Need to Introduce Venture Loans to Promote 'Scale-up'

Utilization of Policy Funds, Expansion of Collaboration Between Banks and Venture Capital

[Asia Economy Reporter Kim Cheol-hyun] There has been a claim that it is necessary to consider introducing 'venture loans' into the domestic venture finance market using policy funds to promote the 'scale-up' of venture companies in South Korea.

Jongsoo Hong, Associate Research Fellow, and Sumi Na, Research Fellow at the Small and Medium Business Institute, announced the results of a study on the 22nd titled "Measures to Introduce Venture Loans to Promote Scale-up - Focusing on Collaboration between Banks and Venture Capital Using Policy Funds," revealing this view.

According to the institute, while the high growth of venture companies, so-called 'scale-up,' has become an important policy direction in major countries worldwide, South Korea lacks mid-to-late stage investments at the scale-up phase compared to major countries such as the United States. Although overall quantitative indicators such as new venture investment amounts in South Korea are on the rise, mid-to-late stage investments are insufficient.

Follow-up Investment Rate of Seed and Angel Funded Companies from 2013 to 2015

Accordingly, to promote the scale-up of venture companies in South Korea, it is necessary to consider introducing venture loans into the domestic venture finance market by utilizing policy funds such as the Korea Fund of Funds and policy guarantees. Venture loans refer to all forms of loans provided to venture companies that have received equity investments from venture capital.

In the United States, where scale-up is active, many venture companies receive venture loans, which are debt-type funds, along with equity investments at each growth stage. This is identified as one of the main factors behind the active scale-up in the U.S. According to Dow Jones VentureSource, 28% of U.S. venture companies received venture loans, and among U.S. venture companies that succeeded in initial public offerings (IPOs) in 2015, 47% used venture loans from Silicon Valley Bank, a representative financial institution providing venture loans.

The effects of venture loans include extending the period before venture companies receive follow-up equity investments and preventing equity dilution, thereby increasing corporate value. It can also enhance management transparency through loan screening.

To analyze the possibility of introducing venture loans domestically, a survey was conducted targeting venture companies. Among companies less than five years old, 41.6% expressed willingness to use venture loans to extend the period before receiving follow-up equity investments, and among companies planning follow-up equity investments within three years, 54.9% showed such willingness. Additionally, 60% of companies expected that venture loans could increase their corporate value.

Associate Research Fellow Jongsoo Hong emphasized, "In the early stages of introducing venture loans, it is necessary to utilize policy funds to build a collaborative relationship between banks and venture capital. A venture loan-exclusive fund funded by the Korea Fund of Funds should be created, and a collaborative guarantee linking policy guarantee institutions with follow-up investments by venture capital should be introduced."

Research Fellow Sumi Na pointed out, "Through venture loans, banks can play a role as productive financial suppliers for innovative growth, and new revenue generation is possible by participating in the venture loan market. However, for this, banks' selection capabilities must be strengthened under policy support."

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