KCCI SGI "Innovation Startup Policy... Regulatory Innovation Must Lead Corporate Investment and Collaboration"

KCCI SGI Promotes Domestic Innovative Startups
Report Released Highlighting Key Issues and Improvement Plans

Difficulties Including Funding Procurement, Weak Cooperation Between Large Corporations and Startups
M&A and Secondary Market Revitalization
Expansion of CVC and Open Innovation
Support Needed by Distinguishing Types of Rechallenge

[Asia Economy Reporter Donghoon Jeong] The Korea Chamber of Commerce and Industry (KCCI) has published a report emphasizing that for fostering an innovative startup ecosystem, it is more important for the private sector to play an active role rather than the government providing direct support.

On the 21st, KCCI pointed out in its report titled "Tasks for Fostering an Innovative Startup Ecosystem" that although the domestic startup infrastructure has been modernized, relying solely on government support policies has limitations in developing the innovative startup ecosystem to a global level.

Therefore, it argued that the secondary market for investment recovery should be revitalized, regulations on Corporate Venture Capital (CVC) should be eased, and cooperation between large corporations and startups through open innovation platforms should be promoted with incentives provided for this purpose. Regarding strengthening the startup safety net, it proposed differentiated support according to the type of re-challenge.

The overall domestic startup infrastructure has continuously developed thanks to government policy support. The government’s startup support budget increased about sixfold from 143.9 billion KRW in 2010 to 849.2 billion KRW in 2020. The investment scale also grew from about 600 billion KRW in 2002 to 4.3 trillion KRW in 2020. However, it is suggested that to take a further leap as a global powerhouse in innovative startups, it is necessary to improve conditions for investment funding and cooperation systems among companies.

The proportion of M&A in startup exits is 82.8% in major overseas countries... Korea stands at only 52.9%

The lack of M&A and a secondary market for mid-term investment recovery for startup exits* was pointed out as a factor restricting funding. An exit refers to the process of recovering investment funds through IPOs, M&As, etc., after a startup grows post-establishment.

The domestic M&A market size is very small compared to major overseas countries, and both the number of M&A deals and recovery amounts in 2020 decreased compared to 2010, ten years earlier. Overseas, startups have long established a cyclical structure where they generate profits through M&A and then use these funds to start new ventures or invest in new startups. Global companies such as Microsoft and Amazon actively contribute to a virtuous cycle of startup recovery and reinvestment through M&A.

Initial Public Offerings (IPOs), which secure investment funds by issuing shares in the public market, also present high practical barriers for startups. It is known that the average time for domestic startups from initial investment to IPO is 13 years. In contrast, the average operation period of venture capital funds is 7 to 8 years, shorter than the time to IPO, making it difficult for early venture capital investors to expect returns through IPOs, thus burdening their investment decisions.

Therefore, it is necessary to revitalize the secondary market where investment funds can be recovered mid-term, and support such as tax benefits on capital gains after recovery should be provided to incentivize investment.

Government support for investment attraction depends on growth stages after startup... Overseas sees active global corporate investment through CVC

The report pointed out difficulties in raising funds not only in the early investment stage of startups but also in the scale-up* stage to grow into unicorn companies, and emphasized the need to ease regulations related to CVC. Scale-up refers to ‘high-growth companies’ whose sales and employment rapidly increase in a short period, representing the process where startups evolve by combining their capabilities with the market.

CVC refers to venture capital established as a subsidiary by large corporations. Large corporations can explore new technology and market opportunities by investing in promising startups, while startups receive venture capital and can utilize the networks of large corporations. In countries like the U.S. where startup growth is prominent, companies have expanded investments in startups through CVCs, with investments amounting to $57.1 billion across 3,234 deals in 2019.

Domestically, regulations such as a debt ratio limit of 200% and external capital contribution capped at 40% are applied to the establishment of CVCs by large corporations. The problem is that these regulations limit the use of external capital, potentially restricting funding for innovative technology sectors like biotechnology that require large-scale investments.

As a result, currently about ten companies own CVCs, and the investment scale in 2021 was about 1 trillion KRW, indicating that the market is not yet active.

Creating synergy between startup ideas and large corporation resources through corporate networks

There was also a call to build and activate open innovation platforms to systematize cooperation between large corporations and startups. Open innovation is a concept where companies procure necessary technologies and ideas externally while sharing their own resources with outsiders.

Large corporations seek new growth opportunities through innovative ideas from startups, and startups can grow by utilizing the management know-how and networks of large corporations. In this regard, since 2021, the Ministry of SMEs and Startups has been operating the ‘DaeStar Solver Platform,’ which discovers and supports startups to solve R&D technology tasks submitted by large corporations. This platform matches tasks submitted by large corporations with startups during designated application and selection periods.

However, this process reveals limitations as it is difficult for various entities such as companies, research institutes, and scientists to participate flexibly while linking technology tasks and solutions. Therefore, the report pointed out the need for the government to establish an open innovation platform that can operate continuously and suggested providing tax benefits when large corporations invest in startups during the initial introduction phase.

Startup re-challenge support is focused on ‘re-startups’... Needs to be divided into ‘re-employment’ and ‘social safety net’ support

Strengthening the startup safety net to facilitate re-challenges is also essential for revitalizing the innovative startup ecosystem. The report pointed out that it is appropriate to classify government re-challenge support targets into ‘re-startup,’ ‘re-employment,’ and ‘social safety net’ and provide support tailored to each target.

In other words, although it would be appropriate to provide re-employment education or basic social support to those for whom re-startup is not suitable, support has been focused on re-startups, leading to a vicious cycle of repeated failures. Along with this, the report suggested considering the establishment of a fund that entrepreneurs attempting re-startups can utilize.

The KCCI stated, “For the innovative startup ecosystem to continue growing, it is crucial to activate voluntary investment and cooperation in the private sector,” and added, “To this end, easing CVC regulations and revitalizing the recovery market are necessary.”

Professor Jinsu Kim of Chung-Ang University emphasized, “To create a global-level innovative startup ecosystem, the government should focus on creating an environment where startups can thrive and revise regulations that hinder this.”

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