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[Finance] Status and Outlook of the Korean Start-Up Ecosystem

There is one thing observers of the Korean start-up ecosystem like to point out. The United States has 99 “unicorns”—start-ups valued at USD 1 billion or more—and China has 42. Korea has only two. These two rare Korean companies joined the league of unicorns in 2014, and no additional entry by Korean companies has been made since then. The name of the city, “Seoul,” does not appear among the most advanced ecosystems featured on the Start-Up Ecosystem Rankings by Startup Genome, which annually assesses and ranks major cities around the world in terms of how favorable they are to start-ups. Nevertheless, signs are pointing to a brighter future ahead for the Korean start-up ecosystem.

Increase in Start-ups

The number of new start-ups has been rising rapidly in Korea. The number of start-ups that has received new venture capital investment was 688 in 2012 but quickly multiplied to 1,191 in 2016. The amount of investment in these enterprises almost doubled from KRW 1.23 trillion to KRW 2.16 trillion over the same period. The proportion of investment made in businesses in their earliest stage is also on the rise, from 30% in 2012 to 36.8% in 2016, with the amount of investment in early-stage enterprises also multiplying from KRW 269.6 billion to KRW 790.9 billion. As important as the outward growth of start-ups and the related investment market is the diversification of the start-ups launched. Thanks to the entrepreneurial support initiatives introduced by large corporations, such as C-Lab of Samsung Electronics and Idea Plant of LG Electronics, the number of in-company start-ups is also growing. Examples include Bagel Labs, which is famous for its smart measuring tapes, and WELT, which has launched a health-care belt. Start-ups founded by retirees like Encore Technologies are also emerging.

The value of start-ups is also growing in Korea. According to the Korean Venture Capital Association (KVCA), the average value of venture capital–invested enterprises managed to double from KRW 21.1 billion in 2012 to KRW 42.2 billion in 2016. The average of all start-ups as well as the average value of start-ups in specific industries have been growing, attesting to the success and growth of young businesses in Korea.

Average Value of Venture Capital–Invested Enterprises (2012–2016)

(Unit: KRW 100 million)

Source: KVCA.

Emergence of Fast-Growing Start-Ups

In the meantime, the number of start-ups that have secured Series-A investment, by completing the development of their products and generating proven records of stable growth, is also on a rapid rise. According to Start-up Alliance, the number of Korean start-ups that has managed to receive Series-A investment multiplied from 80 or so in 2015 to more than 300 in 2017. The average amount of Series-A investment in Korea often exceeds KRW 1 billion. This means that a typical start-up that has attracted such investment is valued at KRW 5 billion at the least.

The emergence of fast-growing start-ups has also led to the rise of a number of start-ups drawing popular attention. These enterprises especially concentrate in providing information and communication technology (ICT) services in Korea. Viva Republica, a leading FinTech start-up, now occupies 95% of the simplified online money wiring service market in Korea with its application, Toss. It even managed to place 35th out of the 100 leading FinTech companies ranked by KPMG. As of February 2017, users had transferred more than KRW 3 trillion in cumulative total using the application. The Farmers, a start-up specializing in the delivery of fresh food ingredients and products, is better known by the brand name of its online service platform, Market Kurly. In just three years from its establishment, The Farmers generated KRW 35 billion in annual revenue in 2017, with its cash flows already turned into surpluses. According to Platum’s report on start-up investment patterns in 2017, all start-ups that have secured the greatest numbers of investment deals, the greatest amounts of investment, and the greatest investors were involved in ICT services.

There are, of course, fast-growing start-ups in other services and industries as well. Fast Five, a start-up that provides and manages co-working spaces, has extended its network of branches to 12 stores, mainly in and around Gangnam in Seoul, in just three years since its establishment in 2015. The company has already received more than KRW 20 billion in cumulative investment. Mesh Korea also deserves attention as an up-and- coming leader of logistics. With its Last Mile service, which delivers goods from warehouses or retail shops to consumers’ doorsteps, it has signed contracts with giants such as CJ Logistics, Shinsegae, Lotte Mart, Pizza Hut, Burger King, and KFC. Accordingly, the company saw its annual sales multiply by 3.5 times from KRW 5.5 billion in 2016 to KRW 19.7 billion in 2017 in just three quarters. It has also received more than KRW 75.5 billion in cumulative investment so far.

Investors Reap Returns on Start-Ups

Investors have traditionally shied away from investing in Korean start-ups due to the lack of an active merger-and-acquisition (M&A) market in Korea. Still, progress is being made in the M&A market for start-up investors. Last year, 29 M&A deals involving start-ups were signed, showing a 32% increase from the 22 deals in 2016. More interesting than the outward growth of the number of M&A deals is the content of those deals. Large Korean corporations are increasingly acquiring start-ups. Naver, Korea’s most popular search engine, has acquired Company AI, a specialist in artificial intelligence, and Drama & Company, which provides Remember®, a business card management appli cation. Samsung Electronics made headlines by acquiring Fluenty, the first-ever Korean start-up it has acquired. Industry experts expect that the number of M&A deals involving Korean start-ups will continue to rise this year.

