I’m learning quite a lot since moving to South Korea and working within its startup ecosystem. I’m learning from the feedback and conversations about the ecosystem by thinking through how Koreans are positioning their market pivoting into Asia and beyond.
I had not realized when I was in the States or perhaps in DC that I was getting spoiled. I was spoiled with the sheer market size, scale, and the global scope of the work we could accomplish. Being in America meant you are able to scale to global operations with a very friendly operational and regulatory environment and being at the State Department meant you are going to work with the top talent and industry leaders at the forefront of global issues.
I’m learning though about opportunities here in Korea, and there is a lot to be catalyzed and leveraged here —
Korea as a bedrock for innovation
South Korea’s total GDP is listed 14th globally by the World Bank, and comes in 5th in Asia. In the last fifty years, the manufacturing, electronics, semi-conductor and cars, etc. have spurred the growth of its economy.
Korea is renowned for its rapid economic and social development. Korea’s growth
initially depended on a low wage, educated and disciplined labor force to produce
goods for exports from its predominantly agricultural state possessing few natural
resources. When the state prioritized economic development with a combination of
state planning and entrepreneurship, South Korea had set forth on a trajectory into a
prosperous, industrial society it is today.
A combined effort of state and entrepreneurs later became family-owned conglomerates, capital-intensive in manufacturing, construction, and steel. The conglomerates today including Samsung, POSCO, LG, and others became the foundation for the innovation and IT entrants.
$$$ Let’s talk about cash.
Korean government well understands the importance of investing into R&D for global competitiveness. It led to the incubation and concentration of money and talent in Korea.
South Korea is one of the most business-friendly environments to foster entrepreneurship. There exists government support with incubation, procurement, funding, policies, and incubation expertise with government grants on public-private partnership investments.
Korea Venture Capital Associations projected that venture investment would hit 5 trillion won ($4.28 billion) over the next two years. And in January, the Ministry of Science and ICT set a record-high budget of KRW 24.2 trillion for R&D, upping the 18% from last year’s amount, for “domestic production of core materials and components necessary for R&D projects,” said Choi Do-young, director of the ministry’s R&D Investment Coordination Bureau. He also mentions the R&D projects will increase to about KRW 31 trillion by 2023.”
High amount of government funding is not always rainbows and butterflies. One of the biggest problems is that Korea has not fully embraced the venture capital culture of high risks and high returns.
The onset of investing from government funding has led to investments are thus defined by the social and local needs identified by the government. Venture capital funding also initially developed by the government as policy tools to promote small and medium companies. Therefore, when members of the public hear about failed investment attempts, they can be quick to criticize.
Korea as a testbed for new technologies
Here’s what I know to be true of the American market. America is a melting pot. It has a mix of demographics and consumer tastes and preferences. Tailoring a marketing strategy often entails to zero-nailing down on a specific race/age/and other varying degree of tastes.
Korea’s high population density further propels adoption of new products and services. The growth of ICT infrastructure over the past ten years also significantly expanded South Korea’s capacity for the digital underpinnings of the economy. The foundations laid the backbone for the advent of new technologies, such as mobile, internet, and platform-centered services. Korea enjoys the world’s fastest broadband internet speed and highest smartphone penetration rate. It naturally birthed its massive consumer base highly versatile with new technologies, media content, and digital technologies.
South Korea is also a relatively homogenous society. It is an incredibly communal and collective. People tend to be relatively on top of trends, so it is a wonderful market to test out new products and services for a specific segment of a population.
Korea as a content powerhouse
South Korea’s content market is incredibly strong as the fourth largest mobile gaming market in the world and a country fueled with a K pop craze from an international audience.
The content industry is nonetheless backed with strong government support, as in September of 2019 announced a “content venture investment fund” for the country’s entertainment and content industry via an investment-loan guarantee project worth more than 1 trillion won, an equivalent of $841 million USD. It is aimed to provide loans for developers and producers of content in “K-pop, K-dramas, animation, online games and other digital media contents.”
