Venture capital activity stalls amid economic uncertainty

South Korea’s venture capital firms are facing a significant slowdown in investments as high interest rates and ongoing economic challenges continue to impact the sector.

According to data obtained by Maeil Business Newspaper from the office of People Power Party Lawmaker Kim Sung-won on Thursday, the number of venture capital (VC) firms and accelerators (ACs) that did not make any investments over the past year surged from seven in 2018 to 36 last year.

Moreover, 16 firms failed to make a single investment for two consecutive years, while four companies have not invested in three years.

Out of 246 registered venture capital firms last year, about 15 percent did not execute any investments, according to the Ministry of SMEs and Startups.

“During the Covid-19 pandemic, low interest rates and increased liquidity led to the creation of many new investment firms,” said an official from a mid-sized VC firm. “However, unlike established firms, these new firms are more susceptible to economic fluctuations and have struggled to make significant investments.”

A venture capital firm based in Gangnam District in southern Seoul also commented on the cautious approach to investment during these uncertain times.

“Due to the challenging economy, conservative views have dominated internal discussions, and we did not make any investments last year,” the company’s CEO said. “With increasing skepticism about the potential for returns, many firms, including ours, are taking a wait-and-see approach.”

The CEO added that pausing investments for a year or two does not necessarily spell disaster, as firms are waiting for better opportunities.

However, venture capital firms could face penalties for prolonged inactivity.

Under Korea’s Venture Investment Promotion Act, the Minister of SMEs and Startups can cancel a firm’s registration, suspend operations for up to six months, or issue corrective orders or warnings if a VC firm fails to invest in venture or small companies for more than a year without justifiable reasons within three years of registration.

One firm in 2016 and 2020 had its registration revoked.

The venture capital slowdown has continued into the first half of 2024.

Data from industry tracker THE VC showed that Korean VCs invested 1.35 trillion won ($1.02 billion) in the first half of this year, down 9.6 percent from the first half of last year and down 21.4 percent from the second half of last year.

Early-round investments (seed to Series A) in startups also fell sharply, with only 376 deals worth 910.3 billion won, representing a 37 percent drop in deals and a 29 percent decline in investment value year-over-year.

“Given the difficulty in raising funds, VCs are focusing their investments on companies that are more likely to succeed,” said the CEO of a large VC firm.

Another mid-sized VC head added that there are even rumors of firms preparing for mergers and acquisitions or returning their licenses altogether.