Korea start-ups: The graduates
Korea’s start-ups are internationalizing and becoming more technically advanced as the ecosystem matures. A rapidly multiplying flock of local VCs will have to do the same to keep up with them
When Korean instant messaging and internet giant Kakao was established in 2010, its founders rightly focused on the domestic market, an enticingly affluent and digital-savvy consumer base of some 50 million people. However, the scope of this development vision in time came to be seen as insufficient.
As Kakao concentrated on its empire at home, local rival Naver was looking outward with a messaging and social media subsidiary that would go on to dominate the Japanese market under the name Line Corporation. Not to be utterly outmaneuvered, Kakao has since launched two internationally facing VC arms in Kakao Investment and Kakao Ventures. Fad-driven consumer media and gaming categories are still a major focus, but the broader footprint has facilitated a transition into something deeper.
Some of the latest deals are virtually unconnectable to the usual connotations of the Kakao brand, such as Standigm, a spin-out from Samsung Advanced Institute of Technology that uses artificial intelligence (AI) to develop drugs for Parkinson’s disease among other conditions. This activity has been interpreted as confirmation of ecosystem development on two fronts: homegrown digital leaders are internationalizing as they come of age and start-up creation trends are responding with growing sophistication.
Biopharma is really hot in Korea, but the companies are having difficulty finding a product-market fit
For now, the biggest names in Korea’s start-up scene still sit firmly in consumer-related industries, including e-commerce platforms Coupang, Market Kurly, Woowa Brothers and Tmon, payment services player Viva Republica, and media-focused Yello Mobile. But the grassroots story tells another tale. Bernard Moon, a co-founder and partner at cross-border early-stage VC and accelerator SparkLabs Group, says he’s seeing more frontier tech like AI, biotech, autonomous driving, robotics and drones.
“Older entrepreneurs are applying to our accelerator, including vice presidents from companies like Samsung and LG. They’re harder tech teams with founders in their 40s and 50s,” Moon observes. “That follows the trend in the US, where the average age of first-time founders is 39 or 40. It’s also a sign that Korea’s a more global market. The entrepreneurs are not just trying to capture the domestic or even regional market. They’re more bilingual and globally minded than before.”
Fundraising spree
SparkLabs tackled this opportunity set last year with the launch of a $50 million fund led by Brian Kang, a founding member of Samsung Ventures and Chris Koh, co-founder of Coupang. This has coincided with a surge of corporate and financial VC activity in the country, including the launch of a $100 million virtual reality-focused fund by industry incumbent Moiin, a $50 million fundraise for Seoul-based BonAngels Venture Partners that will spread the firm’s reach across the region, and a $10 million Korean crypto vehicle from Line.
In June, 500 Startups Korea established its second technology fund with a view to backing seed rounds for15-20 local start-ups. The mandate sticks closer to Korea’s core strengths in areas such as education, e-sports, online retail, and media, but Jeffrey Lim, a partner at the firm, sees global opportunities in these categories as well. This month, 500 Startups backed a $17 million round for Spoon, an audio broadcasting player that has recently carved out markets in Southeast Asia, Japan, and the Middle East. From this viewpoint, the increasingly crowded VC space still has plenty of regional elbowroom.
“I believe strong competition will benefit founders and VCs. Founders gain better access to various VCs and can find a VC fund who can better help their businesses. VCs will also evolve to attract more high-potential founders to invest in,” Lim says, flagging a parallel trend of local VCs targeting deals in foreign markets such as Vietnam and Indonesia, sometimes with specially mandated overseas funds. “We need more international VCs in Seoul. There are not many in Korea, mainly due to regulations.”
The number of VC funds in the country has grown from 381 in 2012 to 807 last year, according to the Korean Venture Capital Association (KVCA). This has precipitated six consecutive years of increased investment through 2018 when local commitments totaled KRW3.4 trillion ($2.8 billion). This compares to KRW1.8 trillion the prior year and only KRW725 billion as recently as 2008. KVCA has also tracked distinct growth in earlier bets, with angel investment rising from KRW58.1 billion in 2012 to KRW439 billion last year.
