[Venture Investment Slump]②"Rich-Get-Richer, Poor-Get-Poor" Worsens Among Venture Capital Firms

Capital Flows to Large VCs While Small, Innovative VCs Face a Drought
LPs Seek "Stable Returns" as Stricter RWA Rules Fuel the Trend
"Pension Funds, Mutual Aid Associations, and Banks Should Expand 'Small VC Investment Leagues'"

Editor's NoteThe Lee Jaemyung administration is increasing its budget to foster startups and venture companies, while also introducing a variety of policies to expand investment. However, the "funding drought" for early-stage startups persists, and the "rich-get-richer, poor-get-poorer" phenomenon among venture capital (VC) firms has intensified. This article examines the current realities and solutions for the venture investment market, which is struggling to overcome a difficult period.

The "rich-get-richer, poor-get-poorer" phenomenon is becoming more pronounced in the domestic venture capital (VC) industry, which serves as a critical funding source for startups. This is because limited partners (LPs) are increasingly directing their capital toward established large-scale VCs, in line with the financial sector's preference for safe assets. Industry insiders are concerned that this polarization of funding will undermine the diversity and innovation of the early-stage startup ecosystem.

Number of Funds Increases, But Concentration on Large Firms Deepens

According to the Korea Venture Capital Association on December 3, the cumulative amount of venture funds formed through the third quarter of this year reached 9.7219 trillion won, a 17.3% increase from the same period last year. This marks the first rebound in fund formation since 2022, reversing the previous downward trend. The private sector accounted for 83% of all LPs, driving the upward trend in fund formation, and investments from pension funds and mutual aid associations reached a record high of 837 billion won.

However, the number of funds formed through the third quarter was 602, a 2.4% decrease from 617 in the same period last year, contrasting with the increase in total fund size. This indicates that the average size per fund has grown. The total number of venture investment firms stood at 248, down by one from last year. During this period, six new firms were registered and seven were deregistered.

Koo Taehun, CEO of Minetabrook Ventures, commented, "We are seeing a 'sorting out' of VCs, with fewer new registrations and more deregistrations. In a situation where the exit market is blocked, no matter how much government funding is released, it is difficult for smaller VCs to benefit. The structure favors VCs with a long history." The CEO of Company A, a mid-sized domestic VC, said, "Competition for fundraising among VCs has become even fiercer. When the market was good, large firms played in the 'major league,' but now, with matching becoming more difficult, they are coming down to compete even in the small fund league."

The tightening of risk-weighted asset (RWA) regulations has also intensified the conservative investment stance of financial institutions, further fueling polarization among VCs. LPs are increasingly allocating capital to large VCs to manage risk. The CEO of Company B, a small VC, attempted to form a co-GP with a larger VC to participate in fundraising, but ultimately failed to be selected as a general partner (GP) this year. He lamented, "Since the strengthening of RWA management, financial institutions have prioritized safety, making survival strategies a major concern for VCs with a shorter track record."

"Declining VC Diversity Will Entrench the Venture Investment Ecosystem"

Even if a large amount of capital is released next year, the situation is unlikely to improve. This is because the "matching" stage-where additional private capital must be raised after receiving funds from the Korea Fund of Funds-remains a major hurdle. The CEO of Company A explained, "Even if the Korea Fund of Funds provides 40-50% of the capital, the remainder must be matched by banks or other institutions. However, banks are likely to focus their resources on the 'National Growth Fund,' which will launch next year, making them less willing to match individual VC funds. From the LPs' perspective, there is a burden in having to invest twice."

The problem is that a decline in VC diversity could lead to a crisis for early-stage startups. Large VCs tend to invest in late-stage companies nearing an initial public offering (IPO), while the discovery of innovative early-stage startups has traditionally been the domain of distinctive small VCs.

Koo emphasized, "Ideally, VCs with strong individual characteristics should operate funds that match their unique profiles." He added, "Early-stage investment is similar to the local business scene. When rents rise, unique restaurants disappear and only large franchises remain-much like gentrification. In the venture investment market, as funding concentrates on large firms, distinctive small houses that used to discover early-stage companies are losing their place."

An industry insider noted, "Many VCs claim to specialize in Series A early-stage investment, but in reality, they are preoccupied with increasing their operating capital to maintain LP interest. Above all, LPs also allocate funds in this way. In such a structure, VCs inevitably become more like growth capital investors, making large-scale investments based on proven track records, while the role of venture capital as risk capital diminishes."

"More Focus Needed on 'Small and Medium-Sized' and 'Market Failure Segments'"

As a result, there is growing support for the idea that major LPs, such as mutual aid associations, should significantly expand "rookie leagues"-dedicated funding rounds for small and medium-sized VCs. In fact, the Korea Scientists and Engineers Mutual Aid Association (SEMA) revived the rookie league for the first time in about six years in its regular funding round in the second half of this year, opening up opportunities for new and smaller firms. SEMA allocated 140 billion won to the VC sector, selecting three large firms to receive 30 billion won each, and three medium or smaller firms to receive 15 billion won each. For the VC rookie league, one firm was selected to receive 5 billion won.

There are also calls for financial holding companies, which have recently announced plans to expand "productive financial investment," to play a greater role. While forming large funds is important, it is also crucial to allocate a certain amount of capital to the small VC league to serve as a catalyst for early-stage investment.

Han Jaejun, Professor of Global Finance at Inha University, and Kim Hyunyeol, Research Fellow at the Korea Institute of Finance, recently pointed out at a Hana Financial Research Institute roundtable, "The domestic VC market still relies heavily on policy finance, while the share of investments from pension funds and mutual aid associations is only about 3%, far behind the United States (42%) and Europe (12-18%)."

They suggested that there should be a stronger focus on "market failure segments," such as early-stage startups and regional industry support, through enhanced private sector involvement and policy finance. One of their recommendations was to reform the policy fund performance evaluation system to focus less on investment scale and more on alignment with policy objectives and contribution to corporate growth.

This content was produced with the assistance of AI translation services.