The biggest reason for the lack of angel investments is that businesses lack attractive exit options for investors. (image: Kobiz Media / Korea Bizwire)
SEOUL, Sept. 22 (Korea Bizwire) – It has been pointed out that in order to continue the growth of domestic startup businesses, the ‘exit (investment collection) market’ should be activated.
Kim Ju-wan, a consulting partner at McKinsey & Company, stated that the domestic startup ecosystem has entered a typical vicious cycle, at a debate entitled ‘The Continuous Growth of Korean Startup Businesses’.
Although funding is easy in the early stages due to government programs, financial support gets difficult as businesses start to grow. Furthermore, similar services flooding a small market makes it difficult to collect investment through Mergers and Acquisitions (M&A).
According to a recent report issued by McKinsey, Korean startups easily secured 30 million won to 70 million won in initial investment funds, but had a hard time getting angel investments ranging from 100 million to 300 million to develop new products and create marketing materials and campaigns.
As a result, startups that make it across ‘Death Valley’, from establishing the business to securing venture capital, are very rare.
The biggest reason for the lack of angel investments is that businesses lack attractive exit options for investors.
Unlike other countries, Korean startups that collect investment through M&A are below 1 percent, and so primary listing is the only way out.
However, it takes an average of 13 years for a venture business to establish itself well enough to reach an Initial Public Offering (IPO), which is much longer than in China (3.9 years) and the U.S. (5 years). McKinsey sees this as an unattractive factor to investors.
Kim also points out that the concentration of Korean venture companies in a specified field is another factor that is turning investors off.
According to McKinsey, a majority of Korean venture businesses are concentrated in the internet and mobile industries, which are easy to enter but low in profits because of excessive competition.
Kim offered advice on how to break the vicious cycle. “The government, venture businesses and investors all have to work together in order to make the venture industry enter a passage of sustainable growth. We need to find ways to revitalize the venture M&A market, and shorten the time from setup to IPO.”
By Francine Jung (francine.jung@kobizmedia.co.kr)
