In this blog post, we’ll examine why South Korea produces fewer unicorn companies than the U.S. and China, and explore how the startup ecosystem, investment environment, regulatory issues, and scale-up strategies impact corporate growth.
Unicorn Companies: Are There Any in South Korea?
When reading economic news, one often comes across statements such as, “Half of the world’s unicorns are U.S. companies,” “In China, a new unicorn emerges every 3.5 days, and the country is expected to soon catch up to the U.S. high-tech IT industry,” or “South Korea’s environment is hostile to the emergence of unicorns due to heavy regulations.” However, the term “unicorn” is somewhat unfamiliar to many people.
A unicorn is originally a mythical creature from Western folklore—a horse-like animal with a single horn on its forehead. So why does this mythical creature appear in economic news, particularly in articles covering the IT industry and startups? In this chapter, we’ll examine the world’s leading startups—known as “unicorns”—and how they are rapidly transforming the existing economic system.
What Is a “Unicorn”?
Recently, there has been a succession of analyses suggesting that China’s high-tech sector is on the verge of catching up with the United States. Some even argue that the U.S. initiated a trade war to curb the growth of China’s high-tech industry. A term that frequently appears in media reports on this topic is “unicorn.”
So, let’s first find out which companies are called “unicorns.” In the media and investment industry, the term “unicorn” refers to a startup that has not yet gone public but has a valuation exceeding $1 billion. $1 billion is well over 1 trillion won in Korean currency.
A startup refers to a newly established company founded not long ago based on technological capabilities. Since technological prowess is so important, these companies often operate primarily in the IT sector. If you think of Google or Facebook in their early days, just after they were founded, it’s easy to grasp the image of a startup.
So how can a company that has been in business for only a few years and isn’t publicly traded reach a valuation of over 1 trillion won? It’s undoubtedly a very rare occurrence. That’s why American venture capitalist Aileen Lee likened these companies to the mythical creature, the unicorn, which seems to exist only in imagination. This term was first used in 2013, so it’s not as old as one might think.
However, what once seemed possible only in the imagination has now become a reality, shaking up the global economy and industries. According to CB Insights, a U.S.-based research firm specializing in startups, there were 305 unicorn companies worldwide as of January 2019. In January 2014, when the term “unicorn” had just emerged, there were only 45 such companies, meaning the number has increased nearly sevenfold in about five years. Just looking at this rapid growth, it’s clear how much of an impact startups—armed with new technologies and ideas—are having on the global economy and industries.
So where is the largest unicorn located? Many people would likely think of developed countries like the United States—home to Silicon Valley—or the United Kingdom and Germany. However, contrary to expectations, the world’s largest decacorn (a startup valued at over $10 billion) is in China. It is China’s ByteDance, the company that operates the video-sharing app “TikTok.”
In November 2018, ByteDance secured $3 billion (approximately 3.35 trillion won) in investment from investors including Japan’s SoftBank. As a result, its valuation reached $75 billion (approximately 84.37 trillion won), surpassing Uber—which had previously been the world’s largest unicorn—to take the top spot. What is even more remarkable is that ByteDance’s valuation stood at just $11 billion as recently as April 2018. In just half a year, it grew nearly sevenfold.
TikTok is the driving force behind ByteDance’s explosive growth. Users can upload 15-second videos recorded on their smartphones, as well as watch and share videos uploaded by other users. As of November 2018, the total number of users reached approximately 500 million, of whom 400 million were Chinese. The remaining 100 million users are from countries around the world, including the United States, Japan, South Korea, and Southeast Asia. Notably, a significant portion of the user base consists of young people in their teens and twenties.
It is by no means a coincidence that the world’s largest unicorn company is a Chinese firm. As we will examine in more detail later, China is currently fostering high-tech startups at the fastest pace in the world.
The world’s second-largest unicorn is Uber of the United States, valued at $72 billion. Following closely behind is Didi Chuxing, a ride-sharing company often referred to as the “Chinese Uber,” with a valuation of $56 billion. Fourth place goes to the U.S. accommodation-sharing platform Airbnb ($29.3 billion), and fifth place goes to SpaceX ($21.5 billion), the private space exploration company led by Elon Musk. China’s online food delivery service Meituan-Dianping was also among the top ranks, but it was excluded from the unicorn list after going public on the Hong Kong Stock Exchange in November 2018.
As such, the top ranks of unicorn companies are effectively dominated by U.S. and Chinese firms. The situation is similar when looking at all unicorn companies. Of the 305 unicorns, 150 are U.S. companies and 83 are Chinese companies. The United Kingdom and India tied for third place with 14 companies each, while Germany ranked fifth with seven companies. South Korea follows with six unicorn companies.
Israel and Indonesia tied for seventh place with four companies each, while Switzerland ranked ninth with three. France, Colombia, and South Africa each produced two companies, tying for tenth place. The remaining 15 companies came from 15 different countries, including Japan, Canada, and Australia, with one company each.
