As unicorns spawn, South Korea’s anti-entrepreneurial practices evaporate
South Korea has long been one of the most top-heavy economies on earth.
At the summit, tower a privileged handful of massive, family-run conglomerates which vacuum up capital, lure elite human resources and bully suppliers. At the bottom, countless mom ‘n’ pop operations – franchises, restaurants, coffee shops, educational institutes, taxis – battle to survive.
And in the middle? Precious little – bar suppliers to the various conglomerates.
A chaebol (/ˈtʃeɪbɒl,
ˈdʒɛbəl/; Korean: [tɕɛ̝.bʌl] (listen)) is a large industrial conglomerate that is run and controlled by an owner or family in South Korea. A chaebol often consists of a large number of diversified affiliates, controlled by an owner whose power over the group often exceeds legal authority. The term is often used in a context similar to that of the English word “conglomerate“. The term was derived from the Japanese zaibatsu, sharing a similar structure and origins. It was first used in English in 1984. There are several dozen large South Korean family-controlled corporate groups that fall under this definition.
The chaebol have also played a significant role in South Korean politics. In 1988, a member of a chaebol family, Chung Mong-joon, president of Hyundai Heavy Industries, successfully ran for the National Assembly of South Korea. Other business leaders also were chosen to be members of the National Assembly through proportional representation. Hyundai has made efforts to contribute to the thawing North Korean and South Korean relations, but not without controversy. Many South Korean family-run chaebols have been criticized for low dividend payouts and other governance practices that favor controlling shareholders at the expense of ordinary investors.
This, at least was the situation in the 1960s, when Korea started to industrialize, to the last few years. Now, evolution is becoming apparent. “Significant social and cultural changes are taking place in Korea,” said Park Young-sun, Seoul’s minister for Startups and SMEs – a body created in 2017 – in a briefing to foreign reporters on Friday.
There are positive signals that Korean entrepreneurialism is being unleashed, that venture capital taps are gushing and that Korea’s middle business tier is being filled. According to global research platform CB Insights, South Korea has, as of 2019, bred eight unicorns, or privately held startups valued north of $1 billion.
Overall, this means that G11 South Korea (population: 51 million) falls behind only G2 economies the US and China, services giant the UK (with 17 unicorns) and demographic monster India (with 16).
According to CB Insights’ data, South Korea’s unicorn herd is the same size as Germany’s (eight); double the size of France’s, Israel’s and Indonesia’s (each with four) and is galloping ahead of national competitor Japan (which boasts just one).
Rise of the unicorns
Korea’s unicorns bestride a range of sectors. They are, according to CB Insights: E-commerce company Coupang (valued at $9 billion); Travel-tech provider Bluehole (worth $5 billion); Yello Mobile, a mobile software and services provider ($4 billion); Woowa Brothers, an on-demand player ($2.6 billion); L&P Cosmetic, a beauty-and-grooming firm ($1.78 billion); Wemakeprice, an e-commerce marketplace ($1.33 billion); Fintech provider Viva Republica. or Toss ($1.2 billion); and Yanolja, a travel-tech company ($1 billion)
Officials are upbeat. “We believe in the strong emergence of a second venture boom in Korea,” said Oh Kee-woong, the ministry’s director general for Venture Innovation Policy, who joined Park at the briefing.
Korea’s first venture boom – the Internet bubble of the 2000s – would bust, but not before spawning a handful of firms to add to a national industrial portfolio that previously consisted of metal bashers like Samsung and Hyundai. Those companies include portal firms Naver and Daum and online gaming firms like Nexon and Neowiz.
A major barrier preventing Koreans from creating startups was a financial eco-system and social culture that has customarily punished failure. But now, “We have programs to support ‘second-chance’ startups,” said Park.
“As statistics from Silicon Valley show, before there is one success story, there are seven to eight failures,” said Oh. “We are recognizing the importance of failure before success, and we are working to improve institutions, culture and society.”
That is a tall order, demanding regulatory change and social engineering. But positive change appears to be underway.
