[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 less risk-taking." This is the paradox of the 'Mother Fund,' which has fueled the growth of South Korea's startup and venture sector for the past 20 years. Many point out that after several years of a funding winter, policy-driven venture capital has become overly focused on short-term performance management and loan-style operations. The Asia Business Daily examines the role of venture capital and directions for improvement, and in a three-part series, explores the conditions for a 'venture nurturing ecosystem' where startups, venture capital (VC) firms, and limited partners (LPs) grow together.

"Because the Mother Fund and others demand short-term quantitative indicators, VCs end up forcing startups to deliver short-term results. Startups, in turn, tailor their business models to fit those metrics, creating a vicious cycle that prevents them from focusing on their core business."

This is according to the head of a foreign VC firm currently investing in South Korean startups. He said, "The investment and exit periods for Korean venture funds are generally shorter than those overseas," adding, "Even companies in sectors where short-term results are unrealistic are pressured to deliver 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 investment capital is converging on a 'banking-type' model, focusing on late-stage, 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 'risk of failure'-which is inherent to venture investment-has become the fund's top priority.

In Korea's venture investment ecosystem, limited partners who provide capital typically evaluate GPs' performance based on KPIs, and the results determine the right to manage future funds. The problem is that quantitative indicators-such as fund size, execution rate, and exit performance-tend to dominate these KPIs. While losses in private funds may be seen as 'investment failure,' losses in policy funds are often interpreted as 'policy failure.' The more the government's KPIs are designed for 'short-term stability,' the more VCs and other GPs are naturally pushed toward late-stage, low-risk investments.

On the ground, people say this pressure is felt from the internal decision-making stage for startup investments. LPs often demand annual performance from VCs and accelerators (ACs), and the following year's budget and incentives are determined based on that evaluation. Requiring short-term revenue and growth metrics even for pre-seed startup investments is a characteristic unique to the Korean VC industry, rarely seen in the US or Europe.

"No More Unique VC Strategies"... Spotlight on Long-Term, Goal-Oriented KPIs

The CEO of Company B, which was selected as a GP for the Mother Fund last year, said, "As a VC, you inevitably have to be conscious of the LPs," adding, "The more losses are highlighted, the greater the fear that it will work against you in re-delegation evaluations or the next fund formation process."

He continued, "As we try to minimize the risk of failure and reduce that burden, the more uncertain the sector-like early-stage or deep tech-the more common it is to see multiple VCs join forces in 'club deals' for a single startup. Instead of showcasing each VC's unique color or strategy, as in Silicon Valley, we end up viewing startups through a rigid, formulaic lens."

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 economies are expanding fiscal innovation funds to secure future core technologies and build long-term growth foundations. Unlike ordinary programs, these initiatives require differentiated performance management, including qualitative evaluation, milestone-based management, and follow-up support linked to the level of output."

A research report last year from the Korea Institute of S&T Evaluation and Planning (KISTEP) noted, "Policy finance institutions still manage performance mainly through quantitative indicators such as execution amount, number of guarantees, and number of beneficiaries. To enable scale-up investments from a long-term perspective, it is inevitable to overhaul the system into a dual KPI structure that evaluates both policy goal achievement and profitability."

Looking at global cases, the US Small Business Investment Company (SBIC) and Small Business Innovation Research (SBIR) programs, the UK's BPC, and Israel's Yozma program have all institutionalized structures where the government absorbs early-stage risk and the private sector actively participates in the growth phase. In contrast, Korea remains stuck in a 'single-source, single-agency, short-term execution' model, making it less competitive by global standards.

Representative success stories include Natron Energy in the US, which pioneered commercialization by building a sodium-ion battery factory, and Quantexa, a UK data analytics company that became a unicorn (with a valuation of over 1 trillion won) thanks to guaranteed long-term investment. Germany's High-Tech Gr?nderfonds (HTGF) also succeeded in more than 180 exits-including AI-based fitness unicorn EGYM-through a structure where the government covers up to 60% of the losses as a subordinated investor.

"Evaluation Transparency and Expertise Lacking... Need for Advanced VC Infrastructure"

Establishing a 'transparent and professional review and evaluation system' is also cited as a key task. Kim Hyun-yeol, Research Fellow at the Korea Institute of Finance, said, "Ultimately, an environment where information is accumulated and shared in the market must be created. This could include building a professional VC database, establishing tech company valuation standards using public institution evaluation capabilities, and activating the investor advisory market through ACs."

Typically, LP investment committees are composed of internal staff and external experts, but industry insiders and outsiders point out that few of these external experts have actual venture experience. The CEO of Company B said, "Most of the Mother Fund investment committee members have no connection to the venture industry, so they often do not understand the fundamentals of startup growth. Many VCs question the GP selection results, but currently there is no official channel to raise such concerns."

He added, "All reform depends on the will of policymakers, but each agency's staff rotates every two to three years. Rather than understanding why the system needs to change, a bureaucratic attitude of 'disbursing funds according to current standards is the priority' is blocking innovation."

The CEO of Company A remarked, "In the early days of the Mother Fund, this model clearly contributed to the development of Korea's venture ecosystem, but now it's time for a new stage. The operational methods of institutions, including KPIs, need to be further modernized."