Another reason to consider South Korea’s ‘creative economy’

Photo credit: Zjaaosldk.

Proudly wearing T-shirts emblazoned with their company logo, motivated by an enthusiastic ambition of changing the world, and renouncing the “established way,” Korean entrepreneurs have joined the global startup tribe. Just like the fabled hwarang warriors of third-century Korea, these entrepreneurs, who are the modern-day warriors, have a vision to create a better world.

Photo credit: Tech for Korea.

While South Korea does not appear in headlines as much as VC markets like India, China, and Singapore, the global investment community cannot afford to underestimate the lucrative opportunity the country offers.

Over the past year, I have been an active participant in various South Korea-focused investment events, including Softwave and Invest Korea, which have all played an active role in putting the focus on the country’s innovative and active tech startup scene. Here’s what I learned:

• There is strong government support for entrepreneurs in the core tech sectors.
• The propensity of Korean entrepreneurs to take risks is increasing, leading to more young people wanting to start their own businesses or work for an early-stage company.
• An advanced technology infrastructure, in addition to the strong cultural focus on higher education, has created a deep technology talent pool.
• The technological depth of entrepreneurs needs to be augmented with management expertise to help with commercialization.  Function-specific and sector-targeted accelerators and incubators could help fill this gap.

Building a future from the successes of the past

South Korea attributes much of its economic success to its chaebols or conglomerates. Groups like Hyundai and Samsung have played a pivotal role in helping develop the country to become a leading powerhouse in automotive, consumer electronics, applied materials, and other high-tech sectors. These companies have created the technical and management depth needed to scale their businesses in Asia and around the world.

The Asian financial crisis in 1997 resulted in a significant reduction in the number and scale of chaebols. While some companies managed to sustain themselves and even thrive in the modern integrated economy, new entrants in emerging sectors are facing a gap in the market.

The Korean government has stepped up by putting significant focus on developing a “creative economy” with an objective of making South Korea one of the top seven countries in the world for startups. Multiple startup and investment events are being organized all over the country to promote this vision.

Korea Trade-Investment Promotion Agency (KOTRA) has taken the lead. (I have had the privilege to attend and contribute to the most recent event in Singapore which showcased top Korean startups to leading investors.) The government has launched an initiative of setting up 17 government-mandated, conglomerate-run incubation centers. Spark Labs, in collaboration with chaebol Hanjin that operates Korean Air, has recently launched a government-backed IoT innovation center, which aims to build the IoT industry in Korea. Large organizations like Korea Telecom and SK Telecom have also been active supporters of the startup ecosystem within and beyond the country.

While, working with large companies is often a lengthy process, startups can significantly benefit from the experience, networks, and capital that these partners bring to the table.

In my experience, working with various accelerators in Singapore ( including ACP’s Velocity accelerator) has shown me that the most successful startup-MNC collaborations usually emerge from working with specialized business accelerators and VC partners. Velocity has recently partnered with MetLife’s Collab in Singapore to help support high-quality insurance tech startups scale globally.

Global companies have also recognized the opportunities that the tech ecosystem offers. In May 2015, Google formally opened its first Asian-based startup campus in Seoul, further cementing Korea’s emerging position as a center of tech entrepreneurship. This leverages the trained technical workforce, regulatory and tax advantages, and proximity to global consumer electronics supply chains that Korea now offers.

What’s in it for VCs?

The government is not just putting in a lot of effort on promoting startups but also funding private VCs. These government incentives keep VC firms focused on startups, SMEs, and new technologies. One of the most interesting initiatives is the Tech Incubation Program for Startup (TIPS), which includes a 9:1 angel-matching fund. For every US$1 a startup secures from an investor, the government will match it with US$9. This creates a great opportunity for foreign investors to enter into this high-potential market.

While there has been some pull-back on these initiatives from the government, I believe that large companies, angel investors, and institutional investors can step in to fill some of the gap. Moreover, while the VC ecosystem in Korea is still in its early stage, some active and successful investors are leading the charge in supporting the startup ecosystem. In the last three years, over US$3.2 billion has been invested in over 200 Korean startups, with some impressive recent successes like ZigBang, RIDI Corporation, and Viva Republica, among many others.

Photo credit: CB Insights.

With all the innovative products being built in Korea, I believe an opportunity exists for seed-stage VC firms and accelerators to step into this market. The most valuable ones are likely to be those that have operational experience and regional and global networks to support their companies.

Opportunities abound — but some challenges remain

Focus on education, strong R&D, and technical infrastructure have created a technically exemplary workforce. New startup hubs and employment centers for aspiring entrepreneurs are being promoted across the country. These could complement private initiatives from large companies and VC funds. Progressive government regulations enforced by access to risk capital has encouraged a growth in entrepreneurial activity.

However, many challenges remain to be addressed for the ecosystem to see some major success stories. Startup management teams often lack experience in business and operations. The almost singular focus on technical innovation comes at the detriment of more commercial considerations  like product market fit, sufficient addressable market, and long-term profitability. The companies can also be quite insular and locally focused rather than looking at global opportunities.

I believe that close collaborations with regional markets (especially Singapore), incubators, accelerator programs, and international mentors and global VCs that are entering Korea will help change this situation.

Photo credit: Country Facts.

I believe that South Korea can easily ascend to the next level by building a startup ecosystem that provides operational support, a broader network, and ready access to early-stage capital. With the right blend of investment and guidance, early-stage Korean companies can take on other global markets and really scale their businesses.

Many of the fundamentals are already in place. Just as Samsung transformed the consumer electronics business, Korean startups are poised to have an explosive impact on digital media and services.

I remain optimistic about the impressive possibilities Korean entrepreneurs are creating in transforming the way the world lives and works. I am also committed to helping support promising businesses coming out of Korea.

This is an opinion piece.