Things are slowing down as the novel coronavirus appears to become a pandemic. In Korea, big and small meetings -- even demo day events -- are being canceled and people are afraid of human contact. Even though IMF Managing Director Kristalina Geogieva said it is too soon to gauge the economic impact of the virus outbreak, it is likely that the fatal disease will take a toll on the global economy.
It is hard to predict how this epidemic situation will impact global startups.
While hoping the fear wanes soon, we can always look back at what the last year was like.
1. Quantitative growth
Would it be an exaggeration to say 2019 was a rollercoaster ride for the startup ecosystem? Probably not even just based on figures. The number of unicorns almost doubled; total venture investments rose more than 20 percent; one of the most prominent Korean startups, Woowa Brothers was sold to a German company.
First, the number of unicorns, or those startups valued at more than $1 billion. Less than two years ago, we were asking ourselves why there were only two unicorns in the country. Such anxiety was short-lived.
In 2019, Korea witnessed the birth of four additional unicorns - online fashion platform Musina, beauty startups L&P Cosmetic and GPClub and first biotech unicorn Aprogen. With 11 unicorns, South Korea ranks sixth, just behind Germany with 12 unicorns. It’s a startling number considering there were only two unicorns until mid-2018.
Part of the reason comes down to abundant funds flowing into the startup scene. According to the Ministry of SMEs and Startup, total investments in startups exceeded 4 trillion won ($3.35 billion) in 2019, compared to 3.42 trillion won in 2018.
One notable investor said that money is not an issue for startups anymore, but execution is. Some believe that the inflow of monetary support has led to a bubble, but whatever the true reason is, Korea is now proud to say that the country is sixth-largest in terms of the number of unicorns.
And people here are satisfied yet.
To foster more unicorns, the government this month announced a series of measures called the K-Unicorn Project to support 1,000 potential unicorn candidates.
Future unicorns include social media firm Hyperconnect, prop tech startup Zikbang, car-sharing platform Socar, education technology firm ST Unitas, cloud service provider Bespin Global and e-commerce platform Market Kurly.
2. More money, more players
When we talk about abundant funds, how much money are we talking about? New venture investments reached 3.52 trillion won ($2.9 billion) in the first 10 months this year, 20 percent more than the same period last year. By the end of this year, the total number reached 4 trillion won.
This is partly backed by government efforts. In March, the government pledged to invest 5 trillion won in new venture investments and create 20 unicorns by 2020. It wants to display its endeavors by hosting large-scale startup conferences.
It’s not just the government. The number of accelerators, coworking space firms, corporate VCs and domestic and overseas VCs all have increased this year. According to the Korea Venture Capital Association, there are more than #15*# VCs, up from 138 in 2018.
South Korea’s chaebols, long considered as an important pillar of the country’s economic growth, are making efforts to cooperate with startups.
Korean family-owned conglomerates, locally called chaebol, have been drivers of Korea’s exports for over the past decades. While their performance in the world markets has been rivaled by global juggernauts, chaebol also have a reputation of stiffness in work culture. Going through succession plans and facing public demand for reform. They are inevitably turning to the startup ecosystem at home and abroad and spending big on open innovation, through venture fund investment, mergers and acquisitions of startups, among others.
Hurdles remain to be seen, including antitrust regulations that recognize the conglomerates’ portfolio startup as a group affiliate.
Below are summaries of notable family-led conglomerates’ move into the startup ecosystem at home and abroad.
In November, US cosmetic company Estee Lauder agreed to buy the two-thirds of Have & Be, the South Korean owner of Dr. Jart+ cosmetics.
Earlier this year UK private equity firm CVC Capital Partners acquired Yeogi Eottae for 400 billion won and Cognex, a leading U.S. manufacturer of machine vision systems, bought Sualab for 230 billion won.
There were several notable deals but M&As still accounted for 2.5 percent of the total exits in 2018, compared with the US’ 44.5 percent. The government has promised to stimulate M&A deals
4. Taxi operators vs. Tada
Tada van (left) and a taxi
“Over my dead body!” This was the reaction of taxi drivers when carpooling services were introduced late in 2018 by Kakao Mobility, the mobility arm of internet giant Kakao. Four taxi drivers have attempted self-immolation until now and three private taxi drivers passed away.