IPOs by start-ups is also on the rise. Investors already expected IPOs by start-ups to increase when the special technology listing criteria were introduced in 2005, but much of the IPOs that have since followed involved biotech companies only. With the so-called “Tesla listing criteria” introduced recently to enable even start-ups generating deficits to offer their stocks to achieve greater growth, Café 24, a web host specializing in online retail malls, joined the KOSDAQ in February this year. A number of other start-ups, including Flitto and Hyperconnect, are also preparing to offer their stocks. The success of these enterprises will likely increase the number of other start-ups making similar attempts this year and afterward.

The Rise of Deep-Tech Start-Ups

Digital transformation is a major keyword to industrial transformations worldwide, led by the strides of 3-D printing, robotics, big data, Internet of Things (IoT), and AI technologies. Start-ups are at the forefront of the digital transformation. Mobileye, a company based in Israel, is a good example. With possession of cutting-edge advanced driver assistance system (ADAS) tech nologies that are in high demand today amid the rise of self-driving cars, Mobileye has signed partnerships with Intel and BMW to develop new vehicles. In terms of Korea, observers have been lamenting the lack of similar deep-tech start-ups in Korea. While deep-tech companies abroad often boast long histories, most deep-tech companies in Korea date back to 2010 and afterward.

Nonetheless, observers are speculating that more and more deep-tech start-ups will emerge in Korea, some of which will grow into world-class leaders. This is not only due to large corporations like Naver increasing investment in tech start-ups, but also because venture capital investors are turning their attention to these start-ups as well. In addition to the increasing number of deep-tech start-ups, existing enterprises are also making efforts to apply deep technology, with some already having begun to bear visible outcomes. Lunit, a specialist in AI, was named one of the 100 AI companies on CB Insights’ rankings. Luxrobo, which develops robots for learning, has recently been approached by a renowned global IT company with an offer of an M&A worth USD 100 million.

Start-ups specializing in blockchain-based services are also growing in number. MediBloc, a leading example in this regard, provides a blockchain-based system of medical data for patients, medical practitioners, and researchers. The company also managed to raise KRW 30 billion in funds through an initial coin offering (ICO) abroad last year. As it is critical for blockchain companies to establish and strengthen their own communities in their respective fields, companies like MediBloc are drawing much interest for their potential for growth.

Increasing Presence of Korean Start-ups in the Global Market

The dearth of networks between Korean start-ups and their counterparts abroad has also been criticized as another major problem of the Korean start-up ecosystem. More and more Korean start-ups, however, are poised to break out of this mold and expand their presence on the global market this year. The fast growth of start-ups has compelled them to expand their business opportunities outside the confines of Korea. The Korean government and investors are also emphasizing the importance of pioneering new markets abroad.

There is also a growing number of Korean start-ups that are established with global aspirations from the very beginning. Sendbird, which succeeded in attracting Series-A investments totaling USD 160 million from Silicon Valley investors in December 2017, is a good case in point. Kim Dong-shin, the company’s CEO, explained that he founded Sendbird in Silicon Valley because of the lessons he learned from his failed first start-up that was based in Korea. Althea, which is generating a K-beauty boom in Southeast Asia, has also opened its office in Malaysia. These companies defy the conventional model of businesses generating success on the domestic front first before launching internationally. According to Start-up Alliance’s opinion poll, the percentage of entrepreneurs favorably inclined to global expansion also increased dramatically from 31.3% in 2016 to 69.8% in 2017.

Outlook of the Korean Start-up Ecosystem

With many of the issues that have plagued the Korean start-up ecosystem now being addressed and eliminated, Korean start-ups are expected to achieve a dramatic growth and transformation this year. Industry observers and insiders are presenting one rosy picture after another. Start-up Alliance’s opinion poll showed that start-up entrepreneurs gave a score of 63.9 to the atmosphere surrounding the Korean start-up ecosystem in 2017, which is far higher than the 54.8 they gave the previous year. Moreover, 48.3% of the participating entrepreneurs (more than double the 23.3% of entrepreneurs participating in the previous year’s survey) answered that they expected things to get even better in 2018. The year 2018 will mark the transformation of the Korean start-up ecosystem into one of the major pillars of the global economy.

By Gil S. Jo
Associate Research Fellow
Korea Institute of S&T Evaluation and Planning (KISTEP)

The opinions expressed in this article are the author’s own and do not reflect the view of KOTRA
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