News Risk Management09 Jan 2019

South Korea:Red tape and risk aversion deter startups

09 Jan 2019

Rigid regulations, strong labour unions and a risk-averse culture among South Korea's large family-run conglomerates ('chaebols') have hindered the growth of startups in the country, said a recent Reuters report.

One example of this is in automaker Hyundai’s breakup with Luxi, a car-sharing firm. Hyundai had in 2017 acquired a 12% stake in Luxi for $5m, its first investment in ridesharing. However, it sold its stakes just months later when angry taxi drivers threatened to boycott Hyundai cars over fears of losing their jobs.

The decades-old growth model of Asia’s fourth largest economy has been buttressed by large chaebols like Hyundai and Samsung, but has reached its limit in the face of Chinese competition and rising labour costs.

New government agency for startups

To offset slowing growth in sectors such as autos, ships and chips, President Moon Jae-In’s administration created a new Ministry of SMEs and Startups in 2017 to look at these entities and has increased funding to cultivate new technologies.

However, the government has been slow to remove cumbersome regulations for startups, being wary of disrupting the country’s economic order or upsetting powerful labour unions, reported Reuters.

As a result, South Korea has been surprisingly resistant to disruptive technologies, despite its tech-savvy image. While chaebols like Hyundai and Samsung do invest in startups, they are moving too slowly and may be falling behind Chinese rivals, artificial intelligence startup Fluenty’s co-founder Hwang Sungjae was quoted saying.

Regulations also stymie startup growth

Regulations are another challenge, as South Korean laws would entirely or partially block some 70% of the world’s top 100 startups (by investment size) from bringing their services to the country. The country’s rules also prohibit venture capital funds from investing in financial, real estate, accommodation and restaurant sectors in the country, though the government has proposed a new law to lift those restrictions.

Looking abroad?

Korean conglomerates’ tendency to avoid risk and shun outside partnerships also makes them slower than foreign rivals to adapt to fast changing technologies, Seoul-based Yonsei University professor Rhee Moo-Weon told Reuters.

And as cash-rich conglomerates remain reluctant buyers, only 3% of local startups were able to recoup their investments through trade sales in 2017, according to the Korean Venture Capital Association.

IPOs are one of the few exit options for startups, but it takes about 12 years for South Korean startups to go public compared to the six to seven years of their Silicon Valley counterparts according to McKinsey. Only last year, a ‘Tesla listing rule’ was introduced, which allows loss-making startups to list on its junior, tech-heavy Kosdaq market.

A professor and entrepreneur Seo Seung-woo who moved his self-driving startup to Silicon Valley last year, seemed to sum up the situation--“I say, don’t think about doing a startup in South Korea. Think outside Korea," he told Reuters.

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