High-flying world of start-ups sees turbulence, crashes

Start-ups, which Korea hoped would show the way to a prosperous future, are in a slump. Direct investments by venture capital firms and so-called angel investors are down, and so are IPOs.

[SHUTTERSTOCK]

Start-ups, which Korea hoped would show the way to a prosperous future, are in a slump. Direct investments by venture capital firms and so-called angel investors are down, and so are IPOs.

Lific, a start-up founded in 2020, had to shut down in July after it ran out of money. Lific is a mobile application that allows users to search for beauty shops and fitness centers, make reservations and pay for services. The application had its moment back in 2020. It was downloaded 100,000 times in its first two weeks. Around 14,000 establishments partnered with the start-up. But it burned through its cash with marketing expenses, and fresh funding never came along.

“I worked at Lific believing in its possibility to grow, but my career collapsed as the company closed down,” said an IT developer who worked at Lific.

“The current trend is very similar to the dotcom bubble in the past," he continues. "Even if it takes time for me to find a new job, I am not willing to work at a start-up again.”

Streaming service Watcha failed to get the 100 billion won ($70.9 million) in pre-IPO funding it aimed for in the first half.

The company is trying to survive by laying off employees and selling shares in the company's subsidiaries. New businesses related to webtoons and music are all temporarily halted.

“I believe Watcha is a good company, but the future of a start-up is unstable if it doesn't get the funding it needs,” said a Watcha employee.

“I am not even sure if I will be able to work at this company next year.”

Investments by venture capital companies in start-ups amounted to 4 trillion won in the first half of 2022, a dip from 4.6 trillion won in the second half of 2021, according to the Korean Venture Capital Association (KVCA). For the whole year, investment is expected to be significantly lower than last year’s 7.68 billion won.

Data from Startup Alliance, a non-profit support center for start, shows that investments made in local start-ups in the month of July were 836.9 billion won, a drop of 72.7 percent on year.

Small investments increased, although large investments dropped.

In the first half of 2021, four companies got funding over 200 billion won: Noom Korea (607.2 billion won), Viva Republica (460 billion won), TMON (305 billion won) and Riiid (200 billion won). In the first half of this year, Buckethouse was the only one, landing 235 billion won.

Investments of under 1 billion won increased from 47.7 percent of the total in the first half of last year to 52.3 percent in the first half of this year.

Trading volume of over-the-counter stocks in August reached 601.2 billion won, a drop of almost 40 percent from last August’s 988.9 billion won, according to KVCA.

IPOs were not very successful due to the gloomy market situation.

“The value of start-ups that are waiting for IPOs amount to some hundred billions of won, but these companies are having difficulties raising money,” said a spokesperson for a venture capital firm.

“The IPO market sharply shrunk this year and IPOs no longer guarantee profits for investors.”

Socar, which went public in August, is one example. The company’s IPO subscription rate was low at 14.4 to 1 and the value of its stock declined over 40 percent a month after going public, from 28,000 won to 15,000. Socar’s corporate value was estimated at 1.3 trillion won by Lotte Rental, a car rental company, earlier this year. It's now around 500 billion won.

The mobile app screen of Umsun, a food ingredient data analysis mobile application operated by Tryus&Company, shows the service will be halted. [SCREEN CAPTURE]

Some start-ups are giving up. DotFace, a media activism start-up, closed in June and big data analysis application UserHabit shut down in August. Umsun, a food ingredient data analysis mobile application operated by Tryus&Company, has closed too.

Game start-up Vespa, which gave employees a 12-million-won pay raise last year, is in a downward spiral after a product failed and investment dried up.

The survival rate of businesses that are in their fifth year of business is now 32.1 percent in Korea, lower than the OECD average of 44.1 percent, according to PPP Rep. Yang Kum-hee’s office.

Experts expect things to get worse in the future.

“When liquidity was high, there was competition to invest in start-ups, but investments will decline due to interest rate hikes and concerns over an economic slowdown,” said an executive of an asset management company.

“Start-ups shutting down their businesses and going bankrupt continuously are expected when investments are low.”

Some industries have received more funding because they are hot. A total of 18 start-ups related to autonomous driving got funding amounting to 390.5 billion won as of August, which was higher than last year’s 287.5 billion won.

Easy money drove the growth of start-ups over the past few years, and many start-ups got funding even though they didn't have innovative ideas or technologies. Now that money isn't so easy, the tide has gone out and they stand revealed in their nakedness.

“Even though there was nothing special about the company’s technology, the founders started their business during the start-up investment boom last year,” said a spokesperson for a cybersecurity start-up.

“No one knows how long the company will endure as there is no additional funding and investor pressure is growing.”

Electric bike services, which contributed to the growth of the personal mobility industry, are another hot industry. Olulo, the operation of Kickgoing scooters in Korea, received funding from other start-ups since it started in 2018, but went out of business due to a lack of innovative ideas or technologies.

Big start-ups are being shaken as well.

Kurly, the operator of the online grocery service Market Kurly, is getting ready for an IPO, but the company’s valuation has dropped to the 2 trillion won level from 4 trillion won last year. The high costs of salaries and logistics for dawn delivery services and a lack of new businesses are some of the factors that pulled its value down.

Analysts say there should be measures to help start-ups survive and raise the country’s industrial competitiveness.

One suggestion is government support such as tax benefits to encourage private investments.

“Retail and institutional investors receive tax exemptions on transfer gains when selling off shares of venture capital funds, but general institutions, such as banks, securities and insurance companies, do not,” said KVCA chairman Ji Seong-bae.

“Tax benefits should be provided to these institutions so that this money could actively be used at start-ups.”

The implementation of a corporate venture capital (CVC) system is another way suggested by many.

The Korean government eased conditions for holding companies to own CVCs on certain conditions, but many companies that are used to the separation of industrial and financial capital systems are not actively jumping in.

CVC refers to an investment of corporate funds made directly in start-ups.

“In the case of the United States, the country is efficiently using the CVC system to foster start-ups as the CVC investments make up almost half of all venture capital investments,” said a researcher at the Korea Capital Market Institute.

Others pointed out that restrictions on creating CVCs should be further eased.

“There is a need for Korea to relax restrictions on CVCs, such as revising the standards for CVC foundation,” said a spokesperson for the Korea Chamber of Commerce and Industry.

The government’s support of direct investment is also needed.

The budget allocated for next year's government-backed venture capital funds is 704.5 billion won, a drop of 25 percent from the previous year's 937.8 billion won, according to Democratic Party Rep. Kim Hoi-jae's office.

"The government needs to consider whether this [the budget cut on the government-backed venture capital funds] may take away opportunities for good start-ups to receive funding," said Kim Do-hyeon, a business professor at Kookmin University

.

BY LEE CHANG-KYUN [cho.jungwoo1@joongang.co.kr]