[Reporter’s Notebook] Venture Industry Must Prepare for Restructuring Before the Money Flows

"Everyone said that if we just hold on, things will get better, so I endured for three years, but nothing has changed. How much longer do we have to keep holding on?"

Last week, at an investment briefing hosted by a domestic venture capital (VC) firm, the founder of a bio startup posed this question. He was expressing the difficulties in securing follow-up investments as the bio industry has contracted since the COVID-19 pandemic. A VC representative responded, "Still, you have to keep enduring."

In some corners of the venture industry, the saying "Good days will come if you just wait and endure" has been circulating for quite some time. This comes after the peak of the venture investment boom in 2021, followed by a sharp decline in the scale of investments from the Korea Fund of Funds, a slump in the initial public offering (IPO) market, and delays in exits (capital recovery). With the presidential election approaching, the possibility of expanded policy funding from the new administration seems even more appealing. In fact, both Lee Jaemyung, the presidential candidate of the Democratic Party, and Kim Moonsu, the candidate of the People Power Party, have pledged venture investment commitments worth tens of trillions of won. Both candidates' blueprints also include a 100 trillion won investment in the artificial intelligence (AI) sector.

But is simply holding on really enough? The presidential candidates have not presented concrete implementation plans for their venture investment pledges. Even during debates, their answers have been limited to statements such as "We can entrust the private sector by utilizing the Korea Fund of Funds" or "We will proceed according to the situation over several years." There are no specific measures for how the Korea Fund of Funds will be established given the tight fiscal situation of the new administration, or for how to support venture companies that cannot withstand a multi-year execution period.

There are also warnings that the "real bottom" has yet to come. This is because companies that received hundreds of billions of won in investments at high valuations during the boom are now entering the exit phase. This is why VCs are forced to focus more on existing investments rather than new early-stage investments. One VC CEO met on site said, "There are too many zombie startups whose sales have stagnated for years." As a result, both startups and VCs are struggling. He added, "Out of about 250 domestic VC firms, only a handful will be able to maintain assets under management of more than 200 billion won."

The global market is also challenging. The size of fund formation in the US VC market has dropped to less than half in the three years since 2021. Moreover, most of these funds are concentrated in existing large VCs, making it even more difficult for new and small VCs to enter the market. As a result, more large VCs are lowering their fundraising targets or postponing the creation of new funds, and investors (LPs) are increasingly favoring conservative investments due to liquidity shortages, delayed exits, and macroeconomic uncertainty.

Now is the time to prepare for restructuring. Startups should reorganize their organizations and secure key talent to strengthen their foundations. VCs should return to their original role as venture capital and become more proactive in early-stage investments. Only then can the venture ecosystem function properly. There are already agile players who are improving their structure by expanding domestic and international networking. Venture companies and VCs that prepare properly will be able to take the lead during the recovery phase.