2013-2015: The Venture Renaissance in the Creative Economy, Part 2

06. Startups, Mentoring Day

The venture industry, which was born in the late 1990s along with information and communication technology (ICT), was now entering its second growth period. The emergence of 'venture mentors' who challenge serial entrepreneurs and various mobile lifestyle services had ignited the startup craze in earnest. In particular, successful entrepreneurs' continued startups and reinvestments in startups are helping to create a virtuous ecosystem. For example, the late KAIST professor Lee Min-hwa, who founded Medicine, the granddaddy of Korean ventures, became a venture evangelist, and a parade of venture entrepreneurs who claimed to be 'angels' followed.

In May 2014, the Venture Business Association held the '99 Days Mentoring Party' for prospective entrepreneurs at D-Camp in Yeoksam-dong, Seoul. The '99 Days Mentoring Party' was organized for prospective entrepreneurs and entrepreneurs who need the know-how to run their business in the early stages of their startup, to develop the basic competencies of venture entrepreneurs through mentoring by successful entrepreneurs and to strengthen the base of venture companies through idea exchange and networking.

At the event, which began with an opening speech by the late Professor Lee Min-hwa, six mentors, including Kim Se-jung of Jellybus, a photo retouching app called Fixplay Pro, Yang Jun-cheol of Onoffmix, Korea's largest event portal, Yoo Hyun-oh of Zenic, who recorded a home shopping sales myth with "HowMePack," and Cho Hyun-jung of Bit Computer, a venture company No. 1, gave a talk show on the attitudes, competencies, and leadership that entrepreneurs should have. In addition, 100 participants received advice on starting a business through mentoring with successful entrepreneurs of their choice and created a 99-day roadmap to success.

On August 27, 2014, the Small and Medium Business Administration and the Venture Business Association held the 'Youth Startup Mentoring and Startup Consultation' at the COEX Intercontinental Hotel in Seoul as the first event of the Youth Startup Mentoring Supporters, which was launched as part of the government's 5-15 Venture and Startup Plan to promote global startups by young entrepreneurs. The event consisted of a global youth startup mentoring seminar and a startup counseling session, as well as a networking event for mentors and entrepreneurs.

The Youth Startup Mentoring Supporters consisted of successful domestic venture capitalists and investors, overseas Korean entrepreneurs (INKE - International Korean Venture Network), and overseas Korean scientists (KSEA - Korean Scientists and Engineers Association, AKCSE - Association of Korean Scientists and Engineers in Canada), and was launched with the purpose of providing investment and technical mentoring, information exchange, and global startup and marketing support to prospective entrepreneurs and early-stage startups.

The Small and Medium Business Administration and the Venture Business Association planned to provide information on mentors' specialties (global entrepreneurship, marketing, technology, investment, etc.) online, establish a one-on-one mentoring system between startups and mentors, and hold quarterly cooperative counseling sessions.

"When the venture bubble was a problem in the early 2000s, there were not many venture seniors who could give proper advice on business and investment," said Kim Kwang-hyun, center director of D-Camp, run by the Bank of Korea Youth Entrepreneurship Foundation. "As there were side effects, we learned a lot of cases of 'tutors' and various social networks have increased the number of ways to learn about potentially problematic things in advance."

07. Improvement of the Venture Verification System

The Venture Special Act contained a policy intention to discover and foster venture companies in the early stages of startups through the Venture Confirmation System. The venture verification system was a system in which the government systematically establishes the definition and verification requirements for venture companies identifies SMEs that meet these requirements as venture companies and provides intensive support for funding, technology, manpower, and location.

In 2015, the number of venture companies that received venture verification (certification) in Korea steadily increased to 30,53 as of January. However, there have been various controversies over whether 'real ventures' with high innovation and growth potential are being certified as ventures. We will analyze the types of ventures that can be certified as ventures through the Venture Verification System as follows.

7.1 Analysis of the Venture Verification System by Type

(1) Venture Investment Company Type

Only a few companies have the opportunity to be certified as a venture through this type, and the proportion of early-stage companies receiving investment from venture capital was gradually decreasing, and it was difficult to receive investment at a time when the investment environment such as angel investment was not active.

(2) R&D company type

This type requires higher than average R&D investment to be certified as a venture. The average ratio of R&D investment to sales of venture companies was 3.3%, but the R&D type requires a ratio of 5-10% to be certified as a venture. Venture firms facing chronic funding shortages and difficulties in securing talented human resources, especially those with large sales, have found it difficult to meet the R&D investment ratio requirement.

