From Chaebols to Start-ups (2/2)
South Korea has a thriving domestic start-up ecosystem. Yet foreign investors continue to shy away from the market.
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Book store in South Korea
This post follows my previous article, From Chaebols to Start-ups (1/2). There, I provided an overview of South Korea’s economic history over the past decades, covering its post-war development up to the present day. As key players in that process, I discussed the creation of family-owned conglomerates known as chaebols and their role in driving Korea’s miracle on the Han River — the country’s transformation from one of the world’s poorest nations into a leading global economy. If you haven’t already, I recommend reading that article first, as it provides important context to better understand this piece.
This time I will cover the second miracle on the Han River, as former South Korean President Park Geun-hye coined it, referring to the idea of promoting start-ups and entrepreneurship as key pillars of Korea’s economic growth.
So, let’s cut to the chase.
Chaebols had been the backbone of South Korea’s economic success under the developmental state1 model implemented in the 1960s. The government saw them as essential for the economy because they created jobs and drove growth. I concluded my last post by arguing that while chaebols have been vital to South Korea’s growth, the country would benefit from expanding the role of startups and SMEs in its economy.
Entrepreneurship benefits an economy in multiple ways: it generates jobs, drives economic growth, and fosters innovation. And while it is often associated with private sector innovation, many of the world’s leading startup hubs were built on strong government involvement. Governments can play a huge role in cultivating entrepreneurship by providing funding, offering education and training, and making it easier to start and run a business by reducing bureaucratic hurdles.
However, the reasons for promoting entrepreneurship can vary from country to country. In the U.S., we’re used to a hands-off approach, with venture capital driving the ecosystem. In Korea and other East Asian countries, many policies are designed to ensure entrepreneurship aligns with national economic goals and priorities. In Korea, policymakers often see entrepreneurship as a way to increase employment rather than to change the world.
Anyways, back to where we were.
Things were going well in Korea, with a strong economy and having achieved industrial success. But all went south (no pun intended) in 1997 when the Asian Financial Crisis (AFC) hit the country and revealed the flaws of relying on a chaebol-dominated economy. South Korea had been growing rapidly and many chaebols had taken too much leverage to expand into different industries. When the AFC spread to South Korea, several of them collapsed under their massive debt. Many people became unemployed, and even highly skilled young professionals had difficulty finding jobs.
The silver lining of the crisis was that it highlighted the need for a more diversified economy. It gave Koreans an opportunity to see entrepreneurship as the path forward.
In the early 2000s, Silicon Valley was already the world’s top tech ecosystem while Korea struggled with a lack of investors willing to fund unproven start-ups. So the Korean government decided to step in.
South Korea’s startup ecosystem is one of the most government-driven in the world. Since the onset of the AFC, policymakers in Korea have launched many initiatives, including accelerators, funds of funds, start-up competitions, etc.
At first, these efforts were short-lived. In 2001, the dot-com bubble burst, leading to the failure of many start-ups and showing how risky these businesses are. The government, who had hoped start-ups would create long-term, stable jobs like chaebols, became more cautious and scaled back its support for new ventures. As a result, the Korean venture industry entered the so-called ice age of ventures, a period with fewer start-ups, less venture funding, and a loss in investor confidence.
But things got busy again in the mid-2010s. Over the past decade, policymakers have once again become more proactive in supporting the start-up ecosystem. And to some extent, this has been successful. As of January 2025, South Korea is home to 33 unicorns, and Seoul alone saw 208 startup exits between 2019 and 2023. According to Startup Genome, Seoul ranks 9th among global startup ecosystems. For the skeptics, you can review the ranking methodology here.
GLOBAL STARTUP ECOSYSTEM RANKING (2020-2024)
Source: Startup Genome
Let that graph sink in for a moment. Seoul outranks every EU ecosystem. It’s ahead of Tokyo and Shanghai. And just four years ago, they were at the bottom of this ranking. This goes to show that they’ve managed to build a thriving ecosystem—at least on paper.
But, there’s always a but. Here’s the issue: I’m based in Singapore, I take care of Asian investments for my fund, and I hardly know any VCs in the region who are actively investing in Korea. That’s because there simply aren’t many foreign investors doing so.
The local market is booming — we’ve seen many success stories, with some notable IPOs (e.g. Coupang going public on the NYSE) and many private companies crossing the $1B valuation mark. However, the ecosystem still struggles in two areas: 1) having local start-ups successfully expand internationally and 2) attracting foreign investors to invest in domestic start-ups. In 2022, only 7% of Korean startups had expanded overseas or had been founded abroad by Korean founders. This same article also notes that from 2020 to 2022, only 7% of investment in Korean startups came from foreign investors, compared to 25% in the UK and 32% in Singapore.
Korea’s startup policies were mainly focused on growing local businesses rather than helping them expand globally. The government has now recognized this gap and is taking steps to fix it. The Startup Korea policy — which includes funding programs, policy reforms, and support for global partnerships — was introduced in 2023 and supports this goal by strengthening ties between Korean startups and international markets. Last year, they introduced new immigration policies to attract foreign entrepreneurs and skilled talent to start businesses in the country. Additionally, the government has been operating a fund of funds since 2013 that backs offshore VCs who invest in Korean companies. They have funded firms like 500 Global, Vertex Ventures, Altara Ventures, Cento Ventures, Antler, Gobi Ventures, SOSV, and many others.
