The coronavirus pandemic is pressing Korean conglomerates to seek innovation for growth. At the same time, a recent change in the nation’s law, allowing a chaebol with a holding company structure to own a venture capital house, is expected to add vigor to the startup ecosystem here.
Before the revision, corporations turned to venture capital houses to indirectly invest in startups. The revision, however, still highlights the existing role for local venture capital houses -- to intervene in that process, or to serve as mediators in corporate innovation involving startups -- the heads of Korea‘s early-stage venture capital firm Thoughts Become Things said in a recent interview with The Korea Herald.
“Large corporations find it more critical to adapt to changes,” TBT managing partner Lim Jung-wook said. “There are lots of choices ahead of them. And a venture capital manager can help to solve the large corporations’ problem by helping them get to know more about startups.”
As conglomerates offer financing to VC funds as limited partners, the budding VC house can serve as a bridge and give the conglomerates a learning experience in the startup community along with the opportunity to invest in nontraditional assets.
Being alien to the startup ecosystem, however, large companies can face unexpected risks when investing in startups directly, despite deregulations in place, said Lim, who joined TBT to co-head in March 2020.
“Finding and investing in good startups is hard from a non-venture capital’s perspective because, even if a large corporation managed to do so, startups might have second thoughts about receiving funding from it directly,” said the journalist-turned-corporate strategist who formerly led the Korean startup ecosystem advocacy group Startup Alliance.
“Large companies can get a taste of how the venture investment world goes, by partnering with decent venture capital firms to invest indirectly in startups.”
TBT was founded in 2018 by Lee Ram, who currently serves as Lim’s co-managing partner. Lee was a career mobile strategist. She formerly headed Naver’s camera app developer arm Camp Mobile and served as Naver's vice president in charge of mobile strategy.
Lee said its first fund had received a combined commitment of 110 billion won ($92.6 million) from Naver and Amorepacific. The TBT fund backers’ collaboration opportunities with TBT portfolio startups began to materialize.
For example, Amorepacific, a Seoul-based beauty goods maker, began to launch projects with TBT’s numerous portfolio startups, according to Lee. To name a few, Amorepacific started to grow Asiatic pennywort in indoor farming technology startup n.thing’s farming facility to obtain extracts for skin care products, while Amorepacific staff turned to mobile app Shopl to streamline the workflow at stores and used live commerce platform Grip to sell products online.
“Without the relationship as an indirect investor and a target startup, businesses in the two fields would have had little in common, making the collaboration between the two even more of a surprise,” Lee said.
Fostering such relationships, a fund manager, a large corporation and a startup can bring the relationship to the next level and lay the groundwork for venture capital-led corporate open innovation, coupled with recent deregulation surrounding the establishment of corporate venture capital arms.
“Large corporations will invest in venture capital funds as a backer to finance the startups indirectly. Subsequently, the corporations will be capable of directly investing in the startup in the later funding round,” Lee said. “Therefore, the corporations will ultimately be able to secure a new growth engine from startups they’ve invested in or acquired.”
“Venture capital fund managers will seek to work with fund backers to create new chances in the next funding round for a target startup, especially if the backer of the fund is a strategic investor like a large corporation,” Lim said.
The question now is whether demand for VC-led corporate innovation remains solid in the time of COVID-19. The answer may lie in the VC’s resilience to the COVID-19 situation, according to TBT’s top officials.
Lim said the second fund, whose commitment could amount to as much as 39 billion won, could make a difference by paying close attention to startups that can survive COVID-19 and thrive by innovating in people’s lifestyles or the way people do business -- for example, by adopting digital health care solutions or fresh manufacturing infrastructure. The new fund in the making has so far received commitments from corporations such as SK Broadband and Shinhan Bank. TBT won commitments as an external partner of Korea Venture Investment Corp., a state-led fund-of-funds institution.
“The coronavirus fallout is triggering a seismic shift across all industries,” Lim said. “What the second fund is dedicated to is to find a startup that grasps a new opportunity amid the unraveling shift.”
The resilience was also seen in TBT’s existing portfolio companies. One of the companies to thrive in this way was S-Lab, a cold chain logistics firm dedicated to cross-border fresh delivery targeting Southeast Asia. As COVID-19 effectively ground its cross-border delivery service to a halt, S-Lab turned to a fresh business model of leasing its boxes used for cold chain packaging solutions to domestic retailers, riding on domestic demand for e-commerce.
On the other hand, some portfolio startups associated with online platforms may get windfalls. These include ST Unitas, an educational technology startup that provides online classes for exam preparation; Rael, a maker of sanitary pads that sells its products on global e-commerce platforms such as Amazon; and the Sandbox Network, a multichannel network firm dedicated to YouTuber management.
Lee said it is the role of a venture capital firm to help entrepreneurs of portfolio startups to find the right direction through communication.
“We tend to ask questions instead of giving advice,” Lee said. “We want to be an entrepreneur’s discussion partner.”
By Son Ji-hyoung (firstname.lastname@example.org