(3) Types of Technology Evaluation Guarantee and Loan Companies

Since the establishment of the technology evaluation guarantee company type in 2006, the majority of companies have received venture confirmation in the form of guarantees, and they have also benefited from self-financing at the same time as confirmation. However, out of the 28,803 venture-verified companies, 24,812 companies received venture verification as a technology evaluation guarantee type, accounting for 88.5% of the total, leading to the problem that 'venture companies = companies with technology evaluation guarantees'. It was also argued that prioritizing companies with guaranteed viability resulted in a large number of SMEs with weak venture ability being certified as venture companies. It was necessary to compare the performance of companies that have been certified as venture companies through guarantee and loan types with other venture-certified companies, and it was also necessary to evaluate their overall innovativeness, such as comparing the number of domestic and foreign intellectual property applications and the ratio of R&D to sales.

(4) Types of prospective venture companies

A minimum of two employees, including the founder, are required for venture confirmation, so one-person creative companies cannot utilize the preliminary venture system. This type was only used by university professors to work as a second job when starting a business, and there was a problem of practicality that there were not many practical benefits. In addition, after becoming a preliminary venture, it was necessary to apply for a venture company separately to receive additional benefits.

7.2 How to Improve the Venture Verification System

(1) Improve the requirements for identifying venture investment companies and R&D companies

Two things needed to be considered simultaneously as a way to relax the requirements to expand the types of venture investment companies. The first was to remove the capital investment ratio or lower the investment amount standard, and the second was to expand the scope of investment institutions to professional angel investors. Regarding the expansion of the scope of investment organizations, it seemed necessary to use the Venture Business Association to act as a verification organization for the time being until the angel investment system was established.

Regarding the types of R&D companies, it was considered to maintain the system of differentiating the ratio of R&D investment to sales by industry, but to lower the level of the investment ratio overall. In addition, the preliminary feasibility of the R&D investment ratio adjustment system considering the size of sales was analyzed using data from the 2011 Venture Business Survey, and it was found that the lower the R&D investment ratio, the larger the average sales. Therefore, it was necessary to consider introducing a standard adjustment system that gradually adjusts the R&D investment ratio by industry according to the size of sales.

(2) Strengthening the requirements for verification of technology evaluation guarantees

In addition to the current technology evaluation rating of the Technology Credit Guarantee Fund, many experts are proposing a 'technology evaluation rating passing system + technology intensity failing system' that introduces technology intensity, a key attribute of venture companies, as a failing criterion. This was expected to strengthen technology, which was a weakness of the technology evaluation guarantee type, and gradually reduce the number of technology evaluation guarantee and loan types.

(3) Searching for alternatives to expand the discovery of new ventures

Since a preliminary venture was not a legal venture, it only has the benefits of "capitalization of 5 million won or more" and "education officials can also be employees. Therefore, it was necessary to actively seek ways to expand the scope of recognition and provide practical benefits as a preliminary venture. There were also opinions that it would be better to change the term 'startup venture' rather than 'preliminary venture'.

In the case of the newly emerged knowledge service industry, it was difficult to apply the criteria for identifying and evaluating ventures at this time, which caused problems in designating ventures. In addition, companies specializing in social service technology are expected to emerge, but may be unfavorably evaluated under the current criteria. Therefore, it was necessary to cope with the rapidly changing venture environment by establishing a new type of venture verification for new technologies and startups (e.g., the evolution and spread of mobile apps and SNS business models, the emergence of big data and new information processing industries, and the convergence of manufacturing and service industries).

The Small and Medium Business Administration was reorganizing the venture verification system in line with the implementation of venture revitalization measures. The core of the reorganization was a shift from financing (guarantee) to investment. After the system was reorganized in 2006, the proportion of companies with technology evaluation guarantees was too high. By the end of November 2012, 24,848 companies, or 88.5% of the total, were technology evaluation guarantee companies. The proportion of venture investment companies and R&D companies invested by venture capitalists was only 2.28% (640 companies) and 5.12% (1,437 companies), respectively.

The Venture Verification System was introduced in May of the following year after the enactment of the Venture Special Act (August 1997) to recognize venture companies. There were four types of ventures: venture investment, research and development, patented technology development, and excellent technology evaluation companies. In May 2001, the R&D ratio of R&D companies was partially reorganized to diversify by industry. After removing the venture bubble, patent technology development companies and excellent technology evaluation companies were merged. In March 2006, the venture company verification system was reorganized to include the private sector, including Kibo, KIC, and the Korea Venture Capital Association. In December 2009, it was supplemented to be verified without guarantee and loan execution.

08. Creative Economy Expo

The Venture Business Association has been organizing Venture Korea every year since 1997. The event was organized to pledge the will of venture and startup entrepreneurs to play a leading role in achieving a creative economy through creative and innovative technology creation, and to explore new alternatives for spreading entrepreneurship and building a healthy venture ecosystem. Since 2014, it has been integrated with the Creative Economy Fair in partnership with 21 ministries and 11 organizations under the Creative Economy Committee, including the Ministry of Science, ICT and Future Planning and the Small and Medium Business Administration.

