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Promising startup businesses find easier access to venture capitalists
As ample liquidity in the market seeks a better rate of returns amid low interest rates, the total amount of money flowing into venture capital funds has been on a constant upward swing lately.
Venture capital funds in the country attracted about 1 trillion won ($883 million) in January this year alone, according to financial industry sources, Monday. The amount for January is seen as a great surprise by many considering the total amount of money injected into the venture capital market during the entire first quarter of last year was only 507 billion won.
Actually, inflows into venture capital funds have been seeing steady growth since early last year with the stock market’s bullish run amid excessive liquidity. The quarterly amount of money invested in venture funds last year stood at 507 billion and 678 billion in the first and second quarters, respectively, followed by 1.68 trillion won in the third quarter and 3.69 trillion won in the fourth quarter. The total amount was 6.56 trillion won, up 54.8 percent from the previous year. The annual sum was also an all-time high.
Despite innate risks and uncertainty in startup businesses, some of the successful IPO cases, such as AI-based image recognition enterprise Alchera’s KOSDAQ debut, have led venture capital-focused investment firms to rake in record-high operating profits in the past year. The lucrative profits shown last year have attracted more liquidity back into venture capital funds since the start of this year.
Currently, altogether 1,076 venture funds are in operation in Korea, about 20 percent of which were newly launched last year. Given that the number of venture funds in the nation only stood at around 600 five years ago, local startups are facing a much wider choice when deciding from whom they will receive investment.
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State-run banks, governments support
Korea Growth Investment Corporation, a state-led funds of funds (FOF) company investing in ventures, will inject an additional 440 billion won within the first half of this year. The Korean government, including the Ministry of SMEs and Startups, also plans to invest a total of 1.5 trillion won in creating venture funds this year.
Market watchers say because venture funds’ rates of return have proven sustainable growth over the past few years, government agencies and state organizations are showing more interest in assisting startups through creating funds of funds (FOF) ― an investment strategy of holding a portfolio of other funds that support local ventures ― instead of simply providing fiscal direct support for them, as FOFs provide much better returns.
Experts also point out that the state-led efforts of creating policy funds backed by commercial financial institutions could be a desirable way of stimulating the nation’s venture capital market, as Korean capital market participants in general still have a strong preference for risk-averse products, although a significant level of improvements in both the amount of investment as well as systemic structures have been made in the area of venture capital.