LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA

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LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA

• World Bank Institute Report

Hoe-Hoon Chung President CEO of eCommunity,
Inc. Hchung_at_ecommunity.co.kr
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Agenda

1. Background for Korean Venture Sector Development

1. Venture Boom Bubble in Korea

1. Government Policy to Grow Venture Sector

1. Assessment of Korean Venture Sector Growth

1. Lessons from Korean Venture Sector Growth

VI. The Prospect of Venture Industry in Korea
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I. Background for Korean Venture Sector
Development

• The development of Korean venture sector was not
  just an outcome of the governments policy to
  bring up venture business, although it played a
  critical role. Rather, it was the natural result
  of the restructuring efforts from the whole
  Korean economy sector that tried to survive
  throughout the 1990.

Driving Forces in the Korean Economy
1970s 80
Mid 90s
Emergence of High-tech Companies
Economy Based on Manufacturing Industry Large
Companies
Economy Based on IT Industry large Companies
Technology Development and Transfer
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I. Background for Korean Venture Sector
Development
Continuous investment in human resource and
technology development has been the foundation
for the development of Korean Venture Sector.
Education Status of entrepreneurs(Year 2002)
Number of Researchers by Country
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I. Background for Korean Venture Sector
Development
The change in the capital market caused by the
IMF foreign currency crisis has triggered the
structural changes in the financial market. That
structural change enabled KOSDAQ to grow rapidly
and this extensive growth in the KOSDAQ market
also led Korean venture sector to grow
tremendously in 1999.
The Capital market centered the Banks

• Fostering of a new stock market after IMF foreign
  currency crisis
• Development of KOSDAQ, to supply capital for
  venture firms

IMF Foreign Currency Crisis
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I. Background for Korean Venture Sector
Development
The revolution of information technology created
abundant business opportunities for both various
venture firms and advanced companies in Korea.
Telecommunications
Booming ofventure firms based oninformation
technology
The Revolution of IT
Internet
Computer related technology

• The importance of element technology in IT
• Low entry barrier and transaction cost
• Reducing the demerits of the firm size

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II. Venture Boom Bubble in Korea

• The growth of Korean venture industry can be
  divided into three generation.
• The 1st generation was established early 80s.
• The 2nd venture generation firms were
  established, based on the new opportunities
  created by the Korean governments venture
  fostering policy and IT development.
• The 3rd generation period is that the
  restructuring of the Korean venture firms after
  bubble.

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II. Venture Boom Bubble in Korea

• Since early 1980s, some companies which had the
  characteristics of a venture firm emerged and
  started their businesses.
• The 1st generation venture firms focused on
  localizing the technologies and products which
• mostly relied on developed countries in the
  past.

Localizing the technologies and products

• Technology intensive venture companies
• Qunix Comupter
• Trigem Computer
• Mirae
• Medison

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II. Venture Boom Bubble in Korea

• The number of venture firms designated by
  government increased dramatically after May 1998.
• Sales growth rate and return on sales of the
  venture firms also were higher than those of
  conglomerates and other small and medium sized
  firms.
• The number of venture companies increased in the
  high tech manufacturing industry.

Quantitative Growth
Qualitative Growth
Source Small and Medium Business Association
Source Small and Medium Business Association
Source Bank of Korea
Source Small and Medium Business Association
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II. Venture Boom Bubble in Korea
The venture capital industry also made a rapid
growth with the increasing number of venture
capital firms and investment funds.
Number of venture capital firms by year
Number of venture capital funds raised each year
.
Source Small and Medium Business Administration
Source Small and Medium Business Administration
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II. Venture Boom Bubble in Korea

• KOSDAQ made a rapid growth as recognized highly
  profitable investment market with the stock
  market boom.
• Being listed in KOSDAQ was recognized as a main
  fund raising source for venture companies and as
  exit market for venture investment.
• The growth of stock trading in KOSDAQ was
  increased rapidly.

The growth of stock trading in KOSDAQ
Number of KOSDAQ listed companies and KOSDAQ
market capitalization
Source KOSDAQ Stock Market, Inc.
Source KOSDAQ Stock Market, Inc.
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II. Venture Boom Bubble in Korea
KOSDAQ General Index and KOSDAQ Venture Index
declined heavily and the venture capital
investment started to decrease in the middle of
2000.
Monthly KOSDAQ index in market booming period
The investment of venture capitals
(Unit billion KRW )
Source KOSDAQ Stock Market, Inc.
Source KOSDAQ Stock Market, Inc.
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II. Venture Boom Bubble in Korea
The reasons for Korean venture bubble can be
found from the sectors of venture firm, venture
capital and KOSDAQ.
Venture Firms

• Weakness in business model of venture firms
• Lack of competitive advantage of technology
• Weakness of financial structure of venture firms

Reasons for Venture Bubble in Korea

• Sharp decrease in investment funds raised
• Decrease of new investment
• Preference to manufacturing venture business

Venture Capitals
KOSDAQ

• Deferring the issue of new shares due to KOSDAQ
  fall
• Decrease in public offerings and transactions
• Companies lost the credit from investors

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II. Venture Boom Bubble in Korea
Venture boom in Korea after the foreign exchange
crisis rapidly cooled down with the collapse of
KOSDAQ. Korean venture firms are facing a
reformation stage and are expected to leap again
if they successfully restructure themselves.
Negative aspect

