Corporate venture capital -- or CVC -- has emerged as a key source of strategic investment.
Unlike venture capital, which has the main aim of reaping returns, CVC is created within large companies to not only invest, but to pursue strategic collaboration with external startups that can be beneficial.
There are many examples of companies running CVC, such as Google Ventures, Intel Capital and GE Ventures, to name a few.
Globally, CVC accounted for more than 20 percent of all venture round financing as of end-September, according to data compiled by KPMG. The figure soars to over 35 percent in Asia.
But South Korea is unique in bucking this trend, primarily because the Seoul government has put a lid on CVC by tagging them as financial companies.
A venture startup chief executive delivers a speech to South Korean President Moon Jae-in about Korea's recent venture business policies at D-Camp in Seoul, March 6.
Conglomerates categorized as nonfinancial holding companies -- a definition referring to most large business groups in Korea -- are not permitted to run financial subsidiaries due to strict laws that ban manufacturers from owning financial institutions, and vice versa.
The regulations were created to prevent companies from abusing financial subsidiaries as their “private vaults,” which has happened frequently in the past.
Not a great alternative for CVC
“Exempting CVC (from financial regulations) would be controversial as it favors conglomerates,” chief of the Fair Trade Commission Kim Sang-jo said at a ministerial meeting in August.
As an alternative, the government is trying to nurture conglomerate-affiliated special holding companies -- dubbed “venture holding companies” -- which it hopes will boost investment into startups.
On March 6, Seoul said it would lower the entry barrier for creating a nonbanking special holding company dedicated to investing in SMEs by pulling down the minimum asset threshold to 30 billion won ($26 million) from 500 billion won starting this April. Beginning in December, investors will also be given tax exemptions for dividends and capital gains gained from exiting startups.
However, there are limits to this approach. For instance, each deal made by the holding company must involve an acquisition of at least a 20 percent stake in venture firms. It also cannot create and operate funds as a general partner to invest in startups, leaving direct investment as the only option.
Finance Minister Hong Nam-ki (third from left), along with chief financial regulator Choi Jong-ku (second from left) and SME Minister Hong Jong-hak (fourth from left), speaks at a press conference about Korea's venture business policies in Seoul on March 6.
Given the restrictions, Korea has yet to see such special holding companies, though related laws took effect in 2001.
“(The government’s) evasive attitude will result in a segmentation of the economy and eventually render it rigid,” Lee Tae-kyu, an analyst at Korea Economic Research Institute, told The Investor.
A matter of survival
Conglomerates argue that access to CVC is a matter of survival.
They call for CVC to be excluded from the law separating financial capital and manufacturing capital because otherwise, CVC entities, such as Lotte Accelerator and Intervest, cannot function properly.
Lotte Accelerator is owned by Korean-Japanese retail giant Lotte, while Intervest is held by SK Discovery. Lotte and SK Discovery employed the holding company structure in November and December 2017, respectively.
Within two years of implementing a holding company structure, business groups are required to sell off shares in financial subsidiaries. CVC entities are also subject to the antitrust rule.
Representatives of Lotte Accelerator and Intervest told The Investor they have yet to discuss how to address a possible selloff.
CVC firms under the umbrella of a conglomerate without a holding company, like Samsung Venture Investment, Kakao Ventures and Hanwha Dreamplus, also face hurdles.
Under the Monopoly Regulation and Fair Trade Act, startups are banned from receiving additional investments from CVC firms once the startups became a CVC affiliate after receiving an investment. This means CVC firms cannot really keep track of startups’ growth.
Experts also point out that CVC would help counter the lack of cash and leverage for conglomerates seeking to invest in startups.
“With CVC, business groups would become capable of making bigger and more proactive investment,” Startup Alliance Managing Director Lim Jung-wook told The Investor.
By Son Ji-hyoung (firstname.lastname@example.org)