Is the Growth Engine of the Venture Market Declining? Innovation Growth Drops Significantly

Decrease in R&D and Innovation Growth Type Ventures
Investment Expected to Shrink Due to High Exchange Rates and US Interest Rate Variables

The venture market in the second half of this year saw an increase in new investment amounts, but the phenomenon of the rich getting richer and the poor getting poorer was evident, with funds concentrated only in companies with long business histories. Additionally, the number of venture companies in the research and development and innovation growth categories sharply declined. There are concerns that the growth momentum of the venture market is weakening.

According to the December 2024 issue of the Small and Medium Business Trends report by the Small and Medium Business Research Institute on the 30th, the number of venture companies in November this year was 38,119, a decrease of 377 compared to the previous month. In particular, the decrease was significant in the research and development (-169) and innovation growth (-198) categories.

On the morning of the 27th, the won-dollar exchange rate surpassed 1,480 won. Exchange rates and other indices are displayed in the dealing room of Hana Bank in Euljiro, Seoul. Photo by Heo Young-han

Venture companies are classified under the Special Measures for the Promotion of Venture Businesses Act into types such as ▲venture investment ▲research and development ▲innovation growth ▲pre-venture. The research and development type, as the name suggests, invests heavily in R&D to develop new technologies and commercialize them, contributing to the enhancement of national technological capabilities. Innovation growth companies are evaluated based on technological innovation and business growth potential. The growth of these two types of venture companies is considered to enhance not only the overall venture market but also national competitiveness.

The decline in research and development and innovation growth companies appears to be due to the rich-get-richer and poor-get-poorer phenomenon in new investment amounts. According to the Ministry of SMEs and Startups, venture investment scale from the first to third quarter this year was 8.5808 trillion KRW, an 11.3% increase compared to the same period last year.

Although overall venture investment increased, fortunes diverged depending on business age. Investment in companies older than five years increased by 27.4% compared to a year ago. Investment secured by companies aged between three and seven years increased by 19.5% during the same period. Conversely, investment in companies younger than three years decreased by 24.8% compared to the previous year.

Many companies in the research and development and innovation growth categories are startups younger than three years, and it takes a long time to achieve results after receiving investment. However, as the economic downturn prolongs, it is analyzed that much of the investment funds have been concentrated in companies that can expect immediate results.

The outlook for the venture market next year is also not optimistic. New venture investment formation amounted to 4.3877 trillion KRW through the third quarter this year, an increase of 170.2 billion KRW (4.0%) compared to the same period last year. However, the growth rate of new formation amounts sharply declined from 143.3% in the first quarter to 20.3% in the second quarter and 4% in the third quarter. It is estimated that the new formation amount continued to decrease in the fourth quarter as well.

Domestic and international adverse factors are also problematic. Amid political instability during the impeachment crisis, the won-dollar exchange rate surpassed 1,470 KRW for the first time since the financial crisis. There are forecasts that it may exceed 1,500 KRW. Another variable is the U.S. Federal Reserve's announcement on the 18th at this year's last FOMC (Federal Open Market Committee) meeting that it will lower the base interest rate only twice next year.

A venture industry official said, "If the exchange rate soars and the U.S. base interest rate remains at a high level, securing venture investment funds is expected to be more difficult than this year."

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