The 2014 event, which was held under the slogan "Creative Economy, You Are the Protagonist," was a consolidation of events led by the Venture Business Association for the past 18 years. In addition, the Creative Economy Committee designated November 24-30, 2014, as Creative Economy Week to discover and promote advanced companies by jointly linking related events from the private sector and various ministries, and to provide a place to understand the creative economy through experience. Successful startup and venture startup cases, excellent government-supported technologies and products, economic ecosystems and achievements were exhibited to share the achievements of the creative economy with the public. In addition, the government expressed its support for fostering ventures and startups by rewarding young entrepreneurs and entrepreneurs to boost their morale.

President Park Geun-hye, who delivered the opening ceremony in 2013 and 2014, emphasized that "Korea needs to find a new engine of growth, and the answer was the 'creative economy' that creates new ideas and added value with new technologies." "We will continue to do our best to support the creative economy so that the flame of the creative economy spreads throughout Korea and more successful ventures are born," she said.

Meanwhile, at the fair, 400 booths in 13 pavilions exhibited excellent products of startups and venture companies by theme, including products that commercialized the creative ideas of the general public, as well as cases of companies that re-challenged and overcame failure. In addition, side events such as the Global Going Global Export Consultation, Global Going Global Strategy Seminar, and Global Venture Startup Conference were held to help venture and startup companies expand their sales and enter overseas markets, and the NEXT Seoul-GoToday Entrepreneurship Lecture and Investment IR Contest were also held.

The Ministry of Science, ICT and Future Planning and the Small and Medium Business Administration said that the event will serve as an opportunity to spread understanding of the creative economy to the public as a place where they can check and experience the excellence of venture and startup companies. In addition, they said that they will provide support for venture and startup companies to secure funding, sales channels, and global competitiveness in each stage of their life cycle so that they can continue to play a key role in the creative economy.

09. The National Assembly passed the Crowd Funding Act

Crowdfunding was a new financial technique that raised funds from the public at large and has been showing rapid growth. The Korean version of crowdfunding was implemented in 2016 after two years of pending legislation. As a representative economic revitalization bill, the amendment to the Capital Market and Financial Investment Act, also known as the Crowdfunding Act, passed the National Assembly.

At that time, a newsfunding, which was commonly found on portal sites such as Daum, was also a type of crowdfunding. Individuals would support their favorite journalists by paying for their coverage, but the crowdfunding that the Financial Services Commission wants to create was not a sponsorship type like news funding, but a securities type. Individual investors could buy shares in ventures they liked, within the limits of the law. Disclosure regulations were relaxed so that companies seeking funding only needed to submit a business plan and a plan for using the funds to online brokers. The idea was to lower the barriers to entry and make it easier for venture capitalists to raise funds.

However, the relaxation of disclosure regulations could lead to investor protection issues, so it was limited to small investments. A general individual investor could only invest up to 5 million won in a year and up to 2 million won in a single company. Individuals with high incomes (those subject to comprehensive taxation of financial income) could invest up to 20 million won in a year and 10 million won in a single company.

To prevent the majority shareholders of crowdfunded companies from "eating up" their investments, a protective deposit system was also introduced, under which securities issuers could not sell their shares for one year.

10. 30,000 Venture Companies in 3 Years

On February 4, 2015, the Ministry of Strategy and Finance and the Small and Medium Business Administration announced that the number of venture-certified companies in Korea has reached 30,82. The number of venture firms, which exceeded 28,000 in 2012, had been stagnant for three years before finally surpassing 30,000. It was the first time in 17 years since the venture industry was born in 1998.

After starting with just 2,402 ventures in 1998, the number of ventures surpassed 10,000 in 2001, just five years later.

The venture frenzy, which was unprecedented in the world, helped Korea become the second largest Internet power after the United States and created a world-class venture ecosystem that was the envy of Israel.

However, as a result of the four major venture health policies of KOSDAQ consolidation, venture certification reform, stock option reform, and technology exchange consolidation, the number of ventures decreased from more than 11,300 to 7,700, and a decade-long venture ice age arrived.

The good news was that despite the decade-long ice age, ventures' sales reached KRW 350 trillion, surpassing Samsung Electronics, and were responsible for more than one-third of the country's economic growth. The bad news was that without the decade-long venture ice age, South Korea would have become a global venture powerhouse in 2015, with more than 50,000 high-quality ventures driving innovation. By then, South Korean ventures generated more revenue than Israel's gross domestic product (GDP) and more venture firms per capita than Israel. Venture was the hope of the new economy, not a bubble.

As a result of the current government's creative economy policy, star ventures such as Kakao, Coupang, and Elegant Brothers have reemerged and venture startups have been revitalized. The biggest tangible result of the creative economy policy was the revitalization of startups.