At first glance, South Korea’s sixth-place ranking might seem like a decent achievement. However, this is not actually the case. Since the United States and China have an overwhelmingly large number of unicorns, comparing the rankings of the remaining countries holds little significance. In particular, there have been recent concerns that the scale of investment in South Korean startups falls short of that in major Southeast Asian countries such as Indonesia, Malaysia, and Thailand.
Many people are surprised to learn that China has the second-largest number of unicorn companies in the world, trailing only the United States. This is because China is still often perceived merely as the “world’s factory,” producing cheap goods based on low labor costs. However, this is a thing of the past. Backed by active government support, Chinese IT companies are rapidly growing their technological capabilities, revenue, and corporate value.
Why Does South Korea Have So Few Unicorns?
While South Korea ranks sixth globally in terms of the number of unicorn companies, that figure pales in comparison to those of the United States and China. What is the reason for this?
Experts point out that South Korea’s startup ecosystem and the scale of venture capital investment lag behind not only China but also Southeast Asian countries. According to data released by the Korea International Trade Association in August 2018, venture capital investment in ASEAN countries grew at an average annual rate of 53.8% over the past decade. In contrast, investment in South Korean startups during the same period grew by only 2.2% annually on average. So, is it because there are few companies in South Korea with the high growth potential needed to attract investors’ interest?
Startup founders and industry experts point out that South Korea’s overly restrictive regulatory environment is hindering the emergence and growth of companies armed with new ideas. A prime example is the ride-hailing and car-sharing service sector.
Uber, which entered the South Korean market in August 2013, effectively withdrew from the market in just two years. Of course, strong opposition to Uber’s operations from the taxi industry was not a phenomenon unique to South Korea. Backlash from the taxi industry occurred in nearly every country where Uber entered the market. However, what set Korea apart was the response from the central government, local governments, and law enforcement agencies.
The Seoul Metropolitan Council passed the so-called “Uberpaparazzi” ordinance, which offered a reward of up to 1 million won to anyone who reported Uber’s operations. The Seoul Metropolitan Government also began cracking down on and prosecuting Uber. The Ministry of Land, Infrastructure and Transport ruled that Uber’s operations were illegal, and the prosecution even indicted Uber founder Travis Kalanick and Uber’s Korean subsidiary. Following these developments, Uber ultimately decided to withdraw from the Korean market.
It wasn’t simply because Uber was a foreign company that it faced these challenges. Domestic startups that entered the ride-hailing and car-sharing markets also encountered similar difficulties.
Luxi, which operated a carpooling service where vehicle owners transported passengers to their destinations, received 5 billion won in investment from Hyundai Motor Company, a sign of its recognized growth potential. However, in May 2017, it came under investigation on charges of violating the Passenger Transportation Business Act. The situation escalated to the point where approximately 80 drivers who had participated in the carpooling service were booked, ultimately causing the company to lose its momentum for growth.
Another carpooling startup, Poolus, also secured 22 billion won in investment from Naver, Mirae Asset Daewoo, and SK, but the Seoul Metropolitan Government requested a police investigation due to legal regulations prohibiting carpooling outside of rush hour. Ultimately, in June 2018, the founder stepped down as CEO, and 70% of the employees left the company.
While ride-hailing and car-sharing services are often referred to as a “graveyard for startups” in South Korea, the situation is entirely different overseas. Uber, which was valued at around 4 trillion won when it withdrew from the South Korean market in 2015, had reached a valuation of approximately 80 trillion won as of August 2018—a 20-fold increase in just a few years.
China’s Didi Chuxing, ranked third among the world’s unicorns, took control of the Chinese market by acquiring Uber’s Chinese subsidiary in 2016 and subsequently expanded its business into overseas markets such as Mexico, Brazil, and Australia.
Founded in Malaysia in 2012, Grab had expanded into 225 cities across eight Southeast Asian countries as of July 2018, growing into a company valued at $6 billion just six years after its founding. Investments in Grab by South Korean companies—including Hyundai Motor, SK, Naver, and Mirae Asset Daewoo—alone totaled approximately 280 billion won.
In November 2018, Hyundai and Kia announced they would make an additional investment of $250 million—approximately 280 billion won at the exchange rate at the time—in Grab. This marked the largest external investment in Hyundai Motor Group’s history. Including previous investments, the total amount invested by Hyundai Motor Group in Grab reached $270 million, or approximately 310 billion won.
Interestingly, Hyundai Motor had previously invested in Luxi, a domestic carpooling startup. However, facing backlash from the taxi industry and regulatory hurdles, it sold its stake and withdrew less than a year after the investment. Even a large corporation like Hyundai Motor shifted its focus to investing in overseas startups rather than overcoming the domestic regulatory environment.
