Korea VC: Seoul-searching

Korean-American early-stage investor Altos Ventures has been active in Silicon Valley for eight years. Over that period, it has leveraged its Korean connections to back a number of start-ups in the country. At two start-ups a year, however, deal flow was slow. The firm decided more resources were required to fully take advantage of the opportunity.

So last year the Altos launched its first Korea-focused fund, a US-based vehicle with a target of $60 million. In January the firm established its first local office in Seoul's Gangnam district. The commitment has already started to pay off.

"Between of 2005 and 2013 we invested in nine companies and in last 12 months we have invested in nine more - and seven since January," says Han Kim, general partner and founder at Altos. "It has been a combination of having an on-the-ground presence, actually having people there, and the fact we are seeing better companies coming out of the country."

They are not alone. In the past year, a number of early-stage investors have either opened offices in Seoul or otherwise sought to increase their exposure to South Korea. Silicon Valley-based Digital Entertainment Ventures (DEV) also set up a base in Seoul under the banner of DEV Korea; 500 Startups is said to be launching a fund there (it has already publicly pledged to back more Korean start-ups in 2014); and Strong Ventures has also beefed up its presence.

Clearly people are paying more attention to South Korea, and for some at least it is translating into real deal-flow. Seoul is no means the only the Asian city to see an uptick in early-stage investment over the past couple of years, but a number of distinguishing factors might just give it the edge over its neighbors.

AVCJ Research data certainly seem to support the notion that the South Korean venture capital is experiencing something of a renaissance. Overall investment is on the rise, totaling $457 million across 125 deals in 2013, compared to $378.3 million across 123 deals the previous year. It is the highest annual total since before the global financial crisis. So far this year $366.7 million has been invested across 62 deals.

It is worth noting that much of this growth has come via early-stage investments. Between 2012 and 2013, capital committed in this segment of the market rose from $38.7 million to $91 million - a 135% increase that far exceeds the 7% growth in later-stage VC deals. The number of transactions jumped from 37 to 51.

Where unicorns flock

No single factor is responsible for the growing appetite for early-stage investments. The first development VCs have witnessed is the maturing of the country's start-up ecosystem. Investments go through a full cycle and early backers get their first spate of home runs; then more capital flows in, based on a perception that the investment thesis has been proven.

In Korea, the biggest success story is Kakao Corp, the company behind messaging app and mobile services platform KakaoTalk. Launched in 2010, its early backers include Korea Investment Partners, DCM, Maverick Capital and Japan's CyberAgent Ventures.

Kakao is the first South Korean business to join the "unicorn club" - a loosely defined group of tech start-ups valued $1 billion or more that launched within the last 10 years. Shareholders recently gave the green light to a merger with internet portal operator Daum Communications Corp. that will value the business at $3 billion.

Other VC- backed start-ups have since joined the club or are on their way to doing so. In May Coupang, Korea's answer to Amazon, raised a $100 million round of funding led by Sequoia Capital. The transaction was said to value the company at $1 billion. Meanwhile, group buying site Ticket Monster was acquired by Groupon in January for $300 million. Boasting a 45% share of the country's group buying market, it is described as a unicorn in the making.

As seen in Silicon Valley more than a decade ago with likes of PayPal, Google and later Facebook, the entrepreneurs from the first generation of unicorns are now the investors and mentors behind this new ecosystem, pumping capital into a new generation of start-ups.

"Korean founders are more experienced and more mature than 3-4 years ago," says Nathan Millard, director of Korean start-up platform and Strong Venture portfolio company BeSuccess. "There is more infrastructure around them both in terms of capital and the quality of mentors."

As such, the perception of South Korea among outside investors is arguably changing. Increasingly, the country is regarded as more than just a center for hardware innovation; it is gradually gaining a reputation for producing successful software start-ups.

"Korea is going wild in terms of software production," says John Nahm, a managing director with California-based Strong Ventures. "There is a sort of prejudice that Koreans are good in hardware but are nDDot good in software, but it is simply not true."

Yet despite the heightened level of activity coming from the private sector it is almost impossible to ignore the role played by Korea's government in nurturing the VC industry. South Korean President Park Geun-Hye was elected in late 2013 after pledging to attract overseas VC investment into the country. She has followed up with a raft of investor-friendly initiatives.

"The government seems to be taking the initiative," says Kaine Kim, managing director at advisory Acuity Partners and partner with DEV Korea. "They sense that the conglomerates may not maintain their global status 10 or 20 years down the road and so they are looking to discover and foster the next generation."

Government sponsorship of Korean venture capital is nothing new. Korea Venture Investment Corporation (K-VIC) K-VIC has been investing in the asset class since 2005 and government LPs had accounted for roughly one quarter of the capital entering Korean VC funds by the time Park came to office. However, more recently the government has focused more of its energy on the start-up ecosystem and the role overseas investors can play in nurturing it.

Among its initiatives is the Ministry of Science, ICT and Future Planning (MSIP), set up in 2013 to encourage technology innovation. The same year the government said it would grant start-up visas to foreign entrepreneurs in a bid to facilitate further inbound investment. Earlier this year, MSIP's budget was increased to more than $12 billion, with $2 billion specifically earmarked for fostering the early-stage ecosystem.

