[Policy Pulse] Investing in Startups... Between Deficits and Possibilities

If Current Laws and Regulations Are Strictly Applied,

Samsung Semiconductors and Musk's Tesla Could Be Charged with Breach of Duty

Overcoming Massive Early Deficits Led to Success

Risk Is the Destiny of Startups—We Must Focus on Future Value

Suman Park, Attorney

Is a deficit a failure? It can also be a part of innovation. Recently, the KOSPI reached record highs, at one point surpassing 8,000. Korean companies with global competitiveness in semiconductors, defense, energy, and bio industries are raising investor expectations. This momentum is bringing change throughout society. Their role model is, without a doubt, Elon Musk.

Elon Musk did not inherit a family business; instead, he created futuristic businesses on his own and built some of the world's largest companies. SpaceX, founded in 2002, faced repeated early failures and was on the verge of bankruptcy but ultimately survived thanks to a contract with NASA. Similarly, Tesla, which Musk co-founded in 2004, operated at a loss for over a decade. Its cumulative losses amounted to several billion dollars, yet it eventually grew into a company leading the global electric vehicle market. Musk's example demonstrates that a deficit can be not a failure, but a process of investment and innovation.

The semiconductor division of Samsung Electronics followed a similar path. It began with the acquisition of Korea Semiconductor in 1974, but at the time, Japanese companies dominated the market, and Samsung, as a latecomer, had to endure losses for 14 years. However, the late Chairman Lee Byung-chul declared in Tokyo on February 8, 1983, "Semiconductors are the rice of industry and the business of the future," and never stopped investing. At the time, Intel mocked Samsung as "delusional," and Mitsubishi in Japan even published a report listing "five reasons why Samsung cannot succeed in semiconductors." Ultimately, however, Samsung succeeded in developing and mass-producing the 4M DRAM in 1988, posting its first profit and subsequently establishing itself as a leader in the global memory semiconductor market.

The issue lies in the reality of laws and regulations. Under the pretext of investor protection, instead of recognizing the initial deficit structure and long-term investment required of startups, there is a tendency to apply various regulations that punish or suppress the creation of future industries. Recently, a newly established company developing secondary batteries was convicted under the Capital Markets Act for fraudulent transactions. The basis for the verdict was that "since there were no sales or operating profits, raising investment funds could only have been due to fraudulent promotion." However, the essence of a startup is precisely that it attracts investment in its future potential.

Let us consider further. If current laws were applied, could the directors and executives of subsidiaries who participated in Chairman Lee's Tokyo declaration in 1983 have been free from concerns about breach of duty? Would independent directors appointed by minority shareholders support a major shareholder chairman's startup investments? Is there any realistic standard that guarantees a startup raising funds is not engaged in fraudulent promotion? In an environment of such uncertainty, is it possible to have a second or third Tokyo declaration for future growth industries?

Startups are inherently risky. But this risk is not simply a loss; it is an investment in future possibilities. Deficits for the sake of innovation must be distinguished from other types of deficits. SpaceX, Tesla, and Samsung Electronics' semiconductor division all experienced substantial cumulative losses in their early stages. Nevertheless, they have grown into companies that are changing the world today. Law enforcement agencies must approach startups with humility. The determination of Chairman Lee, the daring of Musk, and the courage of countless investors deserve respect.

Investing in startups is not about short-term results but about betting on long-term potential. Deficits can be seeds of innovation. Only by protecting those seeds can the future of our economy open up. There are many investors in Korea who are willing to endure long-term deficits even in the face of uncertainty about the future. If law enforcement agencies do not respect their choices, the shoots of innovation will be cut down before they have a chance to grow.

Suman Park, Attorney at Law

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