Kakao indefinitely put off its carpooling service but TADA, a van-hailing service that uses a legal loophole, continued operations and the company has become the enemy No. 1 in the eyes of cab drivers. Trying to resolve the conflict, the government set up a reconciliation committee
The dispute between mobility companies and the taxi industry has been one of the biggest issues in South Korea’s startup scene and is still on-going as prosecutors indicted Tada executives and a proposed bill is likely to ban Tada-like service from the operation.
At the center of the controversy is the law and it continues to be the case after a new bill passes.
In Korea, commercial use of passenger cars are prohibited except during rush hour.
Tada uses Passenger Transport Law which exempts 11-seats from commercial use ban.
A lawmaker proposed a new bill that makes services like Tada illegal. Tada opposes the proposed bill and has called for discussions.
Some argued that this puts South Korea on the backseat as the country lags behind other countries less reluctant to adopt innovative business models. Some others said each country has its own pace and the mobility companies should slow down as many of taxi drivers’ livelihood is at stake.
5. Global expansion: A dream come true?
South Korea is no China. Chinese companies don’t particularly need to go abroad as their local market is huge enough. South Korea is no Israel either. Israel is small and surrounded by unfriendly neighbors. It has to bet on overseas markets to survive and thrive.
South Korea has a market size good enough for startups but not enough for companies that want to scale up. Lacking a global mindset was one of the problems experts pointed out for local startups, but these days there are more and more founders who want global success.
Woowa Brothers, the operator of the No. 1 delivery app Baedal Minjok, bought a Vietnamese delivery startup, to make a foray into the fast-growing market. Yanolja, a unicorn that rules the budget hotel booking industry in South Korea, has been expanding its presence in Asia by acquiring local companies.
Yanolja bought eZee Technosys, an Indian hospitality software developer, in September and became the largest shareholder of Zen Rooms in October.
And there are startup founders who target global markets from the get-go.
Seoul Robotics, a startup that produces LIDAR-based solutions for autonomous cars, is one focused on the global markets from day one.
“The domestic market for LIDAR-based self-driving technology was nearly nonexistent when the company started in 2017. Even big domestic auto companies did not want to work with a fledgling startup like us although we have competitive edge in the LIDAR vision technology,” said Lee Hab-bin, head of the startup.
Mobility platform operator Movv, mobile marketing platform Qraved, and accommodation booking company Yanolja are running their respective services in Southeast Asian markets.
Movv offers a chauffeur service for tourists, both South Korean and non-South Koreans, in Thailand and Taiwan, while Qraved, founded in 2013, runs marketing services -- such as restaurant recommendation and leisure activity reservation in Indonesia.
Some startups, like Himedi and Hyperconnect, are unique companies in South Korea in that they target the Middle East, a relatively untapped market for local companies. Himedi offers a concierge service for patients with serious illnesses from the Middle East and their family members. From airport pickup to accommodation booking, the company helps clear nearly all the hurdles that patients can face during their visit to Seoul for treatment.
Azar, a company that offers video chat services in 230 nations, earns more than 90 percent of its sales overseas. Its video chat platform Hyperconnect is extremely popular in the Middle East, outpacing other social media services like Facebook Messenger and Line.
It posted 104.5 billion won ($8.9 million) in revenue and operating profit of 17.2 billion won. Its investors include SoftBank Ventures, and Altos Ventures.
Most of the companies cited above as well as many other South Korean startups said they believe there is a much bigger opportunity in global markets than in the nation.
6. The emergence of Artificial Intelligence
“The first is AI, the second is also AI and the third is AI as well.”
This was the answer of one of the world’s most prolific investors, SoftBank CEO Masayoshi Son, when asked about South Korea’s next focus area during a meeting with President Moon Jae-in in July 2019. He forecast AI will become the most significant revolution in human history and disrupt every industry.
Also having recognized the importance of AI technology, the South Korean government and private companies have been making all-out efforts not to lag behind in the race for AI supremacy.
Participating in a developer event held by web portal giant Naver in October, President Moon promised that the government would set aside a budget of 1.7 trillion won ($1.4 billion) to nurture industries linked to data, network and AI in 2020, up 50 percent from this year. The government has also vowed to eliminate regulatory hurdles that hamper the growth of the cutting-edge industries. For example, it plans to alter the regulation that prevents AI professors from working at private business entities on the side.
