[Opinion] Preparing for the Post-Coronavirus Era

The novel coronavirus disease (COVID-19), which originated in China, is severely impacting the Korean economy. It is predicted that if China's economic growth rate drops by 1%, South Korea's economic growth rate will decrease by 0.5%. Due to the spread of COVID-19, South Korea's economic growth rate this year is expected to fall short of the 2% range, with some scholars even forecasting growth rates in the 0% range.

It is clear that expecting high growth as in the past is difficult. In such circumstances, growth strategies through startup companies and venture businesses are very important. As of May 2018, many of the top 10 global companies by market capitalization are venture companies. Besides being ICT companies representing innovative industries, they share the commonality of overcoming financial difficulties and growing through venture capital investments.

The government has announced more than 90 measures related to venture startups since March 1997, starting with the "Comprehensive Measures to Revitalize Venture Business Startups," to establish a startup environment and growth foundation. Thanks to these efforts, the number of startups increased by an average of 6.7% annually over the past five years (2012?2016), and government financial support also grew externally, increasing by 29.2% from 2.0905 trillion won in 2013 to 2.7108 trillion won in 2017.

However, the proportion of venture-invested companies through venture capital remains sluggish at about 5.9%. Although this is an increase from 3.7% in 2017, about 90% of companies are still recognized as venture companies through certification such as technology evaluation. Venture companies are defined as such because they cannot guarantee technological capability or future growth potential. These statistics undermine the government's intention to strengthen venture investment policies recognized by the market.

As of the end of 2016, there were 864 venture companies producing products or services related to the Fourth Industrial Revolution, accounting for only 2.59% of the total 33,360 companies. Among them, Internet of Things (IoT) related companies are the most numerous with 340 (39.4%), followed by robotics (194, 22.5%), virtual reality/augmented reality (60, 6.9%), big data (58, 6.7%), and 3D printing (57, 6.6%).

According to the Venture Business Survey, their business performance is poor. In 2015, the average sales per Fourth Industrial Revolution-related venture company was 4.053 billion won, which is less than the 6.923 billion won average for general venture companies. Profitability indicators such as operating profit margin and net profit margin relative to sales are also comparatively low.

Nonetheless, it is encouraging that venture capital investing in these venture companies is increasing. As of the end of 2019, there were 149 venture capital firms, a 42.3% increase from 104 at the end of 2008, and 140 newly formed funds with about 4.1 trillion won. The problem lies in the fact that despite the increase in venture capital and investment funds raised by new funds, the investment return rate is not very high. The average internal rate of return (IRR) of 706 dissolved funds from 2003 to 2017 was only 3.8%.

What is the cause of the low returns? While the qualitative aspect of investee companies may be a factor, I believe the cause lies in the fragmentation and discriminatory systems of laws supporting venture capital that create the investment environment. This means the efficiency of policy implementation is low. To fix this, asymmetric venture capital-related regulations must be revised.

First, regulations that differ for the same functions of venture capital should be changed to uniform regulations for the same functions to promote competition and enhance capabilities. Second, support laws related to small and medium enterprises, which focus on deregulation, should be revised and an integrated management promotion system established. The creation of mega mother funds led by the private sector is necessary. Third, venture capital itself must develop its 'deal sourcing' capabilities. Domestic venture capital tends to rely excessively on the government.

Technology startups are the hope of our economy. Although COVID-19 is damaging the national economy, as the Bible says, "This too shall pass," we can and must overcome it. Plans to overcome COVID-19 and economic difficulties must proceed simultaneously. For venture entrepreneurs, now is the time to demonstrate wisdom by preparing in advance for the changing startup and business environment.

This content was produced with the assistance of AI translation services.