From the preference for face-to-face meetings to startups' over-reliance on government contracts, here are six unique aspects of investing in South Korea.
Jeffrey Lim, managing partner at Korean VC firm Signite Partners, gets calls from investors all over the world, from New York City to London, the Middle East and Paris, asking how they can invest in South Korea’s booming cosmetics and fashion startup sectors.
“Investors are flocking into Korea to invest in consumer goods startups because K-Beauty and K-Fashion are booming globally,” says Lim
Lim heads the CVC fund of Korean retail conglomerate Shinsegae Group. The unit set up a separate fund in December last year to invest in K-Beauty brands, including cosmetics and skincare.
The international interest in K-Beauty brands as well as other consumer startups made popular by cultural exports such as K-Pop and K-Drama shows how much the Korean tech ecosystem has matured over the past couple of years.
No longer known solely for dominating the consumer electronics sectors, the South Korean VC-backed startup scene is deeper and more diverse. And international investors, including corporates, want a slice of the growth.
Korea’s startups have benefitted from heavy government investment in technology and its efforts to connect founders with investors. In the past few years, Korean conglomerates have also taken a more active role in investing in the country’s startups after regulations were recently introduced to allow the country’s large corporates to set up CVC units.
Global Corporate Venturing held a webinar with Korean and foreign investors to learn more about the opportunities for investing in the country. They also shared the quirks of operating there and tips for doing business with Korean companies.
Here are takeaways from the webinar, Pop, Beauty and chips: How to invest in South Korea.
Korean investors are more global in outlook than ever before
Korea’s tech ecosystem has radically changed over the past decade. Korean investors invest more in a diverse range of sectors and are more interested in global startups rather than just Korean startups. They are also more open to partnering with international investors on startup investments, says Hee Jung, head of innovation and investment at SK Discovery, a Korean company focused on sustainable materials, biopharmaceuticals, energy and real estate.
“Everything was really focused for Korean investors and startups in dominating the market inside Korea. But now they are thinking how can they get into the international market,” says Jung.
Korean people like to meet face-to-face
Whether you are investing in a Korean startup or hoping to make contact with domestic VCs, you are much more likely to make a connection if you meet Koreans in person.
“Korean companies feel more comfortable with face-to-face meetings. In a global world and in the post pandemic era we all feel comfortable with Zoom meetings and remote working, but face time is still very important in Korea,” says Lim, of Signite Partners.
“I advise coming over to Seoul as many times as you can and then making good quality face time with key people in Korea,” he says.
Korean CVCs use manufacturing expertise to gain competitive advantage
South Korea has a strong manufacturing sector and conglomerates are keen to partner with startups to share their infrastructure and expertise in this area. This benefits domestic startups as well as foreign startups that want to enter the Korean market.
Small cosmetics brands, for example, have been able to mass produce their products because South Korea has the manufacturing capability to support this.
This infrastructure also applies to computer chip startups, says Leo Ahn, head of US Lotte Ventures, the US-based VC arm of Korean conglomerate Lotte Corporation. “There is a good level of technique to build the chips so that they can go global,” says Ahn.
The Silicon Valley-based investor uses the parent company’s expertise in manufacturing as a competitive advantage when investing in US startups. He says Bay Area companies excel in making software but tend to lack understanding of manufacturing. He introduces the company’s engineers to startups at their first meeting to show how it understands startups’ technology. “We can support in ways that Silicon Valley companies usually can’t,” says Ahn.
Korean startups are benefiting from the shift away from China
Korean deep tech startups have been the winners from the geopolitical shift away from investments in Chinese startups. International investors, which in the past made a beeline to China to invest in deep tech and semiconductor companies, are shifting to other Asian countries amid the political tensions between China and western countries.
South Korea is one these favoured countries, especially in semiconductor technology, says Gil Kim, investment manager at Applied Ventures, the CVC arm of US computer chip equipment maker Applied Materials. The company seeks to make investments in South Korean startups and has a fund dedicated to investments in the country.
The increased interest in Korean startup sector has also made it more competitive, says Kim.
Korea lacks global investors and diverse limited partners
South Korea welcomes international investors because its market is still dominated by domestic venture capital and domestic startups. “We are still lacking global leading VCs that are investing in Korea,” says Lim. “I think that’s a problem. If we want to go further, we need more investors from around the world with diverse investment themes.”
He adds that the country could also benefit from having a more diverse base of limited partners in funds. “The Korean government has played a key role in promoting the startup ecosystem and the venture capital ecosystem for more than the past two decades.
“That’s great, but we need to diversify LP pools in Korea. We need more LPs from the western world coming to Korea.”
Korean startups need to think more globally
Korean startups tend to be more focused on serving the domestic market and need to be pushed to expand globally. In the case of semiconductors, Korean startups have benefitted from a mature market with supply chains and vendors to support their business models. Kim says he tells startups “the battlefield is not in Korea but in the global market”. He encourages Korean startup founders to think about global expansion from the get-go.
Korean startups also rely too heavily on government contracts and should focus more on developing their core technologies, says Jung. “They are so tied up doing so many government product projects because it’s a lot faster and easier money. They leave their core technology just sitting there and not developing further because they’re so busy doing so many projects,” says Jung.
“I say, hey, guys, we got to step away from the government project to be more sustainable for the business. Go back to your investors for more money and just keep developing your core technology. Don’t walk away from it,” he says.
There was much more discussed in detail in the full webinar session. You can watch the full replay here:
This webinar is part of GCV’s The Next Wave series of webinars. We run a webinar on the second Wednesday of every month, alternating between advice for CVC practitioners and deep dives into specific investment areas.
