Government-Funded Startups Vulnerable, but Show Promise

SEOUL, Sept. 8 (Korea Bizwire) – Government funding for startups is bearing fruit after a report released on August 9 by the Korea Institute of Startup and Entrepreneurship Development and the Ministry of SMEs and Startups revealed that government-sponsored startups had hiring increases that were five to six times higher than at small and medium-sized companies and major corporations.

The report, titled “2016 Overview of Government Funded Startups”, analyzed the effects of government funding on 12,996 companies from 2009 to 2015.

The report found that companies had added an average of 4.1 jobs per year.

First year startups employed an average of 2.6 employees, which increased to 5.3 by year three. By the fifth year, the average number of employees per company was 7.7.

The hiring rate was measured at 19.3 percent, 5.4 times the rate of small and medium sized companies (3.6 percent) and 5.8 times the rate of major corporations (3.3 percent). 

The average rate of sales growth was 20.7 percent, while average yearly revenues were 508 million won. In contrast, the average rate of sales growth for small and medium size companies in 2015 was 8 percent, whereas the rate of sales growth at major corporations actually decreased, with an average rate of -4.7 percent.

On August 29, the Ministry of SMEs and Startups’ reported year-on-year budgetary increase exemplified the ever strengthening government dedication to investing in startups. Of next year’s proposed 2.62 trillion won budget, 399.8 billion won will be dedicated to startup investment capital, a 35.1 billion won increase compared to this year.

Specifically, the reserved amount for the commercialization of startups jumped from 126 billion to 161 billion won, and funding for office space and other infrastructure increased from 47.8 billion to 59.6 billion won.

The Ministry’s Tech Incubator Program for Startups (TIPS) funding was also greatly expanded from 15.0 billion to 32.6 billion won. Special programs for nurturing “senior startups”, or startups founded by those over 40 years of age, and a fund designated specifically to supporting the co-founding of startups made up of intergenerational team members also received increased funding, to 19.5 billion and 11.9 billion won, respectively. 

Such measures played a part in the birth of 8,316 new companies in the month of July, according to a market analysis by the ministry that was published on August 31. Broken down into categories, manufacturing (21.8 percent), wholesale and retail (20.5 percent) and construction (11.2 percent) made up a significant chunk of the new businesses. The data also showed that 2,061 of the founders were women, an increase of 126 compared to the same period the previous year. 

The ministry’s August 31 report also highlighted the steady year-on-year growth of new businesses being established by founders under 30 years of age, evidenced by the 4.4 percent growth in such businesses compared to the same period last year.

The number of such businesses has increased by approximately 20 percent per year over the last three years, explosive growth when accounting for the fact that in the early 2010s, the annual growth rate was between 3 and 7 percent.

Along with the enhanced accessibility to government assistance has come concerns over sustainability as companies are opening and closing in quick succession. In the month of July, there were 57 new companies added that were established by founders under 30. However, in the same month, 34 such companies closed down.

Moreover, sustainability is a problem not just for young founders but for nearly every startup. Described in the inter-ministerial report released on August 9, the debt ratio per startup was a whopping 324.4 percent (adjusted to 2015 figures), with an average debt of 418 million won.

Debt ratios of small and medium size companies and major corporations, on the other hand, were 182.0 percent and 107.7 percent, respectively.

In order to aid struggling startups, the government has reportedly proposed to drastically increase the number of accelerators that will provide mentoring and other services from 30 to 100 nationwide.

One CEO of an accelerator said, “As the government’s support for startups has diversified, the number of young people who are taking on the challenge has increased.” He added, “Helping to create startups is a good thing but there must be more thought being put into whether a startup is sustainable.”

 

S.B.W. (sbw266@koreabizwire.com)