources to expand our servers or hire more staff, so additional investment is desperately needed." The CEO added, "I have knocked on the doors of more than ten venture capital firms, but the response has been cold. At this point, I am even considering relocating to China or Japan, where the startup market is growing rapidly, to start over."

There are many others in the domestic startup market facing the same dilemma as CEO A. Similar stories have been heard countless times from 'senior founders' who have already launched and succeeded with their own startups. Lee Hanbin, CEO of Seoul Robotics, which was founded in 2017 with B2B autonomous driving technology and is now preparing for a KOSDAQ technical special listing, recently said at a National Assembly forum, "If I were to start a business again, I would choose to set up a U.S. headquarters with a Korean subsidiary, like Coupang did." He explained that attracting foreign investment and bringing foreign currency into Korea is too cumbersome, and that it is also difficult to achieve an exit (capital recovery) through mergers and acquisitions (M&A) or an initial public offering (IPO) in the domestic market.

"Not Venture Capital, but 'Safety' Capital"

Seoul Robotics, which has made it to the threshold of an IPO, is actually considered to be in a relatively favorable position. Early-stage startups struggle even to secure the investment needed for survival. According to the Ministry of SMEs and Startups, the scale of venture investment reached a record high of 15.9 trillion won in 2021, but then declined sharply for several years, before rebounding to 11.9 trillion won in 2023?a 9.5% increase from the previous year. However, early-stage startups, which are in urgent need of capital, still do not feel the effects of this increase in venture investment. This is because, from the VC perspective, large sums of money are being concentrated only in late-stage startups with 'proven business models' that are likely to achieve target returns.

The share of early-stage startups (those established within three years) in total venture investment has plummeted from 26.9% in 2022 to 24.6% in 2023 and 18.6% in 2024. In contrast, the share of late-stage startups (those established for more than seven years) has surged from 38.7% to 47.3% and then to 53.5%. Investment is being funneled into 'safe' bets?companies with some revenue and imminent IPOs. Ha Seungjae, CEO of AIBIZ, sarcastically described this phenomenon as "not venture capital, but safety capital."

No 'Virtuous Cycle' in the Startup Ecosystem

The number of startups shutting down due to a lack of follow-up investment is rising rapidly. According to venture investment platform The VC, the number of startups with previous investment history that closed due to a lack of follow-up funding jumped from 104 in 2021 to 170 in 2024.

Within the VC industry, the response is often, "We have no choice if we want to survive." Given the industry's structure?where policy funds from entities like Korea Venture Investment and Korea Growth Investment are used to attract limited partners (LPs) such as banks, insurance companies, and corporations to form funds?good fund returns are essential to launching the next fund. One VC CEO explained, "When the overall scale of venture investment is growing, there are many options for selling early-stage startup shares to other VCs, private equity funds, or mid-sized companies. But when the market is as contracted as it is now, there are fewer buyers for existing shares, and with the KOSDAQ IPO as the only real exit, it's inevitable that we focus on late-stage startups first."

The CEO of a large VC firm with over 1 trillion won in assets under management (AUM) said, "The essence of VC is to make bold investments in startups with high growth potential, but the reality is far from easy. Recovering investments through IPOs takes a long time and the chances of success are low." The CEO added, "M&A activity needs to be revitalized, but due to issues with handling equity stakes, it is not easy in Korea. As this situation persists, many VCs are investing in late-stage startups that have already established a stable position in the market."

Data from the Ministry of SMEs and Startups and Korea Venture Investment show a stark contrast in exit strategies between domestic and global VCs. As of the third quarter of 2024, 72% of U.S. VC exits were through M&A. In contrast, in Korea, 'disposals'?including M&A, buyouts, and secondary share purchases?accounted for only 54.4% in 2024. The Korea International Trade Association has analyzed that, as of 2022, only 0.7% of VC exits in Korea were through M&A, indicating that such exits are minimal in the domestic market.

Meanwhile, Korean VCs rely heavily on IPOs for investment recovery. In 2024, 30.6% of exits were through IPOs. In the U.S., as of the third quarter of 2024, only 6.5% of VC exits were via IPO.

Yoo Hyosang, director of the Unicorn Management and Economy Research Institute, pointed out that there is no virtuous cycle in the domestic startup ecosystem. He said, "There are over 2,700 companies listed on KOSDAQ, which is far too many for proper trading to occur. As a result, exits through KOSDAQ listings are difficult, and the investment virtuous cycle has disappeared." He continued, "Last year, 70 VC-backed companies went public on KOSDAQ. Even if that number increases by 10%, it's only 77, but there are 60,000 new tech startups every year, so the impact is negligible."

Director Yoo emphasized that the government must take the lead in revitalizing M&A activity. He said, "Other startups, as well as mid-sized and large companies, should be able to invest in or acquire some of the 60,000 startups, but there is no information available, so connections are not being made. For example, if Samsung Electronics needs a particular technology, they would actively pursue a startup with that technology, even if it has no sales. But since this isn't happening, the government needs to step in and create a system to match these parties."