[Reporter’s Notebook] Venture Investment Focused Solely on IPOs: Beware of Shifting the Burden

Ongoing Discussions on Revitalizing the Venture Investment Market
Large-Scale Capital Inflows Amid IPO-Centric Exit Structures
Without Diversified Exits, Retail Investors May Shoulder the Burden

"To be honest, I wonder if retail investors are simply being left to shoulder all the burden."

This was the remark made by the head of a domestic venture capital (VC) firm I recently met. While discussing the various new systems and support policies being introduced to revitalize venture investment, he candidly expressed his concern that individual investors could ultimately become the final bearers of risk in the investment exit market.

After enduring a prolonged downturn since its peak in 2021, the venture investment market in Korea is finally seeing a rare upturn this year. The introduction of Business Development Companies (BDC), a listed venture investment fund, has become a foregone conclusion, and the government’s budget for the Korea Fund of Funds to support startup investment is set to expand to 40 trillion won annually. President Lee Jaemyung has identified the artificial intelligence (AI) industry as the next growth engine and has begun implementing large-scale investment pledges in this sector.

There is a widespread expectation that funding from limited partners, financial institutions, and policy capital will flow into the venture ecosystem. In July alone, domestic venture investment amounted to approximately 800 billion won, nearly double the monthly average of 440 billion won in the first half of the year. In addition to AI, robotics, and medical devices, investments have also increased in sectors such as gaming and agriculture, which had previously seen a funding drought.

The problem, however, lies in post-investment exits. Korea’s venture investment market is highly dependent on initial public offerings (IPOs). According to the Korea Venture Capital Association, “sales,” including mergers and acquisitions (M&A), buyouts, and secondary share purchases, accounted for 54.4% of domestic VC exits last year. This year, as of May, that proportion had shrunk to 37.9%. In contrast, IPOs rose to 46.7%, becoming the dominant exit route.

The situation abroad is different. In the United States, a variety of exit strategies have developed beyond IPOs, including M&A, secondary (existing share sale) funds, special purpose acquisition companies (SPACs), and recapitalizations. According to global data provider PitchBook, from April last year to March this year, M&A accounted for 44.1% of U.S. VC exits, with secondaries at 29.2%. IPOs made up only 27.7%.

In an exit structure centered on IPOs, the burden of investment recovery can fall on retail investors in the stock market immediately after listing. Overvaluation controversies during IPO pricing and mass sell-offs by institutional investors after lock-up expirations are already familiar scenes in Korea’s capital market. Injecting capital without diversifying exit strategies is risky.

Alongside capital inflows, a robust multi-layered exit structure must be established. The introduction of BDCs with investor protection mechanisms can enhance flexibility in capital raising, while easing risk-weighted asset (RWA) requirements can lower barriers for financial institutions to invest in ventures. In addition, activating the growth private equity market, which makes large-scale investments in pre-IPO growth companies, and the mezzanine market, which involves bonds with equity conversion rights, can enable investor liquidity even before IPO. The soundness of the capital market is judged not only by “incoming funds” but also by the structure through which these funds circulate. This reality must not be overlooked.