The Korean government aims to kickstart innovation and encourage M&A among its system of chaebol after deregulating the sector.
Korea’s corporate venture capital sector has taken off, with 32% of the country’s 76 industrial conglomerates having created a CVC arm.
The South Korean government changed its law to allow large, family-owned holding companies, known as chaebols, to set up CVC units in late 2021. Although the law change only affects several conglomerates that have holding companies, it has triggered many corporations to establish their own investment arms.
Five conglomerates have placed CVC units under their holding companies as a result of deregulation. These are Hyosung (Hyosung Ventures), Dongwon (Dongwon Investment), GS (GS Ventures), CJ (CJ Investment) and POSCO (POSCO Capital).
In addition, at least 20 to 30 CVCs have been created by financial companies, mid-sized companies and unicorn startups in the past several years.
Chaebols were previously prevented from setting up corporate venture arms because of regulation that stopped large holding companies from operating financial companies.
Only Samsung and Hyundai Motors were able to have investment arms because they had set up these divisions as separate businesses.
The government changed the regulation to drive innovation and encourage conglomerates to acquire startups, Jungwook Lim, deputy minister in the Office of Startup and Venture Innovation in the Korean Ministry of SMEs and Startups, tells Global Corporate Venturing.
“The government’s intention was to increase venture capital investment for startups. The second change was that if we allow these big conglomerates to have their own venture capital, they are probably going to make acquisitions as well,” says Lim.
The origins of South Korea’s chaebols go back to the 1960s when they were founded to build up the economy after the Korean War. Sheltered from international competition and structured so that they developed into monopolies, the chaebols grew rapidly and have been responsible for driving strong economic growth in South Korea.
The country has developed into the 12th largest by gross domestic product (GDP) and has a 3.1% GDP growth rate.
The Korean government’s decision to overhaul its regulation of chaebols in favour of relaxing venture investments comes on the back of strong growth in its startup ecosystem.
Since the Asian financial crisis in the late 1990s, Korea’s startup sector has also grown rapidly with the help of government investment. The emergence of several high-profile unicorns has driven interest among large Korean corporates in the startup ecosystem.
Korean startups that have developed into businesses valued at more than $1bn include e-commerce company Coupang, entertainment and gaming business Bluehole, media company Yello Mobile, smartphone app developer Woowa Brothers, and cosmetics and pharmaceutical maker L&P Cosmetic.
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“The chaebol system has been successful but now they need to create more synergies with smaller companies to drive innovation,” says Dong-Su Kim, CEO of California-based LG Technology Ventures, the investment arm of Korean electronics manufacturing conglomerate LG.
Korean startups are now recognising the benefits of partnering with the country’s conglomerates after a long period when the term corporate venture capital was largely unknown in the country, says Lim.
He adds the government hopes to make its startup ecosystem and corporate venture capital sector more connected to global investors.
“The Korean ecosystem is not so well connected to the outside world. It is also very important that our CVCs and venture capital connect to other venture capital ecosystems in other countries,” says Lim.