Now, let’s break down the two main challenges.
Challenge 1: Having local start-ups successfully expand internationally
I previously included some data from 2022 that highlights the scale of this problem. However, it looks like this challenge may be on its way to becoming less of an issue.
Even domestic VCs are now prioritizing start-ups with global ambitions. Most of the country’s unicorns have been consumer-focused, leading to established B2C markets that are dominated by a few big players, which creates high barriers for new start-ups.
In the B2B space, startups struggle to work with chaebols, which dominate most major industries — the top five chaebols alone made up 61% of South Korea’s GDP in 2022. Given their massive resources, it’s tough for entrepreneurs to sell them products since they can easily replicate those ideas in-house. On top of that, there are precedents of chaebols acquiring startups at low prices or using their market power to push them out of business. So you don’t want to compete against them.
If you take conglomerates out of the equation, the domestic market isn’t big enough for a startup to reach unicorn status, which is why many choose to go abroad.
In the past, startups would first focus on the domestic market, and only those that succeeded would consider expanding globally. But we’re now seeing a new generation of start-ups that want to go global from day one. Most of them expand into the US, with Japan and SEA being other top destinations. China used to be a key target market, but now many founders see it as too risky due to geopolitical risks and uncertainty about how they will be treated there.
Challenge 2: Attracting foreign investors to invest in domestic start-ups.
I think this will be tougher to solve. There are a few reasons why it’s challenging for non-locals to invest in Korea.
Part of it is straight and simple: there’s a language barrier. Even though people learn English in school, most don’t speak it fluently. Proficiency isn’t as low as in Japan, but it still falls behind most Southeast Asian countries.
Cultural differences can also make it hard for Korean entrepreneurs to align with global investors’ expectations — and vice-versa.
For example, global VCs expect detailed, document-heavy data rooms, while Korean founders are used to sharing just a few well-prepared documents. Our due diligence process also takes much longer, whereas in Korea, a single decision-maker usually makes quicker investment decisions. As a result, founders can get confused when investors keep asking for more information. Another challenge is that funding thresholds can differ by market. In Korea, startups can raise a Series A with a few hundred thousand dollars in annualized revenues, whereas global VCs typically expect at least a few million at that stage.
These differences create misunderstandings and add hurdles to closing deals, as investors are less comfortable investing in unfamiliar circumstances.
Something else to point out. I mentioned earlier how VCs can get funding from the Korean government through the Overseas Fund of Funds. However, it’s important to note that the typical requirement is that the VC must invest an amount equal to what they receive into Korean companies or founders. This creates a challenge because investors are obligated to deploy capital in Korea, even if strong deals aren’t available, which can lead to investing in weaker opportunities just to meet the criteria.
Conclusion
That was quite a lot of information. Summarizing everything I’ve learned from my trip, follow-up conversations, and readings into a post (well, two) has been quite a challenge.
My current view is the following: The Korean start-up ecosystem is still in its adolescence, growing fast and with strong potential, but still needs time to mature and develop deep roots. It’s an overlooked ecosystem, which logically presents an opportunity for global investors. This is especially relevant now, as deal flow in Southeast Asia has slowed, and the lack of exits has led many regional VCs to look for new markets to tap into. Since Korea is a developed market, the tech innovation tends to be of a similar quality than in Singapore — more advanced than in other SEA countries, though still not on the same level as the U.S.
That said, there are good reasons for Korea to be overlooked by foreign investors. It’s a difficult market to enter due to language and cultural barriers — similar to Japan — and anyone looking to get involved there would need local expertise and a presence on the ground. The domestic market itself is tough, largely because chaebols dominate most industries, making it hard for startups to compete on fair terms. There’s always the risk that chaebols will copy successful startups or acquire them early to eliminate competition. While government support exists, many policies are designed not just to help startups but also to inject innovation into chaebols. As a result, chaebols remain deeply embedded in Korea’s startup ecosystem, with startups seen by some policymakers as a way to bring fresh ideas into these conglomerates rather than thriving independently.
Where I see the real opportunity, as identified by local VCs, is in backing local entrepreneurs who have global ambitions from the get-go. Korea’s strong education system produces highly skilled, tech-savvy talent. Many top graduates gain experience at the big chaebols, which offer access to some of the best R&D in the globe. Samsung is still the top choice for most graduates, but as we’ve seen in other ecosystems, a few big startup success stories can change that mindset. South Korea now has 33 unicorns, and popular everyday apps like Naver and Kakao have proven that startups can succeed. Gen Zs are already more keen to start their own ventures than previous generations were, so the cultural barrier to entrepreneurship is slowly breaking down.
Investors who choose to bet on the Korean market — and have the bandwidth to set up the right infrastructure to compete domestically — will gain access to a growing pool of innovative startups in a less competitive market. It’s far from an easy move, but as they say, fortune favours the bold.
If you made it here, I hope you enjoyed the read! This was a long one. 😮💨
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MP.
Term used by international political economy scholars to refer to the phenomenon of state-led macroeconomic planning in East Asia in the late 20th century.