South Korea is a nation founded on entrepreneurship. Samsung was founded there in 1938, a year before Hewlett Packard, one of the many iconic firms of Silicon Valley. Although the economy has been dominated by conglomerates, this situation is changing. The country is going back to its very creative roots, enabling the growth of a global-reaching startup ecosystem.
Angel investment in Korea plummeted by 94% during the period between the dotcom bubble burst in the 2000s and 2011. However, it is now regaining its momentum with the rise of a strong startup ecosystem in the Gangnam area, thanks to effort from both the private and public sectors. With programs like the K-Startup Grand Challenge, which offers financial incentives, an accelerator program and many other advantages, South Korea is fostering this ecosystem.
Overall, from the perspective of investors, the challenges and opportunities for Korean startups can be summarized as follows:
- Domination of the Korean economy by the “Chaebol” or conglomerates.
- Immature exit environment with narrow M&A market and demanding conditions required for an IPO.
- Ageing society – Korea is just about to fall of the demographic cliff with its extremely low birth-rate.
- Sensitive reactions towards capital – founders often feel anxious over share dilution following investment, worrying it might cause them to lose control of the ownership of their company.
- Strictly hierarchical culture – rigid authority structures in organizations can hinder innovation.
- Strong GDP: $1.4 trillion GDP with a GDP per capita of approximately $36,532.
- Low customer acquisition cost: it is relatively easy to attain a critical mass of target customers with large, concentrated domestic market
- Global popularity of Korean culture and products
- Korean immigrants from overseas have started to return home, sharing their skills and capital.
- A rapid influx of foreign capital from the US to China and Israel for startups with 2-3x lower valuation than comparable U.S. or Chinese.
A cradle of Innovation
In recent years, Korea has also been gaining a reputation as a global innovation hub. According to the Global Innovation Index Report, South Korea has ranked higher this year, at the 11th place, gaining 3 more ranks over the past 2 years. Whilst this number might surprise some, a little bit of analysis will reveal why.
The tech scene in Korea has shown that it is often ahead of the curve by several years in terms of the evolution of business trends. It has the highest broadband penetration in the world and has become a world leader in communication, information technology and patent activity.
New Momentum for Angel Investment Since 2013
- Revitalizing Angel Investment
In 2013, the Korean startup scene was gaining new momentum, riding the wave of the global startup phenomenon. The number of registered angel investors, which bottomed out with only 619 investors in 2011 rose to 4,870 in 2013 and is at 5,429 as of 2017.
- Better Tax Incentives for Angel Investors
In May 2013, in line with the startup renaissance across the globe and the second boom of IT startups in the Korean ecosystem, the government announced an initiative to revitalize startup investing. This included tax incentives for angel investments of up to 100% (a 100% incentive for investments under $13,000; 50% for between $13,000 and $46,000; and 30% for over $46,000).
- A Cultural Shift
A new breed of Korean entrepreneurs is embracing risk, and while they may initially be tackling local problems, they are also thinking about how their solutions can be extended to the global stage. An exchange of highly educated individuals between the East and West has served to shift perceptions of the ideal career, causing larger numbers of young Koreans to veer away from the traditional route of a safe, predictable corporate career.
Korea, a Crystal Ball for Innovation
Nearly all of Seoul’s residents use smartphones, and many of the services just now gaining in popularity in the United States have been commonplace in South Korea for years,” said Tim Chae, a partner of 500 Startups, in an interview with New York Times.
“American investors have begun to think of Seoul as a sort of crystal ball. In it, they can catch the glimpse of a future where the most ambitious dreams the Silicon Valley has — a cashless, carless, everything-on-demand society — have already been realized.”
In 2013, an Indonesian e-commerce website called Tokopedia achieved the #1 position in the local market. This exact same story was foretold 13 years earlier in Korea, with the case of Auction.
Terry Gou, the chairman of Foxconn, said during his visit to D.CAMP that what can be achieved in two years in Taiwan can be achieved in just 6 months in Korea. Benjamin Joe, the head of Facebook Korea, said in an interview with the Korea Herald that, “Korea is a unique market where over 90 percent of users access Facebook through smartphones. Facebook has also recently partnered with the nation’s automobile manufacturer Kia Motors to increase the social experience for passengers in their vehicles. This makes Korea an important test bed to Facebook wishing to be a mobile-first company.”
South Korea has grown considerably over the past decades, and has become a valuable place to start a business. It is increasingly ranked higher as an innovating hub, with one of the high broadband penetration rate in the world and growing momentum in angel investment since 2013. If South Korea keeps expanding in this way, it will be able to create for itself a better (and bigger) place in the start-up ecosystem.
Also, feel free to read our other country reports in the related article section (below).