What Is Needed to Create a Private Sector-Led Venture Ecosystem?

Venture Investment Act Paves the Way for Native Capital-Led Unicorns
Need for Simplification of System and Deregulation

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[Asia Economy Reporter Kim Cheol-hyun] The enforcement of the Act on the Promotion of Venture Investment (hereinafter referred to as the Venture Investment Act) has laid the groundwork for the emergence of unicorns led by domestic capital. However, opinions have emerged that continuous simplification of systems and deregulation are necessary to foster a private-sector-centered venture ecosystem.

According to the Small and Medium Business Institute (President Lee Byung-heon) on the 20th, Researcher Nasu-mi stated this in the report titled "Prospects for Changes in the Venture Investment Market Following the Enforcement of the Act on the Promotion of Venture Investment." The 'Venture Investment Act,' which came into effect on August 12 this year, was newly enacted to integrate and simplify the venture investment systems that were dispersed across the 'Support for Small and Medium Enterprise Startups Act' and the 'Special Measures for the Promotion of Venture Businesses Act,' and to ease regulations to create a private-sector-centered investment ecosystem.

The report forecasted that the enforcement of the Venture Investment Act would facilitate large-scale investments, leading to the emergence of unicorn companies led by domestic capital in the near future. The venture capital industry points out that bold large-scale investments ranging from several billion won to over one trillion won must be continuously made for startups to grow into unicorns. However, as of 2019, the average fund size of Small and Medium Enterprise Startup Investment Associations and Korea Venture Investment Associations (KVF) was about 24.1 billion won. Accordingly, most existing unicorn companies have increased their corporate value based on large-scale investments from overseas venture capital.

In this context, the Venture Investment Act has laid the groundwork for large-scale investments and continuous follow-up investments essential for the birth of unicorn companies. It codified co-investment between venture investment associations, enabling the formation of private mother funds for large-scale investments and consortia of multiple venture investment associations. For Special Purpose Companies (SPCs), equity purchases were permitted, and future amendments are expected to allow attempts at large-scale investments based on finance. Additionally, unnecessary regulatory matters that could hinder follow-up investments were streamlined.

The report anticipated that various competitive private entities more familiar with newly introduced investment methods such as Special Purpose Companies (SPCs) would enter the venture investment market. This is expected to blur the clear division between the venture investment market and other capital markets, intensify competition among venture capital providers, and ultimately strengthen the competitiveness of venture capital in the long term.

The report also pointed out that since the Venture Investment Act relatively provides more incentives for early-stage startup investments, future amendments should offer incentives for late-stage venture capital focused on managing M&A-dedicated funds that contribute to the exit market. It emphasized the need to foster venture capital that can professionally operate in the exit market using various investment techniques to create an exit market capable of handling unicorn companies.

Researcher Nasu-mi stated, "There is a continuous need to strengthen the role of the general public and individual investors in the venture investment market," emphasizing that "in the short term, regulations should be eased so that all venture investment funds can be formed regardless of venture capital licenses." She added, "Ultimately, the laws governing all forms of venture investment funds should be unified, and various restrictions on associations not invested in by the government's mother fund should be abolished or eased to guarantee free investment activities based on market logic."

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