FEAR OF FAILURE: HOW SOUTH KOREA’S CULTURE OF SUCCESS STIFLES START-UPS
Risk-averse mentality coupled with excessive red-tape means there is little change to the economic status quo
When Choi Ba-da pitched his car-sharing company Luxi to Hyundai Motor officials in 2017, he told them there would be no future for South Korea’s top car maker if it failed to embrace emerging technologies.
His pitch worked: Hyundai agreed to buy a 12 per cent stake in Luxi for $5 million, its first investment in a car-sharing operation as it joined rivals in the race for new-age transportation.
But about six months later, Hyundai sold its stake after thousands of angry taxi drivers, worried about their jobs, threatened to boycott Hyundai cars, Mr Choi said. Hyundai officials say they were also wary of laws limiting car sharing in South Korea.
Hyundai’s break-up with Luxi illustrates how rigid regulations, strong labour unions and a risk-averse culture among South Korea’s giant family-run conglomerates, or chaebol, have hindered the growth of start-ups in Asia’s fourth-largest economy.
President Moon Jae-in’s administration says the country’s decades-old growth model, powered by a handful of large exporters such as Hyundai and Samsung, has reached its limit in the face of Chinese competition and rising labour costs.
To offset slowing growth in sectors such as cars, ships and chips, it created a new ministry for start-ups last year and has boosted funding to cultivate new technologies.
But the government has been too slow to remove cumbersome regulations for start-ups, wary of upending the country’s economic order or upsetting powerful labour unions, according to interviews with a dozen entrepreneurs, investors and executives.
That has left South Korea surprisingly resistant to disruptive technologies despite its tech-savvy image, they say.
“After agonising, Hyundai officials told me that they had to go slow with the service, before eventually pulling out,” Mr Choi said. “But how on Earth can a start-up go slow?”
Hyundai said it sold its stake in Luxi as the investment “did not fit a business model the company pursued”, without elaborating.
Hyundai’s chief innovation officer Youngcho Chi also said South Korean restrictions on ride-sharing to unspecified “commuting hours” as one reason and said the car maker had concluded that Luxi was not going to work out.
Instead, Hyundai pumped $275m into Singapore’s ride-hailing company Grab last year, according to Reuters.
Hyundai and Samsung say they invest in both local and overseas start-ups.
Close to the company’s headquarters, South Korean startups are easier to communicate with, Hyundai said. Samsung says it has been running a start-up support programme for five years to raise local entrepreneurs.
Still, some say chaebol are moving too slowly. “The Korean success has been built on a fast-follower strategy, but Chinese rivals are catching up very fast,” said Hwang Sungjae, a co-founder of Fluenty, a South Korean artificial intelligence start-up acquired by Samsung Electronics last year. “Companies now have no choice but to innovate and work with start-ups, but they are not investing quickly enough.”
“Korean companies are at a great risk of falling behind.”
Regulations are another challenge. South Korean laws would entirely or partially block about 70 per cent of the world’s top 100 start-ups by investment size from bringing their services to the country, according to research by Google Campus Seoul and the Asan Nanum Foundation. Those include Airbnb, Uber, and China’s Ant Financial.
Last February, top South Korean mobile messaging operator Kakao Corp bought Luxi for $25m, but it remains stymied by car-pooling regulations, and has yet to launch amid fierce protests from taxi drivers.
One taxi driver set himself on fire and died recently.
Kakao said it pushed back the launch schedule of its carpool service in the wake of the suicide.
Regulations also prohibit venture capital funds from investing in financial, real estate, accommodation and restaurant sectors in South Korea.
The government has proposed a new law to lift those restrictions, but a senior government official acknowledged it would be neither easy nor quick. “The bottom line is that we have to move toward innovation, but it takes a lot of time and is a difficult process to mediate existing interests,” said the government official at the Ministry of SMEs and Startups, declining to be named.
“Realistically, we can’t simply ignore existing interests. There’s no clear answer.”
Many Korean ventures are focused on applications that would only apply locally, making them a hard sell for global companies, a Samsung Electronics source said.
Since 2016, Samsung has acquired minority stakes in nine start-ups, only one based in South Korea, according to corporate researcher CEO Score.
