[Venture Capital Reset]②"Losses Not Allowed" - Flawed KPIs Stifle Innovation

Short-Term, Stability-Oriented KPIs: Investments Forced Into Loan-Like Models
"Performance Management Must Be Redesigned for Long-Term, Goal-Oriented Growth"
Frequent Turnover of LP Managers Every 2-3 Years Is Also a Problem

Editor's Note"There is more money. But there is less risk-taking." This is the paradox of the "Korea Fund of Funds," which has fueled the growth of the Korean startup and venture industry for the past 20 years. Many point out that, after several years of an investment winter, policy-driven venture capital has become overly focused on short-term performance management and loan-like operations. The Asia Business Daily examines the role and direction for improvement of venture capital, and explores the conditions for a "venture nurturing ecosystem" where startups, venture capitalists (VCs), and limited partners (LPs) can grow together, in a three-part series.

"Because the Korea Fund of Funds and others require short-term quantitative indicators, VCs end up forcing startups to deliver short-term results. As startups try to tailor their business models to meet these indicators, a vicious cycle emerges in which they cannot focus on their core businesses."

This is according to the head of a foreign VC firm currently investing in Korean startups. He said, "The investment and exit periods for Korean venture funds are generally shorter than those overseas," adding, "Companies in sectors where short-term results are not possible are pressured to produce outcomes within just a few years, which leads to negative side effects."

'Loss Equals Policy Failure' Frame... KPIs Blocking Risk-Taking

There is growing criticism that domestic venture capital is converging on a "banking-type" model, focusing on late-stage and stable portfolios. One of the main reasons cited is the "operating rules," including key performance indicators (KPIs). As the direction of venture fund managers (GPs) and limited partners (LPs) is dictated by evaluation logic, minimizing the "possibility of failure"-an inherent part of venture investment-has become the top priority of funds.

The domestic venture investment ecosystem is typically structured so that LPs, who provide the funding, evaluate GPs' performance based on KPIs, and allocate future fund management rights accordingly. The problem is that quantitative indicators such as fundraising amount, execution rate, and exit performance easily become the core of these KPIs. While losses in private funds can be categorized as "investment failures," losses in policy funds are often interpreted as "policy failures." The more the government's KPI standards are designed for "short-term stability," the more VCs and other GPs are naturally pushed toward late-stage, low-risk investments.

Industry insiders say this pressure is felt from the internal decision-making stages for startup investments. This is because the government often requires VCs and accelerators (ACs) to deliver annual results, with the next year's budget and incentives determined by these evaluations. The demand for short-term revenue and growth indicators, even for very early-stage startups, is a characteristic unique to the Korean VC industry and is rarely seen in the United States or Europe.

"VCs' Unique Characteristics Disappear"... Attention on 'Long-Term, Goal-Oriented' Performance Indicators

The CEO of Company B, which was selected as a GP for the Korea Fund of Funds last year, said, "As a VC, you inevitably have to be mindful of the LPs," adding, "The more losses are highlighted, the greater the burden that you may be disadvantaged in re-delegation evaluations or the next fund formation process."

He continued, "As we try to minimize the possibility of failure and reduce that burden, club deals-where several VCs jointly invest in a single startup-are common, especially in highly uncertain areas like early-stage and deep tech. Rather than showing off their own unique colors or strategies, as in Silicon Valley, VCs are forced to look at startups through a rigid framework."

As a result, calls for reforming the evaluation system are growing louder. Koo Bonseong, Senior Research Fellow at the Korea Institute of Finance, said, "Advanced countries are expanding fiscal-based innovation funds to preemptively secure future core technologies and build a foundation for long-term growth," adding, "These initiatives require differentiated performance management, such as qualitative evaluations, milestone-based operations, and follow-up support linked to the level of outcomes, unlike general programs."

A research report from the Korea Institute of S&T Evaluation and Planning (KISTEP) last year pointed out, "Policy finance institutions like Korea Venture Investment Corporation still manage performance mainly through quantitative indicators such as execution amount, number of guarantees, and number of beneficiaries," adding, "To enable scale-up investments from a long-term perspective, it is essential to overhaul the KPI system to evaluate both the contribution to policy goals and profitability."

Looking at global examples, the United States' Small Business Investment Company (SBIC) and Small Business Innovation Research (SBIR), the United Kingdom's British Patient Capital (BPC), and Israel's Yozma program have all institutionalized structures in which the government absorbs early-stage risk and the private sector actively participates in the growth phase. However, Korea still remains stuck in a "single funding source, single institution, short-term execution" model, which puts it at a competitive disadvantage compared to global standards.

Representative success stories include Natron Energy in the United States, which commercialized sodium-ion batteries by building a factory; Quantexa, a UK data analytics company that became a unicorn (a privately held startup valued at over 1 trillion won) thanks to guaranteed long-term investment; and Germany's High-Tech Gr?nderfonds (HTGF), which has achieved more than 180 exits-including the AI-based fitness unicorn EGYM-through a structure in which the government covers up to 60% of losses as a subordinated investor.

"Evaluation Transparency and Expertise Also Lacking... Advanced VC Infrastructure Needed"

The need to establish a "transparent and professional review and evaluation system" is also being raised. Kim Hyunyeol, Research Fellow at the Korea Institute of Finance, said, "Ultimately, an environment must be created in which information is accumulated and shared within the market," adding, "This could involve building a professional VC database, establishing valuation standards for tech companies using the evaluation capacity of public institutions, and revitalizing the investment advisory services market through ACs."

Typically, the LP investment review committee consists of about seven members, including at least two internal staff (at the level of government officials) and five external experts. However, there are frequent criticisms that among these external experts, few have hands-on venture experience, with most coming from academia or the bureaucracy. The CEO of Company B said, "Most of the review committee members for the Korea Fund of Funds have no connection to the venture industry, so they often do not understand the principles behind startup growth," adding, "Many VCs question the GP selection results, but at present, there is no official channel for raising such issues."

He said, "All reforms depend on the will of the policy authorities, but each institution's staff rotates every two to three years," emphasizing, "Rather than understanding why the problems need to be fixed, a bureaucratic attitude that prioritizes allocating funds according to current criteria is blocking innovation."

The CEO of Company A added, "In the early days of the Korea Fund of Funds, this model clearly contributed to the development of Korea's venture ecosystem, but now it is time for a new phase," adding, "We need to modernize the operating methods of institutions, including KPIs."