Profitability over growth: 5 investors explain their mantra for South Korean startups

May 25, 2023 ndowd

South Korea’s economic model has for decades leaned on export-led manufacturing operated by family-owned corporate giants. A 2015 report from McKinsey outlined how the country would need small companies to drive an innovative model in preparation for the next phase of economic growth. “The key to fostering such innovation is a vibrant startup community. … Currently, the Korean startup community falls far short of this ideal,” the report said.

South Korean conglomerates like Samsung, LG, and Hyundai still play significant roles in Korea’s primary economic growth; most of them, once focused on manufacturing, are now tech-driven firms.

Along with the Big Tech giants in South Korea, the country’s startup ecosystem has immensely grown compared to 2014, as have startups in other Asian countries like China, India, and those in Southeast Asia.

Back in 2014, there were just 10 unicorns —including Coupang, Naver, Kakao, Line (which relocated to Japan), and game companies like Nexon and N.C. Soft —among 29,561 startups. As of 2022, Korea had 22 unicorns, with a valuation of 1 trillion won (approximately $744 million), up from 18 unicorns in 2021. It might not sound like a massive leap from 2014, but the increased number of unicorns is a testament to the hard work being done by Korean startups.

After the recent pandemic fueled the startup boom worldwide, the startup valuations in South Korea skyrocketed unrealistically just as they did globally. Jumping to the present, the startup funding landscape has shrunk, and valuations have dropped everywhere in the world in the face of uncertain macroeconomic conditions. Venture funding in Asia in the first quarter of 2023 declined 33% from Q4 2023 and 57% from Q1 2022, according to a report by Crunchbase.

We spoke to select investors, who make investments in the South Korean market to hear their predictions for 2023, their investment strategy, which sectors excite them and more.

All the investors we spoke to said there are barely any changes in their investment strategies but approval for due diligence by committees has become rigorous.

“The days of ‘swiping right’ on a deal are well over, and the required level of due diligence has also reverted to historical norms, taking three to four months rather than three to four days,” said Yeemin Chung, managing director of BRV Capital Management.

The investors are now advising startup founders and executives to prioritize profitability over growth, extend their runway, and prepare to stay agile amid fears of a possible recession.

And startups are now seeing a drop in valuations compared to the previous two years. Still, in a way, it is healthy as “people are approaching it more rationally,” according to Han Kim, general partner of Alots Ventures.

“I think the current environment might feel a bit harsh for entrepreneurs, but in a sense, it’s doing a favor for the founders that can realistically map their growth path,” said Eunse Lee, founder and managing partner of 541 Venture.

We spoke with:

Han Kim, general partner, Altos Ventures
Tim Chae, managing partner, 500 Global
JP Lee, CEO and managing partner, SoftBank Ventures Asia
Yeemin Chung, managing director, BRV Capital Management
Eunse Lee, founder and managing director, 541 Venture.

(Editor’s note: The following surveys have been edited for length and clarity. These answers are strictly limited to South Korea and do not encompass all of Asia.)

Han Kim, General Partner, Altos Ventures

We’re seeing a significant drop in VC funding in Asia’s first quarter this year. How has your VC investment strategy changed along with the market condition?

Our strategy has not changed much. We’ve been investing more in our existing companies since the second half of last year, so there are more investment dollars in total. It’s slightly different from other investors. I think it’s because some funds don’t invest much [these days]. In a way, there’s more opportunity for us to invest more. (But those are not new startups but existing companies in our portfolio.) We usually invest between 1 billion won and 10 billion won ($750,000 and $7.5 million) in new companies and we sometimes invest even up to 100 billion won ($75.5 million) in existing portfolios.

What caused the lowest funding in Asia since 2021? and do you think VC funding will continue to decline this year? What are your prospects regarding funding volumes in Asia in 2023 and 2024?

If you look at the data, it includes China. I think that has been a little bit impacted by China. Chinese VCs have faced some regulations on big businesses’ [investment], and now the U.S. also regulates investing in Chinese companies. There are a lot of checklists [for investment in China]. It’s my guess, but at least this year, I think until the tensions between the U.S. and China fade away or resolve, this challenging atmosphere won’t be easy to bounce back.

How does the investment trend in South Korea differ from other regions like the U.S. and Europe?

Now the trend is profitability before growth. I think this trend is becoming more important in South Korea. The U.S. used to be growth over profitability, but now it has changed to profit over growth, but the U.S. has more leeway than Korea. In other words, U.S. investors have more patience than investors in South Korea.

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