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LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA
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LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA

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  • 1. LESSONS FROM VENTURE SECTOR DEVELOPMENT IN KOREA World Bank Institute Report Hoe-Hoon Chung President & CEO of eCommunity, Inc. [email_address]
  • 2. Agenda <ul><li>Background for Korean Venture Sector Development </li></ul><ul><li>Venture Boom & Bubble in Korea </li></ul><ul><li>Government Policy to Grow Venture Sector </li></ul><ul><li>Assessment of Korean Venture Sector Growth </li></ul><ul><li>Lessons from Korean Venture Sector Growth </li></ul>VI. The Prospect of Venture Industry in Korea
  • 3. I. Background for Korean Venture Sector Development <ul><li>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’. </li></ul>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
  • 4. 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
  • 5. 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 <ul><li>Fostering of a new stock market after IMF foreign currency crisis </li></ul><ul><li>Development of KOSDAQ, to supply capital for venture firms </li></ul>IMF Foreign Currency Crisis
  • 6. 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 <ul><li>The importance of element technology in IT </li></ul><ul><li>Low entry barrier and transaction cost </li></ul><ul><li>Reducing the demerits of the firm size </li></ul>
  • 7. II. Venture Boom & Bubble in Korea <ul><li>The growth of Korean venture industry can be divided into three generation. </li></ul><ul><li>The 1 st generation was established early 80’s. </li></ul><ul><li>The 2 nd venture generation firms were established, based on the new opportunities created by the Korean government’s venture fostering policy and IT development. </li></ul><ul><li>The 3 rd generation period is that the restructuring of the Korean venture firms after bubble. </li></ul>Bubble 1 st Generation 2 nd Generation 3 rd Generation ? 1980 1990’s 2000 Late 2000 ~ Qunix Computer Trigem Computer Mirae Medison Handysoft Haansoft Turbotek
  • 8. II. Venture Boom & Bubble in Korea <ul><li>Since early 1980’s, some companies which had the characteristics of a venture firm emerged and started their businesses. </li></ul><ul><li>The 1 st generation venture firms focused on localizing the technologies and products which </li></ul><ul><li>mostly relied on developed countries in the past. </li></ul>Localizing the technologies and products <ul><li>Technology intensive venture companies </li></ul><ul><li>Qunix Comupter </li></ul><ul><li>Trigem Computer </li></ul><ul><li>Mirae </li></ul><ul><li>Medison </li></ul>Bubble 1 st Generation 2 nd Generation 3 rd Generation ? 1980 1990’s 2000 Late 2000 ~
  • 9. 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 <ul><li>The number of venture firms designated by government increased dramatically after May 1998. </li></ul><ul><li>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. </li></ul><ul><li>The number of venture companies increased in the high tech manufacturing industry. </li></ul>Source : Small and Medium Business Association
  • 10. . 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
  • 11. II. Venture Boom & Bubble in Korea <ul><li>KOSDAQ made a rapid growth as recognized highly profitable investment market with the stock market boom. </li></ul><ul><ul><li>Being listed in KOSDAQ was recognized as a main fund raising source for venture companies and as exit market for venture investment. </li></ul></ul><ul><ul><li>The growth of stock trading in KOSDAQ was increased rapidly. </li></ul></ul>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
  • 12. 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 )
  • 13. 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 <ul><li>Weakness in business model of venture firms </li></ul><ul><li>Lack of competitive advantage of technology </li></ul><ul><li>Weakness of financial structure of venture firms </li></ul><ul><li>Sharp decrease in investment funds raised </li></ul><ul><li>Decrease of new investment </li></ul><ul><li>Preference to manufacturing venture business </li></ul><ul><li>Deferring the issue of new shares due to KOSDAQ fall </li></ul><ul><li>Decrease in public offerings and transactions </li></ul><ul><li>Companies lost the credit from investors </li></ul>
  • 14. 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 <ul><li>Bad performance of KOSDAQ companies </li></ul><ul><ul><li>36% of KOSDAQ companies showing deficit in 2002 </li></ul></ul><ul><ul><li>42% of venture designated companies with negative return </li></ul></ul><ul><li>70% of venture capital investment expected to be difficult in successful exit </li></ul><ul><li>Decrease in financing through KOSDAQ </li></ul>Positive aspect <ul><li>Seeking a new profit model through restructuring </li></ul><ul><li>Increased number of strategic alliance and M&A activities </li></ul><ul><li>Focusing on technology development </li></ul><ul><li>Securing global market through export and overseas operations </li></ul><ul><li>Restructuring efforts of venture capitals </li></ul>
  • 15. III. Government Policy to Grow Venture Sector Technology Development Venture Capital Policy KOSDAQ Policy Support for Start-ups GOVERNMENT POLICY <ul><li>Support for technology development plans </li></ul><ul><li>Laboratories to be registered as factories, and urban private building for venture complex </li></ul><ul><li>Permission for professors and researchers to work for venture firms </li></ul><ul><li>Deregulation for venture capital investment operation </li></ul><ul><li>Tax reduction for venture capitals </li></ul><ul><li>Abolition of investment limitation on foreigner’s investment funds </li></ul><ul><li>Government announced ‘Policies to Activate the KOSDAQ Market’ </li></ul><ul><li>Mitigated IPO conditions for venture firms </li></ul><ul><li>Tax support for KOSDAQ listed companies, etc. </li></ul><ul><li>Support for the cost of facilities and operation of incubating centers </li></ul><ul><li>Universities and research institutes designated as incubating centers </li></ul>Investment Fund <ul><li>Incentives : tax reduction/exemption for venture firms, angels and venture capitals </li></ul><ul><li>Credit security supports toward pre-start-ups </li></ul><ul><li>Fund for start-ups and encouragement of small and medium sized firms </li></ul>The Korean government’s major policies to foster venture firms are categorized in 5 aspects.
