[Reporter’s Notebook] The "Third Venture Boom" Depends on Revitalizing KOSDAQ

"With the KOSDAQ in its current state, how can we expect proper venture investment?"

This was the response from the head of a mid-sized venture capital (VC) firm when I recently pointed out the polarization of venture investment. In the current venture market, there is an increasing concentration of investment in late-stage startups that can generate immediate returns, while early-stage startups?those with promising potential?are facing a severe funding drought. The VC executive cited the stagnant KOSDAQ market as the main reason for this situation.

The Lee Jaemyung administration recently put forward the "third venture boom" as a pillar of its economic vision. The plan is to make South Korea one of the world’s top four venture powerhouses through annual investments totaling 40 trillion won. However, the venture industry has responded with a mix of anticipation and concern. Simply increasing investment is not enough to solve the underlying problems.

The venture ecosystem operates on a virtuous cycle of startup, growth, exit, and reinvestment. Currently, the biggest obstacle to this virtuous cycle in Korea is the stagnation of the exit market. If the exit market does not function properly, investors hesitate to invest even when there is sufficient capital in the market. In particular, investments in early-stage startups?which require a long time to bear fruit?are being neglected altogether. Despite this, the government's venture policies are focused solely on "investment," missing the core of the issue.

The main exit strategy for domestic venture investments is KOSDAQ initial public offerings (IPOs). Other exit options, such as mergers and acquisitions (M&A) or secondary share transactions, are not well developed, so most capital is recouped through KOSDAQ IPOs. However, the KOSDAQ market is failing to serve as a lifeline for innovative companies.

The KOSDAQ index remains in the 800-point range, more than 20% lower than at its launch in 1996. As of August 18, the average daily trading volume in the KOSDAQ market for August is 5.0987 trillion won. This is the lowest level in five years and eight months, since December 2019, when the KOSDAQ index fell to the low 600s and the average daily trading volume was 4.098 trillion won. In contrast, the average daily trading volume in the KOSPI market for August exceeds 10 trillion won. The Lee Jaemyung administration’s focus on "KOSPI 5000" and the resulting policy initiatives have played a significant role in this outcome.

One VC executive noted, "Venture capital's reliance on public funds is as high as 25%, and since these are 'taxpayer funds,' we are forced to take a conservative investment approach. Even if government support increases, the discovery of innovative companies will remain limited unless the exit market is revitalized."

To achieve the "third venture boom," perhaps it is time to seriously consider the recent proposal from the venture industry to introduce a "KOSDAQ Activation Fund." The Korea Venture Capital Association has suggested creating a "KOSDAQ Activation Fund" totaling 30 trillion won over three years, with 10 trillion won invested annually. The plan involves establishing a "mother fund" with contributions from the government and policy-based financial institutions to serve as a catalyst for private investment, and then forming "sub-funds" that match these public funds with private capital, including that of ordinary citizens, to inject new energy into the market.

The Lee Jaemyung administration must urgently prepare policies aimed at achieving "KOSDAQ 3000," on par with "KOSPI 5000." The venture ecosystem can only thrive if the KOSDAQ is revitalized. Expanding investment alone will not create a virtuous cycle.