The global economy was now shifting to a venture paradigm of 'entrepreneurship'. It has been proven globally that ventures that create value through innovation are responsible for employment and growth. Now, Korea needed to leap to the forefront of the creative economy through 'disruptive innovation' rather than incremental innovation.

Globally, 90 percent of venture investment exits are through mergers and acquisitions (M&A). However, Korea's share was less than 2% until now. The M&A market could be a bottleneck for Korean ventures. Institutional support to address this has been limited. An innovation platform to trade innovation was emerging as a national challenge.

11. Opening of TIPS Town in Yeoksam

TIPS (Tech Incubator Program for Startup) was a 'private investment-led technology startup support program' newly introduced by the SMBA in 2013. On July 14, 2015, TIPS Town, the home of TIPS, opened in Yeoksam-dong, Seoul. It was led by successful venturers and tech-focused conglomerates to select promising startup teams and match them with angel investment, incubation, mentoring, and government support.

It's no exaggeration to say that starting a business in Korea has always been a risky endeavor for those who attempt it. From the moment you decide to start a business, you face numerous obstacles and only a few survive to get on a stable track. It's a game of survival with slim odds of success. For this reason, many people with promising technologies and ideas have had to abandon their dreams of starting a business due to the burden of programs that help these tech entrepreneurs boldly challenge their businesses without fear of failure.

TIPS was a program to select and intensively nurture startup teams with world-leading technologies through private investment. TIPS operators, such as angel investment firms and tech giants, identify promising startup teams and provide angel investment, nurturing, and mentoring, while the government provides matching funds for technology development and startup funds. By providing an opportunity for high-level human resources with excellent ideas to boldly challenge venture startups even if they do not have startup funds, and helping early-stage startups pass through Death Valley, the success rate of technology startups has been increasing,

WHEREAS, TIPS, which has become a hot topic in the startup market, has shown remarkable results in its short implementation period of less than two years, empowering high-tech workers to venture into startups.

The main feature of TIPS was that it selects startup teams based on private initiative. This was a breakthrough considering that all government startup support programs have been government-led. Instead of government officials selecting startup teams through document evaluation, entrepreneurs with venture and startup experience select startup teams from the perspective of the market. If the management company makes an angel investment of 100 million won or more in a startup team discovered by the management company and recommends it to the government (1.2 times), the government will finally select the startup team to support TIPS through government evaluation.

The selected startup teams are provided with 500 million won in R&D funds by matching the angel investment of the operator for up to three years, and in addition, a total of 400 million won was provided, including 100 million won in necessary funds, 200 million won in angel investment matching funds, and 100 million won in overseas marketing support. Therefore, once the startup teams were selected for TIPS, they were able to challenge the startup even if they lacked immediate capital. In addition, the operator used its own network to support the startup teams in all aspects, not only through angel investment, but also by looking at the startup team's commercialization plan, overseas expansion strategy, and follow-up investment strategy at the level of a co-founder. This was because the success of the startup teams invested by the management company was directly related to the success of the management company's investment and affected the reputation of the management company in the angel investment market.

Startup teams wishing to apply for TIPS support must apply directly to TIPS operators with a specific business plan based on technology and a team of two or more people. At this time, it was possible to contact multiple operators simultaneously by referring to each operator's specialized investment field. A total of 18 TIPS operators were selected at this time, seven of which were angel investment firms, including The Ventures and Futureplay, six of which were early-stage specialized venture capital firms, including Bonnen Gels and K Cube Ventures, and three of which were technology conglomerates, including Hyundai Motor Company and Posto.

In the two years since the first TIPS startup team was selected in August 2013, various achievements have been made, including the acquisition of Kids Note, which developed a mobile smart notification service for daycare centers, by Kakao, and the acquisition of Entry Korea, which developed a visual-based coding learning program, by Naver. In addition, 16 teams, including Drama Company, Joy, Bitpacking Company, and Parking Square, succeeded in attracting follow-up investments totaling 48.2 billion won from domestic and foreign venture capital firms.

Global market expansion was also active. During this period, 50% of the startup teams receiving TIPS support were implementing specific overseas expansion plans, and 17 of them had already established overseas subsidiaries in the United States and China. In addition, 14 of the teams had co-founders from overseas. With the opening of TIPS Town, which gathers TIPS investment companies, startup teams, and related organizations, it was expected that their activities would accelerate.

TIPS Town will house 18 investment companies, 8 related organizations and institutions, and 160 startup teams. As a networking space where major players in Korea's venture startup ecosystem gather, TIPS was planned to become a key growth center for technology-based startups like Zhongguancun in Beijing, China, or Tech City in London, England, and a major symbol of Korea's creative economy.