"Venture Companies' Funding Difficulties... Need to Ease CVC Regulations and Expand Policy Financing and Unsecured Loans"

Venture Capital Investment in Q3 Down 40.1% YoY
High Dependence on Government Grants and Bank Loans
Lift '40% Limit on External Capital Contribution'
Strengthen Policy Finance Support and Expand Unsecured Loans

[Asia Economy Reporter Choi Seoyoon] Domestic venture companies are facing financial difficulties due to tight monetary policies, and to resolve this, there are calls to improve regulations such as lifting the '40% limit on external capital investment' and to increase government support and unsecured loans. Venture companies rely heavily on the government and banks, sourcing over 60% of their funds from policy support funds and about 30% from bank loans.

The Korea Chamber of Commerce and Industry's Sustainability Growth Initiative (SGI) evaluated the funding conditions of venture companies and proposed measures for smooth future financing in its report titled “Assessment and Response Measures for Venture Companies' Fundraising Conditions,” released on the 14th.

According to a survey by the Korea Venture Business Association, as of 2020, 64.1% of new funds for venture companies were sourced from policy support funds, and 28.2% from bank loans. Looking at the investment resources of venture capital, a major funding source in the venture investment market, policy finance accounted for 29.5% of the investors in venture investment associations as of 2021.

The report diagnosed that under these circumstances, financial difficulties for venture companies are intensifying due to reductions in government support funds and tight monetary policies. In 2023, the government’s policy fund and the mother fund budget decreased by 19.6% and 39.7%, respectively, marking a second consecutive year of reduced funding support. Tight monetary policies are also shrinking market liquidity. Banks are adopting more conservative lending attitudes, and with higher market interest rates, financial institutions, major investors in the venture capital market, are expected to shift their investments to deposits and corporate bonds.

Since venture companies often experience chronic excess demand for external funds, a reduction in fund supply rapidly worsens their financial difficulties. In fact, venture capital investment in the third quarter of 2022 decreased by 40.1% year-on-year due to weakened investment sentiment amid economic uncertainty and high interest rates.

Accordingly, SGI proposed measures to alleviate venture companies' financial difficulties, including ▲countercyclical operation of policy finance ▲expansion of unsecured loan supply to venture companies ▲regulatory relaxation to activate corporate venture capital (CVC).

◆Venture Private Investment Funds Hit Hard by Economic Slowdown...Policy Finance Support Must Be Strengthened= SGI argued that policy finance should be operated countercyclically to complement the procyclical nature of private investment funds. Procyclicality means that liquidity decreases during economic downturns and increases during upturns, amplifying economic volatility. SGI Research Fellow Kim Kyunghoon stated, “Private investment funds such as bank loans and venture capital have strong procyclicality, which has been evaluated to worsen venture companies’ financial difficulties during economic slowdowns.”

SGI recommended strengthening policy finance support for venture companies by increasing the mother fund budget or expanding the Bank of Korea’s financial intermediation support loans in response to economic conditions. The mother fund is designed to maximize incentives for private funds, and during economic downturns, increasing its support scale can mitigate the procyclicality of private investment funds and alleviate the contraction of the venture investment market. Therefore, it suggested considering increasing funding support beyond this year’s level through supplementary budgets in the future.

◆Expansion of Unsecured Loan Supply Requires Strategic Partnerships Between Policy Finance Institutions and Venture Capital= SGI emphasized the need to expand unsecured loan supply to venture companies lacking collateral. Currently, domestic commercial banks mainly provide secured loans to venture companies. Early-stage ventures with insufficient collateral face difficulties in raising funds through bank loans. Research Fellow Kim Kyunghoon said, “It is necessary to provide unsecured loans to capable venture companies based on intellectual property rights.” Selecting high-growth-potential ventures and supplying them with loans even without collateral will also contribute to improving banks’ profitability in the long term.

However, as banks are expected to adopt even more conservative lending attitudes during economic slowdowns, expanding unsecured loans to venture companies centered on commercial banks seems difficult. SGI assessed that in such situations, the role of policy finance institutions such as the Industrial Bank of Korea and Korea Development Bank is crucial. The report particularly emphasized the need for a strategy where policy finance institutions and venture capital form strategic partnerships to discover growth-oriented ventures and provide unsecured loans from the early startup stage while supplying long-term capital.

◆Regulatory Relaxation for CVC to Activate Medium- to Long-Term Investment= SGI stated that activating CVC investments is a way to secure stable medium- to long-term investment funds for venture companies. CVCs are venture capital firms established by non-financial corporations, mainly making long-term strategic investments in ventures in sectors where the parent company plans business expansion.

CVCs are less affected by short-term economic fluctuations and can make long-term investments, making them expected to become major investment sources in the venture investment market during economic downturns. In Korea, since the amendment of the Fair Trade Act in December 2021, general holding companies can also establish CVCs, and recently, interest in establishing CVCs has increased among large and medium-sized companies to strengthen core business competitiveness and secure new growth engines.

SGI pointed out the need for regulatory improvements to activate CVC investments. Currently, the external capital investment ratio is limited to 40% when forming funds, restricting fund size expansion, and this limit should be eased.

Kim Kyunghoon, SGI Research Fellow at the Korea Chamber of Commerce and Industry, emphasized, “Due to the recent deterioration of the economic environment with high interest rates, high exchange rates, and high inflation, venture companies are facing difficulties in fundraising,” adding, “We must expand policy finance and activate various forms of venture investment funds to resolve venture companies’ financial difficulties.”

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