While the number of AI-related startups skyrocketed from 50 in 2017 to 500 in the first half of 2019, tech giants such as Samsung Electronics, LG Electronics, Naver and Kakao are moving fast to occupy the predominant position. Since acquiring the Xerox Research Center Europe in 2017, one of the top-tier AI research institutes focused on machine learning, computer vision and natural language processing, Naver has been running projects involving autonomous vehicles, deep learning, intelligent 3D mapping, and robotics. Samsung, on the other hand, plans to have 1,000 experts in different fields of AI by next year. It has so far taken over AI companies, like Viv Labs, and Kngine,
On the startup side, firms are having difficulty in finding seasoned AI developers as established companies often attract them like magnets. As a result, there are few South Korean AI startups that are recognized worldwide. Not a single South Korean company made it to the list of 100 greatest AI companies around the world, selected by CB Insights in February this year.
It is often said that relatively lower salaries and smaller domestic market size are some of the reasons why South Korea has not seen local AI-based startup unicorns yet.
In a recent survey published by Korea Economic Research Institute, a private think tank, 30 AI experts who participated in the survey said South Korea ranked the lowest among three nations, including China, and Japan, in terms of AI competitiveness. The shortage of investments, talent, and education systems were pointed out as the main reasons.
There are, however, some emerging local AI startups that are worth paying attention to, like medical AI solution startups Lunit and Vuno. Vuno build solutions that assess bone age and detects abnormalities in chest radiographs.
Anthony Paek, co-founder and executive chairman of Lunit, said he believes deep-learning technology, which already outperforms human doctors in detecting cancer, will take medicine to the next level in the coming years. Since its foundation in 2014, the medical AI solutions firm has attracted some 30 billion won ($25.6 million) of investment. The achievement was made despite a slew of regulations and a series of clinical trials needed to be completed before commercialization in the medical field, a problem that deters potential investors.
Of Lunit’s 100 employees, some 39 are AI researchers who have presented at least one published report at a top-tier AI conference.
Therefore, the company suffered financial difficulty as it was not able to sell its AI solution that assesses bone age. With the government’s support to set up licensing rules, however, its solution was launched in May 2018. It also raised 11.7 billion won in Series B funding in October 2018, and it plans to go public. It recently rolled out an AI marketing app which enables businesses to better know their customers and increase customer loyalty.
7. The regulatory sandbox, one year later
South Korea may be one of the world’s most tech-savvy countries, but it is notorious for regulatory hurdles that can stunt the growth of newly sprouting technologies.
Laden with tough regulations and fuzzy ways of interpreting laws, Korea has for years tolerated barriers that forced companies to shut down new services -- in some cases, even after offering them for years.
Now, the nation is looking to buck the trend as technology innovation has become an overriding priority. In 2019, in an effort to foster innovation and promote the growth of new services to ensure consumers would have an array of choices, Korea allowed nearly 100 new technologies to go through a state-led approval process known as a “regulatory sandbox,” allowing tech developers to steer clear of legal uncertainties.
It was a bold step forward in a nation with a “positive” legal system -- that is, one that generally only permits what is clearly spelled out as permissible by law. The government effort is aimed at overcoming barriers created by the system.
The “regulatory sandbox” came into effect in 2019, and the parliament passed a separate law for peer-to-peer lenders and their investors.
Under the revision of the Special Act on Promotion of ICT and Vitalization of Convergence, which went into effect in January 2019, tech developers may apply for regulatory sandbox approval to see whether there are any legal hurdles to the launch of a new and disruptive service. The hurdle could either be the absence of a law, obscurity in the interpretation of a law, or the existence of a law that prohibits the service.
Four authorities -- the Ministry of Science and ICT, the Ministry of Trade, Industry and Energy, the Financial Services Commission and the Ministry of SMEs and Startups -- will interpret the law to identify any legal barriers. If there is one, the government will notify the developer within 30 working days.
The government is obliged to clarify any fuzziness in the legal framework within four years, if it turns out that relevant laws are nonexistent or obscure.
After seven committee meetings in 2019, 95 new and innovative technologies had gained regulatory sandbox approval as of early December. Of the total, 55 technologies received government clearance, meaning they were deemed permissible under existing laws. The rest gained conditional approval, meaning new laws must be enacted within four years of that date to address any issues they raise.
Not all the proposed technologies got a chance to test the waters. Some, such as a blockchain-powered remittance solution by startup Moin, were denied approval under the regulatory sandbox system. In other words, the committee decided not to put those technologies on the table.
Here are a few notable examples of sandbox approval in Korea. Beneficiaries were not limited to startups but also included large enterprises.