Attracting Investment in Korea: Understanding the Flow of Money
Why is our company unable to attract investment?
Technology entrepreneurs want to meet investors. In most cases, they have developed experimental prototypes but lack funding for mass production. Even if they have created molds for initial production models, they may still lack funds for assembly and painting. Even if they have completed the products and services, they often lack funds for marketing. Most entrepreneurs believe that the problem lies in their technology's inability to attract money. It is almost tragic to think that this happens because the evaluators at venture capital (VC) firms fail to understand the innovative nature of their technology. However, is that really the case?
Understanding the flow of money makes it easier to attract investment (or it may even lead to a state of not needing to seek investment anymore). Through the patent firm BLT and the Company B angel fund, we have invested in nearly 50 startups and cashed out (through sales or exits) stakes in over 10 companies. What I felt during this process was that "most technology entrepreneurs do not understand the flow of money." Money does not automatically flow toward "good technology." Money follows the ears of the people who handle it. While it is difficult to cover the entire flow of money in this article, I will provide a brief introduction to the investment funds applicable to technology startups and try to explain the flow of money in a simple manner so that technology entrepreneurs can understand it better.
To understand the flow of Korean startup investment money, it is essential to first understand the "master fund" that is invested in startups and venture companies. In South Korea, master funds are big policy funds which are created by the Korean government. It is called ‘mother fund’ in Korea. Venture capital firms (VCs) make and promote private venture investment funds and ‘master funds’ join those funds to make them bigger. The most well-known master fund is operated by the Korea Venture Investment Corporation (KVIC), but there are also "master fund-level" funds that entrust the operation to VCs with a base capital of several hundred billion won. The selection of fund managers, investment decision-making processes, and fund management methods for master funds are generally similar.
The flow of Korean startup investment money starts with the master fund. Of course, before that, the taxes we pay are distributed to various government ministries, and the investment departments of each ministry coordinate the budget allocations for the master funds. When the master fund is established, the fund management agency (like KVIC) that operates the master fund divides it into sub-funds called "feeder funds." In Korea, it's called ‘son funds’ or ‘venture funds.’ At this time, the feeder funds are significantly influenced by the characteristics of each investing institution (referred to as "government ministries").
Agriculture and food master funds receive investments of hundreds of billions of won (varies each year) from the Ministry for Food, Agriculture, Forestry and Fisheries. Therefore, investments that can gain recognition from the public for the presence of the Ministry for Food, Agriculture, Forestry and Fisheries are made. Venture investment companies (VCs) that have achieved remarkable results in the agriculture and food sector are preferentially selected as fund managers. Master funds that include investments from the Korean Intellectual Property Office are often entrusted to VCs that have successfully invested in startups with high growth potential based on intellectual property (patent rights, trademark rights, design rights, etc.) or VCs that present new investment models in the IP field.
The master fund operated by Korea Venture Investment Corporation (KVIC) plays a crucial role in venture investment in Korea. It currently invests in nine types of sub-funds according to policy objectives, such as:
Smart Korea
Scale-up
Regional New Deal
Youth Entrepreneurship
M&A
Materials/Parts/Equipment.
In 2018, the sub-funds (i.e., VC funds) were selected and divided into 13 sectors. Investment fields can change or disappear according to the trends of the era and technological advancements. There is no need to change the direction of your business to match the type of government-run funds, but if you at least refer to the national investment direction and proceed with the business, the possibility of receiving investment will increase.
As mentioned earlier, the master fund is merely the "bridge or starting point" and not the "main source." The received master fund (e.g., 1 trillion won) is divided into sub-funds (e.g., 50 to 200 billion won), which are then operated by VCs. In this process, participation from companies or private funds (referred to as the "main source") is necessary. Various entities such as banks, mid-sized companies, large companies, and foreign capital fall into the realm of private capital. In the investment industry, they are referred to as Limited Partners (LPs). LPs play a crucial role in the formation of sub-funds and sometimes participate in the investment review committees of the feeder funds(commonly referred to as "venture funds'') which are operated by VCs. There are cases where large companies, subsidiaries, and mid-sized companies participate as LPs to find startups in their respective fields, as well as many financial institutions that invest in venture funds that show good profitability (venture funds typically have an average return rate of 5% to 20%). Thus, VC firms operating these jointly formed sub-funds (venture funds) employ excellent screening personnel to discover startups, small and medium-sized enterprises, and venture companies.
VCs operate venture funds for 5 to 10 years, they are interested in discovering companies that align with their fund’s objectives. Here, an important point to note is that if a startup with semiconductor technology approaches a VC who is operating a fund labeled as "Content Venture Fund" it is unlikely to receive much attention. Of course, venture fund operations must invest in companies in the relevant field due to the purpose of "national industrial development" since the master fund acts as the bridge. However, because the fund's goal is to generate profits for the investors, it is possible to invest in companies outside the designated scope to some extent.
Nevertheless, when conducting investment reviews, the screening personnel generally prefer startups that fall within the purpose scope of the established venture fund, and they politely apologize to the CEOs of companies outside the purpose scope, saying, "We are not familiar with that field." (Venture capital managers have standardized phrases they use when rejecting investments, and you can find related posts by searching online.)
Therefore, it is truly unfortunate to waste time and experience the pain of investment rejection by following the "flow of money" that does not align with the "flow of your business." No matter how famous the venture capital firm is, no matter how close you are to the CEO of the venture capital firm, and no matter how well-connected you are with the government officials, if the "flow of your business idea" does not align with the "flow of money," it will not be easy to secure investment. Therefore, let's not seek short-term gains and stay true to the principles.
Recently, there has been a significant increase in the availability of information about the operation and investment destinations of such institutional funds and venture funds. Data analyzing the investment preferences of venture capital firms' fund managers is also quite detailed. Similar to CrunchBase, in South Korea, platforms like "TheVC.kr" provide detailed information on investment associations and venture capital firms, including which startups they invest in. Based on this information, estimate which fund manager of which venture capital firm may have an interest in your company and business idea. Then, try to meet that fund manager and seek their advice.
The "flow of money" will come towards your company.