VC Industry "Active Investment"... Venture and Startup "No Tangible Impact"

The domestic venture capital (VC) industry is expected to resume active investment activities this year based on the dry powder (funds raised but not yet deployed) accumulated last year. However, startups and venture companies predominantly respond that "it is still difficult to feel noticeable changes."

According to THE VC, a venture investment information company, the total number of investments in Korean startups last year was 1,429, down 36.1% from 2,236 in 2022. The total investment amount was about KRW 7.03 trillion, a 52.8% decrease compared to about KRW 14.9 trillion the previous year. THE VC explained, "This contrasts with the 192.9% surge in investment funds in 2021, when the investment boom peaked due to low interest rate policies," adding, "The investment market has significantly contracted even compared to the pre-COVID-19 pandemic period."

[Source=The VC (THE VC)]

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A survey by the Korea VC Association also showed that the total amount of new investments has decreased for three consecutive years since 2021. Last year's new investment amount was KRW 5.3977 trillion. This decline was larger than the decrease from KRW 7.6802 trillion in 2021 to KRW 6.764 trillion in 2022. The number of companies receiving new investments also fell from 2,474 in 2022 to 2,281 last year.

Polarization by VC scale became prominent. First, investment activities of small and medium-sized VCs shrank. This was due to the prolonged high interest rate trend originating from the U.S. and the decline in the corporate value of target companies, which dampened overall market investment sentiment.

According to the electronic disclosure (DIVA) of Small and Medium Business Startup Investment Companies, four companies?Darwin Investment, Neo Insight Ventures, Yewon Partners, and Platform Partners Asset Management?received corrective orders for "no investment for one year." Notably, Neo Insight Ventures, launched in 2022, received a warning for "capital erosion" in May last year and completed corrective actions but received another capital erosion warning this year. It is interpreted that the capital was depleted due to failure to secure new funding after completing corrective measures. Four VCs had their registrations canceled last year, and this year, E-Land Ventures, a VC of the E-Land Group, also surrendered its license.

On the other hand, large VCs maintained steady investments while securing ammunition. Last year, Stick Investment, Korea Investment Partners, and Praxis Capital Partners each executed investments exceeding KRW 200 billion. IMM Investment and Aju IB Investment also invested over KRW 100 billion. Atinum Investment set a record by forming the largest-ever fund, the 'Atinum Growth Investment Fund 2023,' worth KRW 860 billion last year. Financial group-affiliated VCs such as Korea Investment Partners, KB Investment, Shinhan Venture Investment, and Hana Ventures led large-scale investments based on their parent groups' capital contribution capabilities.

An industry insider noted, "The 'rich get richer, the poor get poorer' trend is intensifying," adding, "When investment funds concentrate on one side, the amount available for other areas inevitably decreases." He also said, "Most of the country's leading institutions have joined the recently created largest-scale funds. There is concern that if these funds do not perform well in a few years, the overall domestic venture investment market could shrink."

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Although each VC has announced plans to actively resume investment activities this year based on dry powder, startups and venture companies respond that "it is still difficult to feel overall investment activation." At a recent Korea Startup Forum New Year's meeting, an executive of a venture company said, "VCs say they will increase investments, but it still seems like just a declaration. It is hopeful that new investments in the second half of last year increased compared to the first half, but we need to watch further to see if this is just a temporary effect."

Within the VC industry, there is a growing call to activate the 'secondary market,' where previously invested venture and startup shares are traded to facilitate mid-term capital recovery. The advantage of secondary investment is that initial investors can recover funds midway, and new investors can make more verified investments. It is gaining attention as an alternative when the IPO market shrinks due to economic uncertainty and high interest rates, as seen recently.

Meanwhile, the Ministry of SMEs and Startups plans to raise a venture fund worth KRW 1.7 trillion by contributing KRW 910 billion. The contribution budget consists of KRW 454 billion from the ministry's budget and KRW 456 billion from recovered funds. This is about a 37% increase compared to the KRW 664 billion invested last year, and all funds will be deployed in the first regular contribution project. This contrasts with previous years when the budget was split to proceed with the second and third regular contribution projects. KRW 100 billion, 10% of this year's budget, will be allocated to the 'Rookie League,' dedicated to new and small VCs. This segmentation by scale aims to alleviate the concentration of investment funds into large VCs and support diversity in early-stage investments.

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