Venturing Beyond to South Korea

Eddie Lee
Aug 30, 2018 · 6 min read

At White Star Capital, we find enterprises that scale globally very compelling, and believe that domestic entrepreneurial hubs act as an important platform for entrepreneurs with global ambitions. South Korean startups’ focus on commerce and cutting-edge innovation has impressed us, and so we’ll share our thoughts on the country throughout the rest of this post.

But first, here’s a little bit about our team. White Star Capital is an early stage technology venture capital firm investing on both sides of the Atlantic (and soon across the Pacific). We have offices in New York, London, Montreal, Paris, and Tokyo. Collectively, we have experience as entrepreneurs, finance professionals, and startup operators. But more importantly, we’re a deeply nomadic group — every one of us is bilingual (at least), and call many places home. It’s only natural that we take such a bullish stance on entrepreneurs with global ambitions.

So back to why Korea is so exciting to us. White Star Capital assesses new markets through three core factors.

Korea makes a compelling case in all three areas. And here’s why.

1. Strong Growth Indicators of Korea’s Economy and Technology Infrastructure

South Korea’s total GDP is listed 14th globally by the World Bank, and comes in 5th among Asian countries. The country’s GDP Per Capita (under Purchasing Power Parity) really stands out as a strong growth indicator of the overall economy.

Even more impressive is Korea’s talent pool in tech. With high school graduation rate in the top 5 among OECD countries, roughly 1 out of every 3 Koreans graduate college with a STEM (Science, Technology, Engineering, Math) degree. Many continue their higher education at competitive institutions in the US, where roughly 1 in 10 international PhDs are Korean. Tapping into this massive talent funnel, Korea has consistently prioritized R&D in both public and private sectors, only behind Israel in Gross Domestic Expenditure on R&D. KAIST (Korea Advanced Institute of Science and Technology) and POSTECH (Pohang University of Science and Technology) are two notable universities that lead research in fields such as robotics and AI.

Technology adoption has always been a key driver of the Korean economy. In a strong domestic market with homogenous demographic makeup, Korea’s high population density further propels adoption of new products and services. Korea enjoys the world’s fastest broadband internet speed and highest smartphone penetration rate. Not surprisingly, Korea’s Internet contribution to GDP is projected to grow by more than 10% according to McKinsey Global Institute.

Harnessing these factors, the Korean government is eager to foster entrepreneurship as a new driver of growth. Through the Ministry of SMEs and Startups (MSS), and its nine affiliated institutions, $33B has been pledged to build what Korea is calling the Creative Economy. In addition, to foster global competitiveness, Korean agencies have started inviting foreign VCs into Seoul as part of their plan.

2. Momentum Behind Korea’s Venture Landscape

Since 2013, the number of deals and funding amount per year grew by 14X and 35X respectively. And in 2014, record $100M+ mega rounds started taking place for the first time, with local unicorns such as Coupang leading the charge.

Even when excluding the five mega deal outliers, we observe a smooth trend with remarkable growth. From 2013 to 2017, annual funding amount grew at a CAGR of 143%. During the same time, number of deals also grew at a three-digit CAGR of 100.1%.

We also see a promising distribution of capital among deal stages. Without the outlier mega deals, Seed and Early stage deals account for more than 75% of all funding amount every year, illustrating a healthy pipeline of young startups that will participate in more mature financing rounds in the near future.

Surging deal volume in Korea demonstrates increased VC activity that now surpasses Tokyo. However, differences in total funding amount compared to other hubs still show ample growth opportunities ahead for Seoul. In fact, New York, London, and Paris had 18X, 9X, 3X total funding relative to Korea respectively. The deal volume difference, on the other hand, was 2.7X, 2.6X, and 1.1X for the same three cities.

IPOs, M&A, and secondaries make up a robust exit pipeline for VC-backed enterprises in Korea. Growing appetite from Korean investment banks (i.e. principal businesses) and private equity firms for pre-IPO buyouts build a strong secondary market. And small cap exchanges such as KOSDAQ (Korea Securities Dealers Automated Quotation) and KONEX (Korea New Exchange) enable companies with less than $100M in revenue to be listed. From an acquisition standpoint, the top five acquirers of Korean startups are tech behemoths themselves. And more than a third of all startup acquisition since 2013 were completed by the same five companies.

3. A Global Outlook

With a healthy, growing venture capital ecosystem in Korea, entrepreneurs and local investors alike are eager to propel Korean startups beyond their domestic market.

In the past five years, 88% of all VC deals in Korea involved only Korean investors. But these were primarily early stage rounds for startups focusing on the Korean market, where average deal size was $3M. More mature startups started seeking larger checks from foreign investors who could also facilitate crucial business development partnerships abroad. In the remaining 12% of VC deals where foreign investors participated, the average deal size was $33M.

Founder attitude towards global expansion has also changed drastically throughout the years. A survey of 116 Korean startup founders shows that 70% of them consider expanding business abroad. At White Star Capital, we specifically see opportunities to help founders not only understand the markets they currently target, but also explore beyond these regions (i.e. non-Valley hubs in North America and Europe).

Building on these two factors, we anticipate globally competitive Korean startups to emerge from sectors where Korea punches above its weight. As an illustrative example, the domestic market for gaming has consistently been strong in Korea. PUBG Corporation, a Korean game developer, rose to immediate stardom after launching its signature title in 2017. It went on to generate $700M+ in revenue for the year, set a global record in concurrent users for all games, and opened offices in 6 key markets abroad.

Venturing Beyond to South Korea

Geographic assessment is an important piece of the puzzle when we develop broad investment theses guiding our activities. Market overviews influence our thinking as much as our vertical deep dives in areas like digitalization of finance, disruption of commerce, and sensors & algorithms.

So what’s next for White Star Capital and South Korea?

Our team consistently searches for early stage companies that show immense potential to grow business outside their domestic market. This strategy is no different in Seoul, as it is in New York, London, Montreal, Paris, and Tokyo. Based on our investing and operating experience in five transatlantic hubs, we will apply theses that help identity winners unique to Korea. Our objective is to discover companies and founders that cannot be found anywhere else in the world, and provide them with the best-in-class resources to unlock their potential at global scale.

If you are interested in our full South Korea research brief, you can download a copy here. To discuss opportunities relevant to this post, please don’t hesitate to reach out to Lylan, Shun, and Eddie.

Venture Beyond

White Star Capital

Eddie Lee

Written by

Eddie Lee

VC @ White Star Capital

Venture Beyond

White Star Capital