Intro to VC in Korea

SYMSYS 161

Final Project

Julie Nam

• Growth Trend & Characteristics 
• Unicorn startups
• Investment Framework: Korean Investment Partners and Kakao

Recent History

• Korea had 147 registered start-up investment companies in 2000 (Venture Boom!).
• There was a decline around 2012, when there were 104 companies. 89% of these were in media, telecommunications, and general manufacturing. 45% companies were invested in early-stage. 
• Now, the scene is different!
  • 103 companies!
  • Korea is excelling in messaging apps, gaming industry, E-commerce, and software. 
  • With the "creative economy" policy of the new government, more support for start-ups
  • I'll get into these in the next slide...

First thing that comes up when you search for VC in Korean search engine?

• KVCA (Korean Venture Capital Association), analogous to NVCA (National Venture Capital Association) in the US
• Founded in 1989
• But very unclear what it's doing - the Board of Directors unknown, its members unknown, benefits of being a member in concrete. Membership payment same regardless of the size or CPM of the company. 
• Seems to be an attempt to benchmark US VC scene - then really, how is Korea doing in comparison to the US?
  • Much fewer major VC firms: SoftBank, Stonebridge, Coolidge Corner, KCube, Strong Ventures

The "Unicorn Club": US

• Software companies that started since 2003 and valued at over $1 billion by public or private market investors... this is very, very rare.
• In fact, only about 0.07 percent of venture-backed consumer and enterprise software startups.
• Thus the name unicorn: in the U.S., there are 39 companies that belong to this club. These include: Facebook, LInkedIn, Workday, Twitter, Groupon, Airbnb, Instagram, Rocket Fuel, etc...
• What about startups in Korea? Are there unicorns?

Unicorns in Korea

• Strong Ventures and beSUCCESS are venture firms that focus on Korean startups. They recognize that VC in Korea is blooming due to the thriving startup culture, and there are 10 unicorns in Korea today!

• Messaging App: Line, Kakao
• Search Engine: Naver, Daum
• Gaming: Smile Gate, Nexon, NC Soft, Com2US
• E-Commerce: Gmarket, Coupang

Early-stage Model?

• Compared to US or Europe, Korea has lower rate of early-stage investment. It is roughly around 27% early and 50% later-stage.

• But when it comes to Kakao, one of the most successful startups in Korea, the success was in early-stage investment.
• Around 2011 (less than a year after its release), Kakao's valuation was around $1.8 Billion. Korean Investment Partners invested $5 Billion, giving them almost 70% VC Ownership. 

Kakao: Risks/Results?

• There were clear risks; none of the other VCs in Korea decided to invest in Kakao because there was no clear profit model. 

• After the investment, Kakao's profits increased almost 200% in a year - by 2013, it saw $60 Billion in profit. 

• As KIP's original investment was around $5 Billion, now it holds stocks that have increased x12 in value. 

• KIP's decision to take a risk paid off!

KIP's Investment Framework

• According to CEO of KIP, the secret to KIP's investment in Kakao was the VC's emphasis on "system." 
• Integrating the perspectives of a diverse group of people

• Less hierarchy (unusual for a traditional Korean working culture) - both seniors and juniors can speak up, and all voices are considered equally.
• This is rather rare in Korean VCs.

• It is not rare to have "steamed debates" over investment choice!

Who was behind the investment?

• Former NHN employee Young Ho Park, early 30s
• Even though he was inexperienced in VC, his pitch could actually be executed because of the "secret vote" system - where people could vote for the investment idea without having to favor other senior members' opinions.
• NHN is the company that succeeded with Naver (#1 search engine in Korea, one of the unicorns) - KIP valued this "start-up eye" 

So how important is culture, really?

• KIV's investment success with Kakao was a good example of how less conservative, less traditional way of evaluating venture ideas can work tremendously!
• The idea of less hierarchy and more "young," "hungry," "risk-taking" attitudes is prevailing in Korean startups and VCs.
• Naver, which started as a small startup (but is now the #1 search engine in Korea), is going back to venture - it is implementing Company-in-Company "cell" type organization for more revolution.
• VCs are adopting this culture as well!

Descriptions of other major VC-backed startups

• List here
• While they can be largely grouped into a few categories (gaming, e-commerce, delivery), it makes sense given the user base. VCs recognize the Koreans' tendency to follow a trend as well as their obsession with gaming. Therefore, more early-stage investments in these types of startups are being made.
• Another trend in Korea for VC-backed startups: they place great emphasis on marketing, often through TV commercials involving celebrities. 

Ending Note - Overall

• $80 Billion overall investment this year, 17.9% growth since last year.
• Return on investment increased to 8.72% in 2013, compared to 4.06% in 2012.
• This growth trend is expected to continue. 
• About 12.3 trillion won committed to early stage funding - record amount!
• All in line with President Park's effort to promote innovation and startups.
  • Government budget for infant companies (2.17 trillion won)
• International VC investing ("shopping") in Korea!