Growing Korean corporate VCs provide silver lining to startups

South Korean companies are rushing to set up their own venture capital units, so-called corporate venture capital firms, to seek new growth engines in a move to support the long-term development of local startups recently suffering from liquidity problems.

Among 390 venture capital companies in South Korea, 141 firms, or 36.1% of the total, were corporate venture capital firms, which invest corporate funds directly in external startups, as of end-August, according to The Korea Economic Daily’s analysis of registration data from the Korean Venture Capital Association (KVCA) and the Credit Finance Association.

The number of newly registered names totaled 17 in the first eight months of this year as local companies -- not only major conglomerates but also unicorns -- jumped into the sector. Last year, 19 corporate venture capital firms started their businesses.

That came as venture investments were seen as one of the best ways to find companies’ future growth engines, industry sources said. That will also support local startups in the longer term as companies have fewer reasons to exit from investments than those of financial investors even during downturns in financial markets or the economy. Domestic startups have had difficulty securing money recently due to rising interest rates.

“Companies, as strategic investors, are expected to become long-term partners of promising startups even if market conditions are bad because profits are not the only purposes of their investments,” said KVCA Chairman Ji Seong Bae.

FROM CONGLOMERATES TO UNICORNS

Holding companies of major conglomerates rushed to set up their own corporate venture capital units as the country eased regulations late in 2021, allowing them to own such firms as wholly owned subsidiaries.

GS Holdings Co., the holding company of energy-to-retail conglomerate GS Group, in May launched GS Ventures, which manages a fund of 130 billion won ($93.5 million). It has invested 6 billion won in five companies including Hyundai Motor Group spin-off startup Mycel, which produces eco-friendly alternative leather.

The leading seafood and logistics conglomerate Dongwon Group and an outdoor clothing retailer F&F Co. opened wholly-owned corporate venture capital firms. Textile-to-industrial materials conglomerate Hyosung Group and apparel maker LF Corp. are set to obtain regulatory approval for such units.

Medium-sized business groups follow suit. Hoban Construction Ltd. and Eugene Group, which operates construction materials, finance and other businesses, registered their own corporate venture capital firms this year.

Local unicorns whose corporate values are estimated at more than 1 trillion won, joined the move. The country’s top online fashion platform Musinsa has invested in eight domestic startups including model management company Ghost Agency so far this year through its corporate venture capital unit Musinsa Partners.

Given such a boom, South Korea’s venture capital sector is expected to be dominated by those corporate venture capital firms, industry sources said.

WHO DOES NOT HAVE VENTURE CAPITALISTS?

The country’s first corporate venture capital firm was Wooshin Venture Investment Corp. founded in 1986 by Asia Cement Co. Other business groups such as LG, Daesang and Chong Kun Dang followed the move.

Samsung Group, the country’s top conglomerate, established Samsung Venture Investment Corp. in 1999 after the government relaxed regulations in 1997 on major groups’ entry into the sector.

During the boom of venture companies in the 2000s, a chemicals-to-bio conglomerate Kolong Group, an entertainment-to-food giant CJ Group and others launched such operations. In the 2010s, new information technology behemoths Naver Corp. and Kakao Corp., as well as startups such as a proptech giant Zigbang follow suit.

Corporate venture capital companies with long histories tend to be operated as financial investors. Many medium-sized companies aim to develop their financial business through those venture capital firms, industry experts said.

Some of the experts, however, said those units are essential for companies’ future growth.

“All companies have teams for new business investments. Startup investments are a strategy for survival through new businesses,” said one of them.

Hyundai Motor Group, the country’s top automaker, has been operating an in-house venture investment organization, which plays a role of a corporate venture capital firm, since 2000. GS Retail Co. has invested tens of millions of dollars in startup deals including the acquisition of the country’s second-largest food delivery platform Yogiyo from Germany’s Delivery Hero SE.

“Those new business units in major conglomerates should be regarded as corporate venture capital firms,” said an industry source.

GLOBAL TREND

Global major companies, especially in the information technology sector, have been actively investing in startups through corporate venture capital units.

Investments through those firms hit a record high of $169.3 billion last year, about more than quadruple of those in 2016, according to market research firm CB Insights. That accounted for 26% of the total venture investment in 2021.

In the first half, corporate venture capital spent $65.8 billion in the first half of this year.

Google led the global corporate venture capital industry. GV, formerly known as Google Ventures and a venture capital arm of Alphabet Inc., made 122 investments last year, the most among global corporate venture capital firms. CapitalG, the independent growth fund under Alphabet, focuses on investments in larger and growth-stage tech companies.

Microsoft Corp., Intel Corp and Qualcomm Inc. are also frontrunners in the corporate venture capital sector. Coinbase Global Inc., which operates the US largest cryptocurrency exchange platform, is expanding its presence in the industry through Coinbase Ventures.

In China, consumer electric company Lenovo Group’s Legend Capital is active, while Mitsubishi UFJ Capital, the venture capital arm of the Mitsubishi UFJ Financial Group, is famous in Japan.

Those overseas players are aggressively nurturing startups as they have few regulations, industry sources said in Seoul.

“In South Korea, more holding companies are establishing corporate capital venture units with regulations relaxed to some degree, but we still have restrictions such as those on debt ratios and external investor ratios,” said one of the sources.

“We still have a long way to go before more corporate venture capital firms are set up to support the startup industries.”

Write to Lan Heo and Jong-Woo Kim at why@hankyung.com
Jongwoo Cheon edited this article.