• Bad performance of KOSDAQ companies
• 36 of KOSDAQ companies showing deficit in 2002
• 42 of venture designated companies with negative
  return
• 70 of venture capital investment expected to be
  difficult in successful exit
• Decrease in financing through KOSDAQ

Positive aspect

• Seeking a new profit model through restructuring
• Increased number of strategic alliance and MA
  activities
• Focusing on technology development
• Securing global market through export and
  overseas operations
• Restructuring efforts of venture capitals

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III. Government Policy to Grow Venture Sector
The Korean governments major policies to foster
venture firms are categorized in 5 aspects.
Investment Fund

• Incentives tax reduction/exemption for venture
  firms, angels and venture capitals
• Credit security supports toward pre-start-ups
• Fund for start-ups and encouragement of small
  and medium sized firms

Technology Development

• Support for technology development plans
• Laboratories to be registered as factories, and
  urban private building for venture complex
• Permission for professors and researchers to
  work for venture firms

GOVERNMENT POLICY
Venture Capital Policy

• Deregulation for venture capital investment
  operation
• Tax reduction for venture capitals
• Abolition of investment limitation on
  foreigners investment funds

KOSDAQ Policy

• Government announced Policies to Activate the
  KOSDAQ Market
• Mitigated IPO conditions for venture firms
• Tax support for KOSDAQ listed companies, etc.

Support for Start-ups

• Support for the cost of facilities and operation
  of incubating centers
• Universities and research institutes designated
  as incubating centers

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IV. Assessment of Korean Venture Sector Growth
The venture industry development contributed to
the growth of Korean economy.
KOSDAQ Development by Venture Companies

• Active leading of KOSDAQ market by venture
  companies market value, trade volume
• High-tech industry based companies led the KOSDAQ
  boom

Enhancing Entrepreneurship

• Excellent entrepreneurs with good business mind
• Encouraged professors and researchers to start
  venture business

Contributions
Real Economy Growth

• Excellent enterprises with competitive
  technologies
• Increased the exports

KOSDAQ Development by Government

• Government revised Securities Exchange Law
• Measures for activating KOSDAQ loosening public
  offering systems, supporting tax system,
  establishing KOSDAQ funds

Development in Science and Tech Areas

• Growth of scientific and technological skill
  development
• Investing in technology development, patents,
  research institutes

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IV. Assessment of Korean Venture Sector Growth
However, there have been some limitations or
problems which were caused by the venture
business development.
Quantitative Growth

• Number increase does not mean the actual growth
  in venture businesses.
• Professional capability of VCs under questions

Government Intervention

• Government has supported the growth of venture
  business with the promotional policy.
• Too much intervention from government contributed
  to cause bubble.
• Government should take a role of market observer.

Venture Business Designation System

• Venture business designation by government could
  be abused.
• Designation system can lead to discouraging
  market competition.
• Venture business growth can be exaggerated due to
  the unique designation system.

Limitations /Problems
Market Distortion between venture and large firms

• Venture businesses and large enterprises are
  complementary in terms of industry value chains.
• Restriction on large companies and protection of
  venture businesses is not desirable for
  government policy.

Limited position in national economy

• Venture business portion of added value and
  employment in the national economy is still low.
• Average number of employees of each venture is 38
  people and the added value is approximately KRW
  1.48 billion.

Moral Hazard and Venture Business Fraud

• Excessive support of the government raised moral
  hazard problems and fraud through venture
  business.
• Some disguised venture companies were established
  to utilize the venture designation system .

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V. Lessons from Korean Venture Sector Growth

• There are several lessons which could be found
  from the venture business development in Korea.
• Balance of market function vs. govt role
• Government should plan when to reduce its role in
  the market, as the market grows.
• Financial market practice of venture business
• A desirable venture capitalist has to provide not
  only investment but also has to support human
  resources, business consulting and marketing
  using his professional knowledge and human
  network.
• Considering the nature of the KOSDAQ market,
  though the entry and exit are very active,
  however a safety installation for the investors
  should be ensured.
• Government investment in technology innovation
• Koreas RD index and patent acquirement has been
  improved similar to those of advanced countries,
  however investment in basic research or
  fundamental technology is still weak.
• Government should support the RD of the areas
  which require the long term investment and the
  basic technology fields.

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VI. Prospect of Korean Venture Industry

• The Korean venture industry will leap again after
  the restructuring efforts.
• Korean venture business transit from the
  government driven development to the market
  driven development
• Korean venture industry will enhance its
  competitiveness by restructuring insolvent
  venture firms.
• The government policy will focus on fostering
  venture firms rather than encouraging start ups.
• Through the restructuring efforts, some venture
  companies take different approach
• A desirable venture capitalist has to provide not
  only investment but also has to support human
  resources, business consulting and marketing
  using his professional knowledge and human
  network.
• Selling business in the mass production stage and
  diversifying into new business areas after
  developing new product and technology, and of
  allying with foreign companies or conglomerates.
• Alliances with other companies will increase to
  enhance the profitability.
• The oversupply of venture businesses will
  necessitate integrating efforts for gaining
  competitiveness
• Government already announced the policy to
  facilitate the MAs by lowering the regulation.
• Venture company will not only aim at IPOs but
  will also try for MAs.
• Active MA activities will lead to the
  development in enterprise control market. 
• In the long run, the Korean venture industry will
  evolve into the ecosystem to develop itself
  through the interaction among core players such
  as venture firms, venture capitals, KOSDAQ and
  MA and some others like universities, research
  institutes.