South Korea finally gets things going for start-ups

Seoul

Park Sung-suh showed good timing by creating his Android-based software company in 2008, just as Google’s mobile operating system was gaining momentum. His flagship product, ColorNote, is now the leading note-taking mobile app in more than 50 countries, with 65 million downloads.

But when he considers the difficulty he had in finding early-stage financing for his company, Social & Mobile, Park looks to have arrived five years too early on the South Korean start-up scene. “When I started, no one wanted to invest in tech,” he says. “There has been a sea change over the past couple of years ... the trigger was the government push.”

Spurred by concern about South Korea’s heavy reliance on the huge chaebol business groups, President Park Geun-hye has made support for start-ups a central plank of her policy agenda. Soon after her inauguration in February last year, her government launched a plan for billions of dollars in financial support for start-ups, aimed at building an environment “that resembles Silicon Valley”.

The state funding schemes have made waves in South Korea’s technology community, encouraging start-ups to seek funding and investors to offer it — but has also led to concerns about the market distortions that can stem from such large-scale government intervention.

The government’s largest financing mechanism, the Growth Ladder Fund, has over the past year spent Won295 billion ($280 million) of its Won2.4 trillion in capital on equity stakes in 37 companies.

The fund, run by bureaucrats in the newly created Ministry of Future Planning, was raised mostly from the state-controlled Korea Development Bank and Korea Finance Corporation, with much smaller contributions from private sector investors including banks and pension funds. It will be boosted a further Won2 trillion by next July.

More than half the money has been earmarked for “matching” investments by private equity and venture capital groups, tempering investor risk to help stimulate an area of investment that had been relatively underdeveloped in South Korea.

Efforts to ease “exits” by early-stage investors — such as the establishment of a new small-cap stock market — have also been welcome, says Lee Hyun-ju, vice-president of Coolidge Corner Investment, a Seoul-based venture capital firm.

South Korea hosted Won830 billion of venture capital investment in the first seven months of this year, almost matching the full-year total for 2009, and putting the industry on course for a record. “Venture capital could not grow in the past because few companies had the opportunity to go public,” Lee says. “This government agenda is really good for us to grow and invest.”

Economists cite the weakness of South Korea’s service sector, with little international reach and largely consisting of small family-owned retail businesses, as a major obstacle to economic growth.

The government believes the software and eCommerce sector can play a key role in addressing this, capitalising on world-leading rates of internet speed and smartphone penetration, and building on previous successes by South Korean gaming and “chat app” creators such as Nexen and Naver.

By taking the lead in pushing this industry forward, Park is seeking to emulate her father, the military ruler Park Chung-hee, whose industrial policy in the 1960s and 1970s fostered manufacturing giants such as Samsung and Hyundai.

“Similar projects were there under previous governments but they were random initiatives,” says Kim Jeong-sam, an official in the software department at the Ministry of Future Planning. “The current government is trying to change the social environment, encourage people to take risk and start a new business.”

Park’s scheme has been broadly welcomed by entrepreneurs, who have long complained of the difficulty in raising funding from conservative banks, with debt financing putting entrepreneurs at risk of personal ruin because of South Korea’s strict bankruptcy law.

“What the government is doing is commendable,” says Jay Eum, managing director of Translink Capital, a Silicon Valley-based venture capital firm with investments in South Korea. But he warns of “redundancy”, with different arms of government competing with each other and offering similar programmes.

Meanwhile, some raise fears of “zombie start-ups”, which are fundamentally uncompetitive but kept alive for a while by government subsidy.

“It has side effects,” says Simon Lee, founder of Flitto, a translation app that has received indirect financial support from the programme, noting that it will take several years before the success of the programme can be judged. “There are good entrepreneurs, and there are some who just want to take money from the government.”

— Financial Times