5 investors explain their mantra for South Korean startups
South Korea’s economy This model has relied for decades on export-oriented manufacturing operated by giant family businesses. A 2015 report from McKinsey explained how the country would need small businesses to pilot an innovative model for the next phase of economic growth. “The key to fostering such innovation is a vibrant startup community. … Currently, the Korean startup community falls far short of this ideal,” the report states.
South Korean conglomerates like Samsung, LG and Hyundai still play an important role in Korea’s primary economic growth; most of them have gone from being manufacturing-focused to technology-focused companies.
With Big Tech giants in South Korea, the country’s startup ecosystem has grown tremendously compared to 2014, as have startups in other Asian countries like China, India, and those in Asia from the South East.
In 2014, there were just 10 unicorns – including Coupang, Naver, Kakao, Line (which moved to Japan) and game companies like Nexon and NC Soft – among 29,561 startups. From 2022, Korea had 22 unicornswith a valuation of 1 trillion won (about $744 million), up from 18 unicorns in 2021. That may not seem like a massive leap from 2014, but the rise in unicorn numbers is a testament to the hard work of the Korean startups.
After the recent pandemic fueled the startup boom globally, startup valuations in South Korea have skyrocketed unrealistically, just as they have globally. In the present, the startup funding landscape has shrunk and valuations have plummeted all over the world in the face of uncertain macro conditions. Venture funding in Asia in Q1 2023 was down 33% from Q4 2023 and 57% from Q1 2022, according to a Crunchbase report.
We spoke to selected investors investing in the South Korean market to learn about their predictions for 2023, their investment strategy, the sectors they are passionate about and more.
All of the investors we spoke to said there was virtually no change in their investment strategies, but due diligence approval by committees has become rigorous.
“The days of ‘swiping right’ on a deal are long gone, and the required level of due diligence has also returned to historic standards, taking three to four months instead of three to four days,” said Yeemin Chung, general manager of BRV. Capital management.
Investors are now advising startup founders and executives to prioritize profitability over growth, expand their footprint and prepare to stay nimble amid fears of a possible recession.
And startups are now seeing falling valuations compared to the previous two years. Still, in a way, it’s healthy because “people are approaching it more rationally,” according to Han Kim, general partner at Alots Ventures.
“I think the current environment may seem a bit harsh for entrepreneurs, but in a way it does a favor to founders who can realistically chart their growth trajectory,” said Eunse Lee, Founder and Managing Partner of 541. Venture.
We spoke with:
- Han Kim, General Partner, Altos Ventures
- Tim Chae, Managing Partner, 500 Global
- JP Lee, CEO and Managing Partner, SoftBank Ventures Asia
- Yeemin Chung, Managing Director, BRV Capital Management
- Eunse Lee, Founder and Managing Director, 541 Venture.
(Editor’s note: The following surveys have been edited for length and clarity. These responses are strictly limited to South Korea and do not encompass all of Asia.)
Han Kim, General Partner, Altos Ventures
We are seeing a significant decline in venture capital funding in the first quarter of this year in Asia. How has your venture capital investment strategy changed with the state of the market?
Our strategy hasn’t changed much. We have been investing more in our existing businesses since the second half of last year, so there are more investment dollars in total. It’s a bit different from other investors. I think it’s because some funds don’t invest much [these days]. In a way, we have more possibilities to invest more. (But these are not new startups but existing companies in our portfolio.) We usually invest between 1 and 10 billion won ($750,000 and $7.5 million) in new companies and sometimes we even invest up to ‘to 100 billion won ($75.5 million) in existing wallets.
What caused the lowest funding in Asia since 2021? and do you think venture capital funding will continue to decline this year? What is your outlook for funding volumes in Asia in 2023 and 2024?
If you look the data, it includes China. I think it was influenced a bit by China. Chinese VCs have faced some big business regulations [investment], and now the United States also regulates investment in Chinese companies. There are many checklists [for investment in China]. I guess, but at least this year, I think until the tensions between the United States and China fade or resolve, this difficult atmosphere will not be easy to bounce back.
How does the investment trend in South Korea differ from that of other regions such as the United States and Europe?
Now the trend is for profitability before growth. I think this trend is becoming more prominent in South Korea. In the United States, growth prevailed over profitability, but now it has become profit rather than growth, but the United States has more leeway than Korea. In other words, US investors have more patience than investors in South Korea.