Central to the problem was capital access. In the United States, such tech colossi as Bill Gates, Jeff Bezos and Steve Jobs enjoyed the security of a financial eco-system where entrepreneurs could bounce from failure to failure before hitting the big time on the strength of personal charisma and smart ideas. Conversely, Korea’s top-down financial system took a sternly conservative approach to risk management.
Banks customarily lent to giant businesses with plentiful collateral; entrepreneurs who lacked such major assets were forced to take on perilous liabilities, and early-generation Korean venture capital firms were not much better.
“In the past, a lot of VCs required the owner or founder to take personal liability or offer guarantees,” James Kim, an investor with Tiandi Partners, told Asia Times.
When a start-up went under, there were dire consequences for its founders.
“I believe that when it came to bankruptcy, there was no protection from liabilities – even tax liabilities,” said Eric Cornelius, managing director of Bright Shiny Robot, a Seoul-based start-up consultancy. Liquidity providers would seek to recoup their investments, “… even if it meant [the capital recipient] had to do slave labor for life,” Cornelius added.
Such practices are thankfully, fading – at least, in the VC space.
“These days it is not that big of an issue, as there as so many sources of funding without debt or personal liability,” said Kim. “VCs have got smarter, they don’t hold company founders personally liable the way it was a few years ago,” noted Cornelius.
Moreover, those who failed once would have their credit history forever besmirched across the national financial system. And in a nation with a powerfully neo-Confucian culture where the issue of “face” was paramount, shame was attached to bankruptcy.
“Now we see serial entrepreneurs who have risen from the ashes of companies that have crashed and burnt,” said Cornelius. “It does not seem as if there is so much judgment [of failure] on the social side; it seems to be getting better.”
As is so often the case in Korea, leading-edge best-practice has been top down: From both big business and government.
On the corporate front, steel giant POSCO last year created a 1 trillion won venture fund, Oh noted, while Cornelius cited an in-house program at the country’s flagship corporate, “Samsung C-Lab.” Under that program, employees with an idea for a business present it before a board of internal judges. If the board OKs the proposal, the employee retains his/her Samsung salary while also being offered start-up funds.
Though some critique conglomerate-incubation efforts as foxes guarding henhouses, the Samsung program insulates the wannabe entrepreneur from failure-related risk: if his/her project does not take off, he or she is offered his previous position in the firm, no questions asked.
Government has also waded in. A fund of funds with 4 trillion won was started in 2005, based on Israeli and Singaporean models, to kick-start the sector. Since then, venture investments have skyrocketed. As of last year, they were worth 3.4 trillion won, up from 2 trillion in the first venture boom in 2000, according to data provided by the ministry.
“The first venture boom was led by the government,” Oh said. “The second venture boom is being led by the private sector, so it is more sustainable; 67% of venture investment is private today.”
The data tell their own story. The number of newly established companies has set a record high for three consecutive years, from 93,768 in 2015 to 102,042 in 2018, according to ministry data. Meanwhile, Korean unicorns have surged from three in 2018 to eight today – “evidence of a mature infrastructure and eco-system,” Oh said.
The changes may be seeping through to youth, who dub their country “Hell Joseon” (the latter being the name of Korea’s last kingdom) – a purgatory in which it is impossible for the young to get ahead, particularly given high graduation rates, which have devalued the currency of a university degree.
While it was previously unthinkable for students to ditch their studies to create a start-up, a Seoul university student anecdotally told Asia Times that a number of her fellow students are now doing exactly that.
Old habits die hard
Even so, the formal Korean financial sector remains a bastion of conservatism.
Oh noted that in the US, about 40% of pension funds invest in VCs; in Korea, that number is just 13%. Seoul’s 2005 fund of funds was designed, “to make up the missing investment,” Oh said.
And he conceded that Korean traditional financial institutions retain problematic practices. “Joint liability regulations are quite unique,” he said. “Founders of failed companies have to pay back loans and we understand that this system prohibits entrepreneurs from having a second chance.”
Once again, government is taking up the slack. As of 2018, loans from government-run financial institutions ceased to demand these onerous liabilities, Oh noted.