Korea brews start-ups for sustainable growth

Korea is determined to support the development of new start-up companies to sustain the economic growth that to date has been largely driven by the chaebol.
A government official giving a speech to venture capitalists as part of the TIPS program
A government official giving a speech to venture capitalists as part of the TIPS program

After decades of chaebol-driven economic growth, Korea is nurturing a fresh batch of innovative start-ups to pave the way for the country’s next phase of development.

South Korea for years was the country famously dominated by large conglomerates – from Samsung to Hyundai and LG – as these laid the foundations for the country’s tigerish successes.

But the world’s 12th-largest economy is losing some of its spark and is now badly in need of structural reform.

South Korea’s growth domestic product grew only 0.3% in the second quarter. GDP growth last year of 3.3% was also lower than the central bank’s estimate of 3.5%.

Since Korea’s first female president Park Geun-hye came into office in 2013 the government has invested heavily on nurturing start-ups by setting up technology incubators and has launched Manufacturing Innovation 3.0, a programme that aims to upgrade the nation’s industry through innovation.

Park’s administration hopes the programmes will produce another Naver, Korea’s largest web portal operator by market share, or another game developing giant like Nexon. The two both began as tech start-ups shortly before 2000 and have since evolved into two of the country’s most well known companies, the chaebol aside.

Korea’s renewed entrepreneurial mission can be dated back to 1998 as the country’s big conglomerates laid off thousands in the wake of the Asian financial crisis, prompting a wave of new businesses as a new generation of tech-savvy talent ventured out on its own.

“Many talented people try to search opportunities back in major companies as the economy recovered, rather than pursuing start-ups, because of burdens about failures,” Han Junghwa, head of Korea's Small and Medium Business Administration, a government-run industry organization, told FinanceAsia.

However, many of those new start-ups were unable to survive after the global financial crisis of 2008.  So in some respects Korea is starting out again.


Park has a plan for private-public ownership structures to help start-up companies grow.

Under Park’s leadership, Seoul has established 17 centres for creative economy and innovation, or CCEI, across the peninsula. Each centre is backed by a large conglomerate and will assist small- and medium-sized enterprises in developing their innovative ideas and bringing them to market.

Samsung has joined hands with the government to establish a creative incubator in Daegu city, while an innovation center in Daejeon has cooperated with SK Group in the development of smart farms. Hyundai Motor, meanwhile, is partnering with the CCEI in Gwangju to study hydrogen-fuelled vehicles.

Support from the chaebol is essential for attracting venture capital or private equity investment to smaller businesses because it offers an exit route for investors if these companies are subsequently bought out by the conglomerate. The chaebol are also a good source of know-how and technical knowledge.

At the same time, the potential acquisition of promising young businesses provides Korea’s leading industrial groups with a potentially faster and cheaper way of developing new products and business lines than might otherwise be the case if they relied just on internal resources.

“Innovative businesses cannot be done better by conglomerates than private equity or venture capital firms,” Perry Ha, managing director of Draper Athena, a Seoul-based tech-focused venture capital firm, said. “Big companies are inefficient to develop new ideas because of bureaucracy and slow decision-making process.”

The government is also supportive in terms of providing funding for venture capitalists.

Korea Venture Investment Corp, a government-run funding agency, has invested $2 billion into venture capitalists since 2005 and has supported the establishment of 380 VC funds. 


The Tech Incubator Program for Startup, or TIPS, is a private capital-driven and government-backed initiative to support new start-up companies. A total of 18 start-ups have been subsidised since the programme’s inception in 2013.

Korea's Small and Medium Business Administration will co-invest in qualified start-ups with venture capital investors by sharing up to 85% of the initial investment. For any single programme, VCs can invest a maximum of W100 million ($100,000) while the government will provide up to W500 million in research and development funding for up to three years.

Through the public-private partnership young entrepreneurs are able to receive funding for their projects, while VCs can limit their risk exposure by sharing the investment with the government.

TIPS has attracted venture capital investment from conglomerates including Hyundai Motor and steelmaker POSCO, and has nurtured two start-ups that have since been acquired by bigger companies.

Kids Note, a childcare-based web and mobile application that connects teachers with parents, was acquired by internet giant Daum Kakao in a W10 billion deal in January. Meanwhile, education program developer Entry Korea became a subsidiary of Naver after a W5 billion buyout in June.


Kim Taeyub, who heads Standard Chartered Private Equity in Korea, told FinanceAsia that more Korean business start-ups are likely in the future as overseas-educated talent moves back to the country.

“There will be more competition for local start-ups because Korea’s business environment has been improving compared to some other Asian countries,” Kim said.

With more start-ups in the pipeline, it could get harder for private equity firms to exit their investments because bigger companies will have more options to choose from. Kim believes that will increase the likelihood of Korean start-up acquisitions by foreign companies or private equity firms.

He is also expecting more acquisitions in the biotech sector as mid-sized companies are eager to grow through purchasing smaller players.

Johnny Yu, vice president of Yuanta Asia Investment, an active venture capital investor in Korea, said investment in the sector is supported by the increase in research and development funding for biopharmaceutical companies. The government-backed Korea Drug Development Fund has provided $1 billion in R&D funding since its establishment in 2011.

Yu, who has 22% of his portfolio invested in biopharmaceuticals, said Korea has an edge over other Asia countries because of its well organized infrastructure and growing early stage clinical trial support to biopharma companies.

Korean companies are also expanding through partnerships with foreign biotech firms. Earlier this month, Korean biopharmaceutical company Alteogen signed an agreement to jointly develop cancer drug with Chinese biotech company 3SBio.

In a separate deal, Cheongju-based Medytox has set up a joint venture with Hong Kong-listed Bloomage Biotechnology to develop botulinum toxin (Botox) in China.

¬ Haymarket Media Limited. All rights reserved.
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