I. Background for Korean Venture Sector Development
The development of Korean venture sector was not just an outcome of the government’s 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’.
Emergence of High-tech Companies Economy Based on Manufacturing Industry & Large Companies Economy Based on IT Industry & large Companies Technology Development and Transfer 1970’s ~ 80’ Mid 90’s ~ Driving Forces in the Korean Economy
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
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
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. Internet The Revolution of IT Telecommunications Computer related technology Booming of venture firms based on information technology
Since early 1980’s, some companies which had the characteristics of a venture firm emerged and started their businesses.
The 1 st 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
Bubble 1 st Generation 2 nd Generation 3 rd Generation ? 1980 1990’s 2000 Late 2000 ~
II. Venture Boom & Bubble in Korea Source : Small and Medium Business Association Quantitative Growth Qualitative Growth Source : Small and Medium Business Association Source : Bank of 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.
Source : Small and Medium Business Association
. 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
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.
Number of KOSDAQ listed companies and KOSDAQ market capitalization The growth of stock trading in KOSDAQ Source : KOSDAQ Stock Market, Inc. Source : KOSDAQ Stock Market, Inc. 1996 1997 1998 1999 2000 No. of listed companies (No. of venture companies) Yearend 331(52) 359(86) 331 (114) 453 (173) 604 (244) New listing 31(14) 83(42) 8(4) 160(58) 250 (116) Withdrawal from listing 39(9) 55(8) 36(2) 38(7) 99(2) Total capital (Million KRW) 3,101,801 3,494,747 5,407,811 13,061,528 15,128,325 Total market capitalization (Million KRW) 7,606,110 7,068,549 7,892,244 98,704,382 29,015,847
II. Venture Boom & Bubble in Korea The investment of venture capitals 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 Source : KOSDAQ Stock Market, Inc. Source : KOSDAQ Stock Market, Inc. (Unit : billion KRW )
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 Venture Capitals KOSDAQ Reasons for Venture Bubble in Korea
Weakness in business model of venture firms
Lack of competitive advantage of technology
Weakness of financial structure of venture firms
Sharp decrease in investment funds raised
Decrease of new investment
Preference to manufacturing venture business
Deferring the issue of new shares due to KOSDAQ fall
Decrease in public offerings and transactions
Companies lost the credit from investors
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
Seeking a new profit model through restructuring
Increased number of strategic alliance and M&A activities
Focusing on technology development
Securing global market through export and overseas operations
Restructuring efforts of venture capitals
III. Government Policy to Grow Venture Sector Technology Development Venture Capital Policy KOSDAQ Policy Support for Start-ups GOVERNMENT POLICY
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
Deregulation for venture capital investment operation
Tax reduction for venture capitals
Abolition of investment limitation on foreigner’s investment funds
Government announced ‘Policies to Activate the KOSDAQ Market’
Mitigated IPO conditions for venture firms
Tax support for KOSDAQ listed companies, etc.
Support for the cost of facilities and operation of incubating centers
Universities and research institutes designated as incubating centers
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
The Korean government’s major policies to foster venture firms are categorized in 5 aspects.
IV. Assessment of Korean Venture Sector Growth Enhancing Entrepreneurship Real Economy Growth KOSDAQ Development by Government Development in Science and Tech Areas Contributions
Excellent entrepreneurs with good business mind
Encouraged professors and researchers to start venture business
Excellent enterprises with competitive technologies
Increased the exports
Government revised ‘Securities Exchange Law’
Measures for activating KOSDAQ : loosening public offering systems, supporting tax system, establishing KOSDAQ funds
Growth of scientific and technological skill development
Investing in technology development, patents, research institutes
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
The venture industry development contributed to the growth of Korean economy.
IV. Assessment of Korean Venture Sector Growth Government Intervention Venture Business Designation System Market Distortion between venture and large firms Moral Hazard and Venture Business Fraud Limitations /Problems
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 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.
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.
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 .
Number increase does not mean the actual growth in venture businesses.
Professional capability of VCs under questions
However, there have been some limitations or problems which were caused by the venture business development. 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.
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 M&As by lowering the regulation.
Venture company will not only aim at IPOs but will also try for M&As.
Active M&A 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 M&A and some others like universities, research institutes.