[Square] Startup Goddess, How Should You Approach Her?

Seongmin Jeon, Professor at Gachon University College of Business Administration

Coupang has been listed on the New York Stock Exchange, and Naver, Kakao, and Celltrion have entered the top 10 in domestic market capitalization. Students preparing for employment regard 'Nekarakubaedangto' as an aspirational target. This term, created by taking the first letters of companies such as Naver, Kakao, Line, Coupang, Baedal Minjok, Danggeun Market, and Toss, has become a buzzword as IT companies attract talent. With the rapid growth of online platform companies in the COVID-19 non-face-to-face environment, the digital economy transition is accelerating. In this situation, what opportunities can traditional credit finance have for startups and venture companies?

In the San Francisco Bay Area, known as Silicon Valley, there is Silicon Valley Bank (SVB), which provides credit to venture companies. Established in 1982, SVB's clients included star companies like Airbnb, Uber, and Twitter, and half of the startups that successfully went public (IPO) had dealings with SVB. Unlike typical banks that do not lend to venture companies without assured repayment ability, SVB actively collaborates with startups and venture capitalists. It manages the risks of venture debt by utilizing the venture capitalists' startup evaluation capabilities.

Specifically, SVB provides low-interest loans to startups raising investment under the condition of acquiring a small amount of warrants and repaying with follow-up investment funds. Startups can use venture debt to prevent equity dilution caused by investment and secure operating funds until the next round of investment. To manage risk, SVB gains additional profits from startups' rapid growth by acquiring warrants, in addition to income from interest. Meanwhile, venture capitalists can use venture debt to secure the necessary time for follow-up investment decisions and expect the value of invested startups to increase.

Traditionally, from the perspective of financial institutions, extending credit to innovative companies with low credit ratings, no collateral, and financial instability is challenging. Startups take a long time from founding to going public; among venture-certified companies, the average period for 789 listed companies is 11 years. Managing finances solely through equity investment without debt during this period is not easy. Moreover, recently, unicorns and online platform startups grow rapidly in a short time, so venture debt is expected to play a role in addressing the lack of linkage among venture support financial systems such as R&D support funds, government policy funds, and venture investments during the startup scale-up process.

In the case of domestic venture companies, banks, and venture capitalists, the applicability of venture debt is higher when the venture company's operating period until Series A investment or the expected duration until follow-up equity investment is shorter. Additionally, to respond to the accelerating digital economy and industrial changes, financial institutions have the potential to participate in the venture loan market as a new source of revenue, and it is necessary to consider forming loan-type funds to attract large investments and explore loan business opportunities for rapidly growing venture companies. Furthermore, as collaboration experience between financial institutions and venture capitalists accumulates, venture lending is expected to be activated, so continuous research is needed.

[Jeon Seong-min, Professor at Gachon University College of Business / Vice President of the Venture Startup Association]

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