Among the most recent entrants is Ascendo Ventures, which was founded last year with a view to backing early-stage lifestyle and entertainment start-ups and related technologies. The firm closed its first blind pool fund last year at $25 million and is already contemplating a follow-up vehicle within the year. Like 500 Startups, the remit reveals ongoing faith in Korea’s core consumer themes, especially when they can be taken overseas. Ascendo CEO Aaron Shin notes that international credibility will be a differentiator.
“There are many VCs in Korea competing for deals, and they tend to be local firms that know about the Korean market,” he says. “That’s problematic because in order to boost the start-up ecosystem, they should be connected to global business markets. Later-stage start-ups must get funding from large financial institutions globally or from strategic investors that can help their businesses in the future. I want to be the investor that helps with that part – the globalization.”
The key understanding here is that accessing capital is no longer the hard part. The Korea Venture Business Association estimates that 93.4% of VCs in the country play no role in the development of their portfolio companies aside from investing capital. Responding to this will involve helping with cross-border expansion, to a large extent. But it will also mean navigating a notorious regulatory environment and recruiting engineers in an ecosystem where big corporations still have overwhelming gravity.
“They [new VC funds in Korea] are hustling and making quicker investment decisions. There is still some way to go before they get experience in both up and down-markets,” says Han Kim, a managing director at US-based Altos Ventures. “Korean start-ups need help in getting the right people into the team, and sometimes letting go. They also need help in deciding when to accelerate their businesses and when to tighten down. Many VCs in Korea are hesitant to offer their opinions.”
Altos launched its third Korea fund last year with an undisclosed target corpus. Its second Korea vehicle closed at $110 million in 2016. Portfolio companies include Viva Republica, Woowa and Coupang. As a culture of risk-taking and diversification has permeated the ecosystem, deal flow has increasingly included deeper tech companies like big data medical analyst Syntekabio. Thriving in this transition during the past five years has been a matter of choosing proactive engagement over passive capital.
“Sometimes, you have to acknowledge that the market demand isn’t there,” Kim adds. “That is when you have to brutally cut cost and focus on the essentials. Sometimes, you have to accelerate when others are hurting. It is a fine line that comes along with experience. In Korea – like anywhere else – it is tough to admit you made a mistake.”
Getting specialized
The main challenge with a move toward more hands-on management is that demand for support is emerging alongside increased specialization in a wider range of fields. In value terms, Korean VC investments in traditionally popular segments around gaming and IT-related manufacturing have essentially flatlined in recent years, while services and medical technology categories have taken off.
KVCA recorded a 122% jump in healthcare VC investment during 2018 to KRW842 billion. Along with Standigm and Syntekabio, Korean health tech start-ups receiving VC funding in recent months include D&D Pharmatech, Orum Therapeutics, TiumBio, ExoCoBio, and Genexine. FuturePlay, a local early-stage VC and accelerator focused exclusively on deep tech start-ups, has backed at least 10 healthcare companies, but it approaches the sector with a twist.
“Biopharma is really hot in Korea, but the companies are having difficulty finding a product-market fit. There was a similar boom last year in crypto, and now those companies are having the same problem,” says Jung-hee Ryu, a partner and CEO of FuturePlay who founded computer vision start-up Olaworks in 2006 and exited it to Intel in 2012. “Now a lot of health tech companies are shifting from pharma to medical AI and IoT [internet-of-things]. I think the next wave of tech unicorns in Korea will be in this sector.”
FuturePlay’s standout investment to date is Vuno, an AI business that had no experience in the healthcare sector when it started but, with investor guidance, found its target market in medical big data. The company has raised three rounds to date from the likes of SBI Investment and BonAngels, and is now preparing for a local IPO next year.
In addition to hinting at a possible breeding ground for local deep tech champions in healthcare, the Vuno story highlights an increasing leniency toward unproven companies on the Korea Exchange’s KOSDAQ board. And if a KRW12 trillion package of funding for pre-unicorn companies recently announced by the Korean government comes to fruition, the diversifications currently taking place at the accelerator level could be set to go mainstream.
“In Korea, global VCs are supporting later-stage rounds for service start-ups like Woowa and Coupang, but they are still not active in deep tech,” says Ryu. “So, it’s good news that the stock market is opening doors to AI and IoT and the government is looking into funds for later-stage rounds in deep tech. Right now, the exit market’s really small, there’s no M&A, and deep tech companies really need that money for R&D.”
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