Korea was the first country to introduce eSports on TV, and the top game players are Korean. With over 35 million smartphone users, the size of the Korean gaming industry exceeds 12 trillion won in total. Korea’s largest game companies, Nexon, Netmarble, and NC Soft generate more than 1 trillion won in sales; and ten leading Korean game companies generate more than 400 billion won in sales each year. The e-Sports market size is also rapidly growing, currently accounting for 13.1 percent of the global industry’s size.
Korean entertainment is a global sensation today, producing massive amounts of content, and the industry is quick to adapt technology to its playground. The K Pop sensation, BTS, continues to expand its global influence after toppling down the 1st spot on the Billboard charts in 2018. SM Entertainment, an entertainment talent agency embraced blockchain technology and released its own coin. The token economy backed with cryptocurrencies would allow artists to network into the ecosystem, allowing fans to invest in the artwork, and engage with the ecosystem.
The competition is hot here.
South Korea is also a very competitive market. Even in the F&B business where I’m starting to develop some market knowledge is that general baseline of product prices like how much a tomato or whatnot costs is well-known. The consumer competitiveness for Korea for F&B restaurants is 1:7 compared to Japan and 1:15 compared to the States.
The upside is that with the competitiveness, you learn how to do things right and well here. You often develop in-house expertise to build things and compete and do well here. To succeed in the Korean market, you learn how to brand yourself, stand out from the heavy competition and to be on top of your stuff. Because the market is small, your reputation will matter.
Should we pivot to Asia?
Due to Korea’s positive regulatory policy, or an environment where new businesses and services must comply with regulations listed in the system, venture builders or investors are increasingly establishing branches in San Francisco or in Singapore, where the investment rules are a lot more flexible. A market under a negative system minimizes pre-regulations but can penalize startups longer down the road. Startups and investors often experience many preconditions for financial companies in launching products and services that is new and unique. Take for example, think about the credit card/financing options in Silicon Valley for napkin-stage startups.
There is an increasing momentum to create a a regulatory “sandbox,” but it is going to take a complete and whole regulatory overhaul. The importance lies in the small wins and victories for types of investment/innovation rules.
It’s hard to say. The Korean market is small and saturated. Perhaps it is prudent for companies with unicorn potential to leverage each country’s competitive advantages – for instance, Korean startups can leverage hardware talent in China to build a model with global competitiveness. They can also register in Singapore and/or Hong Kong, maybe obtain a license or an approval as a launchpad to get into the China market. But this is a big step and also depends on each startup’s journey.
Korean startups will have to prove themselves in the market here domestically. A lot of good startups in Korea have parallel or similar startups in Taiwan, etc. At the same time, it is difficult for a startup to grow beyond the single market or a niche market to become a unicorn, so it makes sense that so many startups say they’d like to enter Asia/global markets.
Where we are and where are heading next.
True, South Korea is well behind United States and China in the number of unicorn companies in other words, unlisted startups valued at over US$1 billion. The United States and China have 201 and 101 unicorns, respectively, while Korea has only nine.
Foreign unicorn companies are showing tremendous growth in such areas as sharing economies, cloud computing, and artificial intelligence, while Korean unicorn companies invest mainly in independent business models such as cosmetics and games that are not subject to regulations and face less conflict with interest groups.
The emergence of various investment mechanisms such as venture capital, accelerator, and micro VCs is noteworthy. The influx of capital and the supply of money to the extent is slowly fixing the problem of information asymmetry and lack of deal sharing in the market.
It is also notable to look over the demographic shift that will happen over the next generation. There will be another billion people moving into the middle class According to Bernard Moon, about three times of 350 billion, the population of the U.S. will be moving toward Asia.
If we’re looking at Asia as a market, it is also important to look at geopolitical/external risks – like to corona virus presently or even Korean-Japan relations. There are many complications to be looking out for, and Asia is a complicated market to be working in.
Softbank Korea rebranded themselves and became Softbank Asia. Though now stationed in Singapore, they are equipped with a dedicated team for China as well.
Korea sits at the center of the Asian market. There are pockets of leadership around the world, but the level of competitiveness, talent, funding, and the trends in Korea are leading Asia. South Korea is an ideal testbed for technologies, as a rare global market with high digital penetration and an equally concentrated tech-friendly consumer base. Korea’s tech-friendly consumer market on mainstream platforms and acquired massive user base offers an opportunity for domestic companies to realize their synergistic potential.