  • 16. IV. Assessment of Korean Venture Sector Growth Enhancing Entrepreneurship Real Economy Growth KOSDAQ Development by Government Development in Science and Tech Areas Contributions <ul><li>Excellent entrepreneurs with good business mind </li></ul><ul><li>Encouraged professors and researchers to start venture business </li></ul><ul><li>Excellent enterprises with competitive technologies </li></ul><ul><li>Increased the exports </li></ul><ul><li>Government revised ‘Securities Exchange Law’ </li></ul><ul><li>Measures for activating KOSDAQ : loosening public offering systems, supporting tax system, establishing KOSDAQ funds </li></ul><ul><li>Growth of scientific and technological skill development </li></ul><ul><li>Investing in technology development, patents, research institutes </li></ul>KOSDAQ Development by Venture Companies <ul><li>Active leading of KOSDAQ market by venture companies : market value, trade volume </li></ul><ul><li>High-tech industry based companies led the KOSDAQ boom </li></ul>The venture industry development contributed to the growth of Korean economy.
  • 17. 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 <ul><li>Government has supported the growth of venture business with the promotional policy. </li></ul><ul><li>Too much intervention from government contributed to cause bubble. </li></ul><ul><li>Government should take a role of market observer. </li></ul><ul><li>Venture business designation by government could be abused. </li></ul><ul><li>Designation system can lead to discouraging market competition. </li></ul><ul><li>Venture business growth can be exaggerated due to the unique designation system. </li></ul><ul><li>Venture businesses and large enterprises are complementary in terms of industry value chains. </li></ul><ul><li>Restriction on large companies and protection of venture businesses is not desirable for government policy. </li></ul><ul><li>Excessive support of the government raised moral hazard problems and fraud through venture business. </li></ul><ul><li>Some disguised venture companies were established to utilize the venture designation system . </li></ul>Quantitative Growth <ul><li>Number increase does not mean the actual growth in venture businesses. </li></ul><ul><li>Professional capability of VCs under questions </li></ul>However, there have been some limitations or problems which were caused by the venture business development. Limited position in national economy <ul><li>Venture business portion of added value and employment in the national economy is still low. </li></ul><ul><li>Average number of employees of each venture is 38 people and the added value is approximately KRW 1.48 billion. </li></ul>
  • 18. V. Lessons from Korean Venture Sector Growth <ul><li>There are several lessons which could be found from the venture business development in Korea. </li></ul><ul><ul><li>Balance of market function vs. gov’t role </li></ul></ul><ul><ul><ul><li>Government should plan when to reduce its role in the market, as the market grows. </li></ul></ul></ul><ul><ul><li>Financial market practice of venture business </li></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><ul><li>Government investment in technology innovation </li></ul></ul><ul><ul><ul><li>Korea’s R&D index and patent acquirement has been improved similar to those of advanced countries, however investment in basic research or fundamental technology is still weak. </li></ul></ul></ul><ul><ul><ul><li>Government should support the R&D of the areas which require the long term investment and the basic technology fields. </li></ul></ul></ul>
  • 19. VI. Prospect of Korean Venture Industry <ul><li>The Korean venture industry will leap again after the restructuring efforts. </li></ul><ul><ul><li>Korean venture business transit from the government driven development to the market driven development </li></ul></ul><ul><ul><ul><li>Korean venture industry will enhance its competitiveness by restructuring insolvent venture firms. </li></ul></ul></ul><ul><ul><ul><li>The government policy will focus on fostering venture firms rather than encouraging start ups. </li></ul></ul></ul><ul><ul><li>Through the restructuring efforts, some venture companies take different approach </li></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><ul><ul><li>Alliances with other companies will increase to enhance the profitability. </li></ul></ul></ul><ul><ul><li>The oversupply of venture businesses will necessitate integrating efforts for gaining competitiveness </li></ul></ul><ul><ul><ul><li>Government already announced the policy to facilitate the M&As by lowering the regulation. </li></ul></ul></ul><ul><ul><ul><li>Venture company will not only aim at IPOs but will also try for M&As. </li></ul></ul></ul><ul><ul><ul><li>Active M&A activities will lead to the development in enterprise control market.  </li></ul></ul></ul><ul><ul><li>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. </li></ul></ul>

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