The government has also sponsored numbers overseas programs intended to give start-ups greater exposure to global tech trends.

Foreign friends

This underscores the importance of overseas investors to South Korea's venture capital industry - not only because of the capital they bring but also because of the insight and access to new markets they can offer. "If you look at Samsung or Hyundai, 70% of their revenue stream is basically from outside of Korea," says Strong Ventures' Nahm."Most companies know that if you want to go big, you have to go abroad."

This is the kind of access that likes of Strong Ventures and Altos are offering, leveraging their US location with a view to taking Korean start-ups global. Another key advantage of US-based VCs is the large number of Korean-Americans able to bridge the two cultures. As a result of this connection, many VCs and start-ups have a US base in Los Angeles - where South Korea has the largest expat community in the world.

"It is true that LA is the capital of Korea outside of Korea," Nahm says. "We believe Los Angeles can be as good as a platform as Silicon Valley. The city is becoming a hyper growth center for tech that can provide the networks needed to catapult Korea start-ups into the global market."

High-profile examples of this trend include gaming company Nexon and Korean-Japanese messaging app developer Line, both of which use Los Angeles as a US base.

South Korea is also attracting considerable overseas interest closer to home. Japan's Cyber Agent and Global Brain Corporation, for example, have offices in the country. Nobutake Suzuki, a partner with Global Brain explains that the many synergies between the two cultures can provide a means for South Korean start-ups to tap the much larger Japanese market.

VCNC is a case in point. The Korean company is responsible for couples' app Between, which raised a Series C round of funding from Global Brain and 500 Startups in May. Japan currently accounts for more than 10% of its user base, the largest proportion outside of South Korea.

"Frankly speaking, it is easier for us to enter the Korean venture community because entrepreneurs are so interested in accessing the Japanese market," says Suzuki. "Our value proposition is that we can support them their entry, hire the right people and help them market to Japanese clients."

Both these points add weight to the notion that Seoul is growing in prominence as an innovation hub in the region. These ambitions are shared by Singapore, Hong Kong and Tokyo. The prevailing opinion seems to be that if South Korea is to eke out a competitive advantage, it will most likely come via a combination public and private sector support as the ecosystems grows.

"It is still dominated by government funding but at the same time the government is evolving, and so are our local venture firms," says Altos' Kim. "It will take a while longer to get to the level of Silicon Valley but I have no doubt that both parties will get there."

He adds that the key to growth will be marrying the government's aim of nurturing a strong start-up industry with the private sector's drive to generate attractive returns.

This view is echoed by BeSuccess' Millard. "The government can get things going but at the end of the day a start-up ecosystem is based on a bottom-up and not top-down model. They can help start-ups, but they cannot create good start-ups."

 

SIDEBAR: Media deals - Korea wave

L Capital Asia's recent KRW61 billion ($60 million) investment in YG Entertainment - the Korean talent agency responsible for acts including "Gangnam Style" rapper Psy - was perhaps the first significant PE deal to embrace the global cultural phenomenon known as "Korean Cool."

By backing in a company that casts, trains, produces and develops South Korea's premium K-pop and TV talent, the private equity arm of the French luxury goods conglomerate LVMH hopes to capitalize on the rise of the Korea cultural exports. The Ministry of Culture, Sports & Tourism said that "Korea Wave" ("Hallyu" in Korean) had 9.3 million-strong following as of last year, compared to 3.3 million in 2011 based official fan club figures.

Venture capitalists have mixed views as to whether this presents an opportunity for early-stage investors. "The cool factor of K-pop and Korean drama across Asia is definitely having some effect," says John Nahm, a managing director with California-based Strong Ventures "But on the VC side there is a little bit of skepticism."

He notes that the more attractive targets for venture investors will be distribution platforms that provide access to content. One example is KakaoMusic, the Spotify-like music service launched by the VC-backed makers of KakaoTalk.

Kaine Kim, managing director with advisory Acuity Partners and partner with Digital Entertainment Ventures Korea expresses a similar view. "There seems to be a trend in Korea where people access a lot of media through their smart phone and use some kind of application to download that content," he says. "But at the same time they do not want to pay a lot of money for it."

The country's entertainment industry is still at a very nascent stage in terms of marketing overseas and there is a need for distribution platforms that can provide steady income streams from abroad. For all the recognition and revenue earned by "Gangnam Style" Kim observes that "the song itself is not going to create an entire ecosystem."

However, maybe where there is a will there is a way. YG's business model is built on a three-stage process, the last of which sees a successful domestic artistic go global. It is an admission that Korea alone is not enough.
"For the Korean music industry the domestic market is too small so they have to think about going global," says Nobutake Suzuki, a partner with Japan's Global Brain Corp. "So in that case the best candidate for investment is a company targeting the global market."

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• Topics
• South Asia
• Venture
• Early-stage
• South Korea
• Venture
• Korea Investment Partners
• DCM-Doll Capital Management
• CyberAgent Ventures
• Japan
• USA
• Media
• Technology