SMBA: "Private-led Transition of Venture Capital Market, Additional Budget for Korea Fund of Funds Needed in Emergencies"

The government’s strategy to reduce the budget for the Korea Fund of Funds and shift the venture capital market from public to private-led may require a supplementary budget if it does not work properly.

On the 7th, the Korea Institute of Startup & Entrepreneurship Development stated this in a report titled "Qualitative Growth Measures for the Venture Capital Market during the Transition to Private Leadership." Researcher Nasu-mi Na explained, "Last year, during the venture capital market adjustment period caused by high interest rates, the Korea Fund of Funds contributed to a soft landing of the market," but added, "It is crucial to be very careful that reducing the Korea Fund of Funds budget while promoting the transition to private leadership during the market adjustment period does not send a negative signal to the market."

The size of Korea’s venture capital market reached a record high of 7.6802 trillion KRW in 2021. Based on this quantitative achievement, the current government has emphasized the need to transition to a market where the private sector has self-sustaining power and leads. Last year, they attempted changes such as reducing the Korea Fund of Funds budget and preparing incentives to attract large-scale private capital inflows.

However, as the venture capital market faced an adjustment period due to high interest rates last year, voices calling for a more active government role have emerged. Looking at the quarterly venture investment trends in Korea and the U.S. during the market adjustment period, both markets have continuously declined since Q4 2021, but the pace was much faster in the U.S. While Korea’s market decreased by 43%, the U.S. market fell approximately 13 percentage points more, recording a 56.3% decline. This suggests that investors in a fully private-led market reacted more sensitively to economic fluctuations than those in a market supported by a large-scale Korea Fund of Funds.

Researcher Na emphasized, "The transition to private leadership during the adjustment period should be carried out cautiously under close market monitoring," adding, "If market contraction that hinders the qualitative growth of the venture capital market is observed or if the adjustment period becomes excessively long, preparations should be made to implement a timely supplementary budget for the Korea Fund of Funds." He further explained, "The government’s proactive intention to boldly redesign the incentive structure and expand the market led by the private sector must be communicated to the market."

It was also pointed out that various private entities’ investment participation should be encouraged to lead a successful transition to a private-led venture capital market. Researcher Na said, "To attract comprehensive capital inflows, new investors who have been passive in startup financing should be drawn into the market," adding, "Liquidity from the banking sector, general corporations, and retail investors can contribute to further market expansion."

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