Hyundai Motor has invested a total 85 billion won (Dh275.8m) worth of minority stakes in 15 foreign start-ups over the past three years, compared to 28bn won spent on five local ventures over the same period, CEO Score said.
San Francisco venture fund 500 Startups, one of the early investors in Grab, said it had looked at Korean ride-sharing operators for a possible investment, but decided against it because of legal restrictions.
“The regulatory environment hasn’t been favourable to the investors like us,” said Jeffrey Lim, who heads 500 Startups’s Korea office.
There were, however, Korean industries offering interesting opportunities, such as pop music, online games, and cosmetics, Mr Lim said.
500 Startups has invested 6.5bn won in 30 South Korean companies since 2015, including radio app Spoon, which is now available in South East Asia and Japan.
Other established foreign rivals have also backed South Korean start-ups despite the challenges.
Softbank of Japan has invested in more than 20
tech companies in South Korea since 2012, according to venture capital data provider CB Insights, including a $2bn stake in online retailer Coupang in November.
South Korean start-up Viva Republica, which operates money transfer app Toss, last week raised $80m from US investors including Kleiner Perkins and Ribbit Fund, valuing it at $1.2bn.
Korean conglomerates’ tendency to avoid risk and shun outside partnerships makes them slower than foreign rivals to adapt to fast changing technologies, said Rhee Mooweon, a management professor in Seoul at Yonsei University, who advises Samsung, Hyundai and the South Korean government.
In 2003, Samsung missed the opportunity to acquire the then small maker of the Android smartphone operating system, just two weeks before Google bought it for $50m plus incentives, according to a 2013 book by Fred Vogelstein Dogfight: How Apple and Google Went to War and Started a Revolution.
When Android creator Andy Rubin pitched his company to Samsung, an executive told him: “Are you dreaming? You and what army are going to go and create this? You have six people. Are you high?” according to the book.
However, outside South Korea, the Middle East is proving a draw for technology investment from the country.
Last month The National reported that South Korea aims to use the UAE as a gateway for investment and knowledge exchange into the rest of Mena.
The South Korean government’s Daejeon Information & Culture Industry Promotion Agency signed a preliminary agreement with Sharjah Research, Technology and Innovation Park this week to carry out the plan.
“The Mena region – a home to huge young population – is a dream market for most of the Korean companies,” Park Chan-Jong, president of Dica, told The National.
“However, this is one of the few markets that Korean industry has not able to penetrate fully for a long time. Therefore, we are going to utilise Sharjah as a very reasonable gateway to the Mena region.”
Dica will establish its office in Sharjah Research, Technology and Innovation Park this year year and plans to bring in up to 25 people from South Korea to work there.
“Our plan is to open a technology licence office, which will be in fact a commercialisation centre,” said Mr Park. “Our negotiations with the Sharjah Government are on to finalise the modalities.
“This office will be the main bridge or entry point for the Korean technology companies who want to invest or do business in Mena.”
As cash-rich conglomerates in South Korea remain reluctant buyers, only 3 per cent of South Korean start-ups were able to recoup their investments through trade sales in 2017, according to the Korean Venture Capital Association.
That leaves IPOs as one of a few exit options, but it takes about 12 years for South Korean start-ups to go public – “an eternity” compared to Silicon Valley, where it typically takes six to seven years, according to consulting firm McKinsey.
In 2017, South Korea introduced the so-called “Tesla listing rule” which allows loss-making start-ups to list on its junior, tech-heavy Kosdaq market. It is named after the US electric car maker that remains loss-making eight years after going public in 2010, but is worth $63bn.
So far, only e-commerce platform Cafe24 has used the Tesla rule to go public. Since its February listing, its shares have risen 25 per cent.
South Korean entrepreneurs say there is a long way to go.
“Government officials are trying to meet every stakeholder’s demands in a way that doesn’t lead to a solution,” said Seo Seung-woo, a professor and entrepreneur who moved his self-driving start-up to Silicon Valley last year.
“I say, don’t think about doing a start-up in South Korea. Think outside Korea.”
Only 3 per cent of South Korean start-ups were able to recoup their investments through trade sales in 2017