Start-ups, which Korea hoped would show the way to a prosperous future, are in a slump. Direct investments from venture capital firms and so-called angel investors have shrunk, as have IPOs.
Lific, a start-up founded in 2020, had to close in July after running out of money. Lific is a mobile application that allows users to search for beauty salons and gyms, make reservations and pay for services. The app had its moment in 2020. It was downloaded 100,000 times in its first two weeks. Around 14,000 establishments were associated with the start-up. But he spent his cash on marketing expenses, and the new funding never came.
“I worked at Lific believing in its possibility to grow, but my career collapsed when the company closed down,” said an IT developer working at Lific.
“The current trend is very similar to the dotcom bubble of the past,” he continues. “Even if it takes me time to find a new job, I am not willing to go back to work at a start-up company.”
Streaming service Watcha failed to raise the 100 billion won ($70.9 million) in pre-IPO financing it wanted in the first half.
The company is trying to survive by laying off employees and selling shares in the company’s subsidiaries. New businesses related to webtoons and music are temporarily stopped.
“I think Watcha is a good company, but the future of a new company is shaky if it doesn’t get the financing it needs,” said a Watcha employee.
“I’m not even sure if I’ll be able to work at this company next year.”
Investments by venture capital firms in startups totaled 4 trillion won in the first half of 2022, down from 4.6 trillion won in the second half of 2021, according to the Korean Venture Capital Association ( KVAC). For the full year, the investment is expected to be significantly lower than last year’s 7.68 billion won.
Data from Startup Alliance, a nonprofit support center for startups, shows that investments made in local startups in the month of July were 836.9 billion won, a drop of 72.7 percent. YoY
Small investments increased, although large ones decreased.
In the first half of 2021, four companies raised more than 200 billion won in funding: Noom Korea (607.2 billion won), Viva Republic (460 billion won), TMON (305 billion won), and Riiid (200 billion won). In the first half of this year, Buckethouse was the only one to earn 235 billion won.
Investments of less than 1 billion won rose from 47.7 percent of the total in the first half of last year to 52.3 percent in the first half of this year.
Over-the-counter stock trading volume in August reached 601.2 billion won, down almost 40 percent from 988.9 billion won last August, according to KVCA.
The IPOs were not very successful due to the gloomy market situation.
“The value of start-ups that are waiting for initial public offerings amounts to a few hundred billion won, but these companies are having a hard time raising money,” said a spokesperson for a venture capital firm.
“The IPO market has shrunk dramatically this year and IPOs no longer guarantee returns for investors.”
Socar, which went public in August, is an example. The company’s initial public offering subscription ratio was low at 14.4 to 1, and its share value dropped more than 40 percent a month after going public, from 28,000 won to 15,000 won. Socar’s corporate value was estimated at 1.3 trillion won by Lotte Rental, a car rental company, earlier this year. Now it’s around 500 billion won.
Some startups are giving up. DotFace, a media activism startup, closed in June and big data analytics app UserHabit closed in August. Umsun, a food ingredients data analysis mobile app operated by Tryus&Company, also closed.
Startup Vespa, which gave employees a 12 million won pay raise last year, is in a downward spiral after a product failed and investment dried up.
The survival rate of companies in their fifth year of business is now 32.1 percent in Korea, lower than the OECD average of 44.1 percent, according to the office of PPP representative Yang Kum- hee.
Experts expect things to get worse in the future.
“When liquidity was high, there was competition to invest in startups, but investments will decline due to rising interest rates and concerns about an economic slowdown,” said an executive at an asset management firm.
“New companies are expected to go out of business and go bankrupt continuously when investments are low.”
Some industries have received more funds because they are fashionable. A total of 18 autonomous driving-related start-ups secured financing worth 390.5 billion won as of August, up from 287.5 billion won last year.
Easy money has fueled the growth of startups in recent years, with many getting financing despite lacking innovative ideas or technologies. Now that the money is not so easy, the tide has gone out and they show themselves in their nudity.
“Although there was nothing special about the company’s technology, the founders started their business during the start-up investment boom last year,” said a spokesman for a cybersecurity startup.
“No one knows how long the company will last as there is no additional funding and investor pressure is growing.”
Electric bicycle services, which contributed to the growth of the personal mobility industry, are another hot industry. Olulo, the Kickgoing scooter operation in Korea, has received funding from other startups since it started in 2018, but closed due to a lack of innovative ideas or technology.
Big startups are also getting shaken up.
Kurly, the operator of online grocery service Market Kurly, is preparing for an initial public offering, but the company’s valuation has fallen to the 2 trillion won level from 4 trillion won last year. The high costs of wages and logistics of delivery services at dawn and the lack of new business are some of the factors that pushed down its value.
Analysts say there should be measures to help start-ups survive and increase the country’s industrial competitiveness.
One suggestion is government support, such as tax breaks, to encourage private investment.
“Retail and institutional investors receive transfer gains tax exemptions when they sell shares of venture capital funds, but general institutions such as banks, securities and insurance companies do not,” said KVCA Chairman Ji Seong. -bae.
“Tax benefits should be provided to these institutions so that this money can be actively used in startups.”
The implementation of a corporate venture capital (CVC) system is another way suggested by many.
The Korean government eased the conditions for companies to own CVCs with certain conditions, but many companies that are used to the separation of the industrial and financial capital systems are not getting actively involved.
CVC refers to an investment of corporate funds made directly in start-ups.
“In the case of the United States, the country is efficiently using the CVC system to encourage business creation, since CVC investments represent almost half of all venture capital investments,” said a researcher from the Korea Capital Market Institute.
Others noted that restrictions on the creation of CVCs should be eased further.
“It is necessary for Korea to relax restrictions on CVCs, such as revising standards for CVC base,” said a spokesman for the Korea Chamber of Commerce and Industry.
Government support for direct investment is also needed.
The allocated budget for next year’s government-backed venture capital funds is 704.5 billion won, down 25 percent from 937.8 billion won a year earlier, according to the Democratic Party representative’s office. , Kim Hoi-jae.
“The government needs to consider whether this [the budget cut on the government-backed venture capital funds] can eliminate opportunities for good startups to receive funding,” said Kim Do-hyeon, a business professor at Kookmin University.
BY LEE CHANG-KYUN [[email protected]]