In the post-COVID era, could Seoul be the next global startup hotspot?
San Francisco-based research and policy advisory organization Startup Genome’s authoritative 2020 Global Startup Ecosystem Report placed the South Korean capital 20th overall with an ecosystem valued at US$39 billion, nearly four times the global average. It was the first time the city cracked the top 20.
Another major ranking, Israel’s Startupblink, put the city 21st overall in 2020, up nine spots from the previous year.
South Korea is also home to 11 “unicorn” startups worth more than US$1 billion, the fifth largest flock in the world. Most are headquartered in Seoul.
If Seoul’s urban policymakers have their way, the bustling metropolis of 11 million people will soon be challenging the likes of Silicon Valley, New York, Boston, Seattle and Tel Aviv as a venture powerhouse.
The city is investing US$1.7 billion through 2022 to become one of the world’s top five startup hubs, aiming to raise the number of South Korean unicorns to 15 by 2022. The funds are being used to train some 10,000 tech specialists and more than doubling the number of startup spaces in the city to 2,200. City Hall recently announced the creation of a separate nearly US$300 million “scale up” fund to create even more unicorns and potential unicorns.
This is all a very big change for an economy that has, since it industrialized in the 1960s, been overly reliant on a clutch of giant business groups such as Samsung, Hyundai and LG.
Focusing away from the big boys
Seoul’s focus on startups is part and parcel of a larger national effort to boost South Korea’s competitiveness by building a more robust startup sector – in the process breaking free from the country’s traditional economic reliance giant family-run conglomerates, or chaebol.
While the chaebol have been the locomotive for the country’s economy, they have also been criticized for monopolizing resources and abusing their power. And that power is considerable. The only Seoul administration that managed to force significant reform upon the chaebol was that which was in power during the 1997-9 Asian economic crisis. Since then – recognizing the importance of the chaebol as major employers – governments have largely failed to reign them in.
Now, instead of changing the chaebol, Seoul administrations are changing the economy. Just as the chaebol were to a considerable degree a result of government policies in the 1960s and ‘70s, so it is governments – both national and local – that are pushing ahead with a start-up eco-system.
The plan has had a recent boost. The ongoing Covid-19 pandemic underscored the urgency of this transition by highlighting the need for speed and innovation.
In May, South Korean President Moon Jae-in told a gathering of young entrepreneurs:
“Amid this situation, we’ve come to face an economic crisis triggered by Covid-19. A new beginning will be made from this moment on… Before growing into global business unicorns, startups must overcome numerous obstacles such as the ‘Valley of Death’ and the ‘Darwinian Sea.’ WHAT DOES THESE TERMS MEAN? The government will continue to provide support until innovative ideas can be commercialized and stand tall on the world stage.”
In August, the South Korean government laid out plans for a “Korean New Deal,” an initiative that calls for KRW 160 trillion in national, local and private funds to create 1.9 million jobs by 2025. Taking its cue from the Great Depression-era program in the United States, Seoul’s bold plan aims to transform the South Korean economy, in part by digitalizing industries through cutting-edge technologies such as 5G, artificial intelligence and big data.
Ministries are jumping to the bandwagon.
Soon after the initiative was announced, South Korea’s Ministry of Finance announced the creation of a US$339.6 million fund to help promising startups commercialize their technologies. In September, the Ministry of Trade, Industry and Energy pledged to increase the number of energy-related startups to 4,000 by 2025, and in November, the Ministry of Environment pledged to spend more than US$2.2 billion over the next five years cultivating 2,000 “green” startups, including at least one unicorn.
“The chaebol structure was fine 50 years ago because it allowed the government to direct economic development instead of having to deal with a myriad of small and medium sized companies, as in Taiwan. The government dealt with a handful of businessmen who covered all sectors for them,” said Mike Breen, a Seoul-based business consultant and longtime observer of Korea. “But that system is no longer appropriate because the tendency of these large groups is to absorb the best talent, absorb the financing available and even co-opt creativity, so it’s actually very difficult for young entrepreneurs to put their ideas into practice in this market. So the idea is to change the system enough to allow entrepreneurial creativity to flourish.”
Support for Seoul’s startup ecosystem long predates the Korean New Deal, or even the current administration.
The Park Geun-hye administration started the ball rolling with a range of policies to kick-start the creative economy, aiming to “strengthen the role of venture businesses and SMEs” and “mainstream the use of ICTs across the entire economy and in particular to increase ICT adoption within SMEs.”
That initiative won support across party lines, earning praise even from Park’s opponent and eventual successor Moon. It created spaces, platforms and programs throughout the country to systematically support innovative startups. One such program was the Tech Incubator Program for Start-ups (TIPS), a state-led incubator program that appoints successful venture founders as incubators and offers services such as angel investor networking, incubating, mentoring/professional support and matching R&D funds.
When the World Economic Forum named South Korea one of five startup hubs to watch in 2020, it specifically cited TIPS, saying, “As the government takes no equity and provides these funds without any strings attached, start-ups can aim high without having to worry about potential failure – and this has been a game changer, especially when considering the risk averseness of South Korean society.”
After Moon assumed office in 2017, he made several pledges to South Korea’s startup community, including increasing funding, making it cheaper to start up, reducing the punishments for failure, encouraging big companies to help smaller ones, and easing the exit process. And his administration created a separate ministry, the Ministry of SMEs and Startups, to cater to the needs of venture entrepreneurs.
Partly as a result of these top-down efforts, new venture investments recorded an all-time high of nearly US$3.9 billion last year, while the number of newly established corporations surpassed 109,000. South Korea now boasts 11 unicorns – one of the highest numbers in the world – with another 235 potential unicorns in the waiting as of 2019, a nearly five-fold increase from four years earlier.
“Startup ecosystems are government-driven in most Asian countries, whereas they are individual founder or investor-led in Western countries,” said Tae-hoon Lee, director general of the Startup Fostering Division, Seoul Business Agency, a Seoul Metropolitan Government-run organization that supports small and medium-sized businesses in the city. “It takes about 10 to 20 years for these private sector-driven entrepreneurial cultures to be rooted in the ecosystem. Therefore, the government plays a leading role until the fundamentals of the startup ecosystem becomes consolidated.”
“Seoul Metropolitan Government has been positioning itself based on the policy of not intervening in the private sector to boost their activities,” he added. “Instead we will focus on filling in the gaps not covered by the private sector. It is a win-win collaboration.”
Edited version of this article originally run in the Asia Times.