Early stage startups are almost always risky ventures, promising but unprofitable, and far from market-ready – often making it challenging to raise much-needed funds.
Seed funding, or initial fundraising, is crucial for these startups to scale and grow, but with the ongoing COVID-19 pandemic, financing has become harder to come by as investors choose proven companies instead of taking on new risk.
The usual startup investors, including accelerators and venture capital firms, are reluctant to invest in the early stage of startups, fueling concerns of disruption to South Korea’s startup investment environment and the country’s business ecosystem as a whole.
DynamicCare, a local technology startup that developed Power Log, a healthcare management robot, received proposals from three seed investors early last year and negotiated with one of them for a 1 billion won ($891,100) investment. But talks failed soon after the outbreak of COVID-19.
“We thought our product, Power Log, would be one of the beneficiaries of the pandemic because it helps people work out individually in the contactless environment. But investors shied away from investing in our company, citing risk linked to early stage startups,” said Koo Song-kwang, chief executive of DynamicCare.
GAME INDUSTRY NO EXCEPTION
The game industry, widely seen as a key beneficiary of the pandemic, is no exception.
Lumiere, a local game startup, said investors declined even meeting with the company, asking for something concrete from the venture firm before investment. Without any significant funding, the company had to produce a new product in August 2020 to appeal to potential investors.
“We were desperate and had no other choice. Once the product was out, business angels began to look to us, asking for investment meetings,” said Kim Yu-ri, chief executive of Lumiere.
Startup operators are finding it harder to attract angel investment. For some startups, the pandemic meant much smaller investment than they had hoped for.
A Korean legal service provider in the information technology sector, known only as “company H,” had to be content with 200 million won in seed funding after a planned 400 million won investment from another investor fell through due to the COVID-19 outbreak.
“Many seed investors looked at us in doubt. We thought our firm’s enterprise value was 4 billion won, but they cut it by half and we had to accept it,” said an executive of the company.
SEED CAPITAL VS SAFE BET
According to The VC, a local startup market researcher, the size of seed funding, or initial fundraising for early stage startup companies, reached 66.8 billion won in 2020, down 41.2% from the previous year. That compares with a 9.9% decline to 3.05 trillion won in overall investment for startups in various stages, from pre-A round funding to Series C round.
By contrast, Series A round funding, which invests in relatively stable startups that have already attracted initial investment, rose 24.9% in 2020 from a year earlier.
“The explosive growth of the Korean startup ecosystem was due to generous seed capital. If such investments dwindle, the country will not see new ideas blossom,” said Choi Sung-jin, executive director of the Korea Startup Forum.
Unicorn startups may become a rarity if government support declines, according to industry officials. GOVERNMENT ROLE
The startup landscape has changed significantly in the past three years, with the focal point of state support moving from companies in the early stages to bigger ones that appear more promising.
According to the Korea Venture Investment Corp., early stage startups, youth-led startups and angel investor funds account for 34%, 32% and 26%, respectively, of the total fund of funds.
Lee Ki-dae, chief operating officer of Startup Alliance Korea, said: “Seed funding, by nature, is hardly available on a private level. That’s why the government’s role is important. The government must ensure that the startup ecosystem continues to thrive.”
Write to Min-Ki Koo and Hanjong Choi at kook@hankyung.com In-Soo Nam edited this article.
