SEOUL, April 3 (Korea Bizwire) — Despite investment from venture capital firms growing every year, unimpressive results by the invested entities and excessive liquidity has analysts warning that steps to prepare for a potential bubble should be taken.
Venture capital investment in new firms reached a peak last year, increasing by 10.7 percent year-on-year, according to the Korean Economic Research Institute (KERI). With both the previous and the current presidential administrations working to encourage more lively private sector participation in venture capital investment, the expectation is for investment to continue to trend upwards for the time being.
Noting that the competitiveness of invested firms has failed to significantly improve, KERI stated, “Should firms fail to possess competitiveness that is in accordance with an abundant supply of liquidity, there is a chance a bubble forms.”
Data from the Ministry of SMEs and Startups shows that invested firms’ revenues year-on-year increase percentages fell from 15.8 percent in 2012 to 7.9 percent in 2016. In addition, the percentage of operating profits in relation to revenue from 2012 through 2016 dropped from 5.7 percent to 4.4 percent.
Despite the favorable conditions for startups and invested companies, last year’s payback amounts dropped by 10.3 percent compared to the year prior. The disappointing payback market has been identified by KERI as a significant stumbling block towards an invigorated venture capital investment ecosystem.
In 2016, South Korea’s payback market was 0.06 percent of GDP. For the sake of comparison, the same figure for the U.S. was 0.29 percent. M&As, an important part of the payback market, comprised 3 percent and 80 percent of the South Korean and U.S. market, respectively.
KERI has called for South Korea’s payback market to be expanded by increasing the number of M&As in order to establish a venture capital investment ecosystem centered on the private sector.