As a result, a situation is unfolding where a handful of foreign companies are preemptively dominating the ride-hailing and car-sharing services—the “mobility” industry—which is viewed as a future growth engine when combined with autonomous driving technology. Even if these services become a global trend in the future, South Korea risks ceding the market to foreign companies because it has failed to nurture competitive domestic firms. Rather than worrying about the failure of domestic companies to expand overseas, we may find ourselves in a situation where we must worry about the possibility of the domestic market being eroded by foreign companies.
Startup founders and industry experts say that regulations hindering new businesses are not limited to the transportation sector. They point out that regulations are deeply entrenched across various industries, including finance, healthcare, and the shared accommodation sector.
According to a startup report released in July 2017 by the Asan Nanum Foundation and Google Campus Seoul, if the world’s top 100 startups—ranked by investment raised over the past year—were to operate in Korea under the same conditions, 13 of them would be operating illegally. Furthermore, the analysis found that 44 companies would be unable to launch their businesses without modifying parts of their business models. This underscores the extent to which regulations are limiting the growth potential of domestic startups.
The reality facing Korean startups is far from easy. On one hand, they must battle various regulations while pioneering new markets; on the other, they must compete with foreign companies that have entered the domestic market.
For this reason, there are persistent calls to create a startup cluster similar to Silicon Valley in order to foster more unicorn companies and make startup creation a driving force for economic growth. Indeed, a look at leading startup nations reveals that each has a central hub representing its entrepreneurial ecosystem. This approach maximizes the agglomeration effect by concentrating talent, technology, capital, and infrastructure in one place.
The United States boasts not only Silicon Valley but also New York as a powerful startup cluster. As of the end of 2017, approximately 6,300 to 7,800 startups were active in New York. New York is the city that has produced the third-largest number of unicorn companies in the world, following Silicon Valley and Beijing.
London, UK, is also home to approximately 4,300–5,900 active startups, and as these companies have concentrated in the Shoreditch area of East London, Europe’s largest startup cluster has been formed. In the financial hubs of New York and London, fintech startups—which combine the traditional financial industry with IT technology—are particularly strong. In fact, 28% of the world’s top 50 fintech startups, as selected by the U.S. business magazine ‘Forbes’, are headquartered in New York.
Beijing, Shanghai, and Shenzhen in China are also recognized as leading startup clusters. Tel Aviv, Israel—which has listed approximately 250 startups on the U.S. NASDAQ market over the past 40 years—and Stockholm, Sweden, where about 900 startups are active, are also cited as major startup hubs.
In contrast, South Korea is assessed as having relatively insufficient policy efforts to foster startup clusters. In the 1990s, the Teheran-ro area in Seoul’s Gangnam District garnered attention as a startup hub, but since then, activity has dispersed to areas such as Pangyo, Songdo, and the Gasan Digital Complex, and the country has yet to establish a cluster with nationwide influence.
Although local governments are making efforts to foster regional startup ecosystems, there is still a lack of consideration for ways to organically connect these efforts to create synergies.
Beyond Startups: Toward Scale-up
Just as important as supporting the creation of new startups are “scale-up” policies designed to help existing companies grow. In fact, many developed countries are shifting the focus of their startup support policies from fostering startups to supporting scale-up.
In 2011, the U.S. government introduced the “Startup America Initiative” to support innovative companies, and in 2014, it launched the “Scale-up America Initiative” to build regional entrepreneurial networks. Through these initiatives, the government provides various services—such as support for attracting venture capital, management consulting, and entrepreneurship education—to small and medium-sized enterprises with high growth potential.
The EU is also moving in the same direction. In 2016, it announced the “Startup and Scale-up Initiative” to promote startup incubation, network building, and support for international expansion. In April of the same year, it raised substantial investment funds through the “Venture EU” program to prevent promising startups from closing due to initial funding shortages.
The United Kingdom is also developing government-level growth support strategies by operating the “Scaleup Task Force,” which involves entrepreneurs and professional investors. In 2014, it established the Scaleup Institute, an organization dedicated to supporting the growth of startups.
The reason so many developed countries are shifting the focus of their policies from startup support to scaleup is to overcome the so-called “Valley of Death.”
The “Valley of Death” refers to the phenomenon where a company succeeds in developing technology but ultimately goes bankrupt because it cannot secure the necessary funding during the subsequent commercialization process. While government support is primarily concentrated on the startup and research and development (R&D) stages, it is difficult to receive support during the promotion, marketing, and distribution stages required to actually sell products. As a result, it is not uncommon for many companies to fail in commercialization despite successfully developing their technology.
Fortunately, there has recently been a growing trend among government ministries, public institutions, the financial sector, and the investment industry to actively support scale-up efforts.
The Financial Services Commission operates the “KOSDAQ Scale-Up Fund,” a 300 billion won fund that invests in small and medium-sized enterprises (SMEs) listed on the KOSDAQ market. The fund aims to identify and invest in companies that are undervalued relative to their growth potential.
In addition, the Korea Technology Finance Corporation, which handles corporate guarantees, introduced a scale-up support program in 2019. Some argue that tax incentives should be provided to large corporations, mid-sized companies, and venture capital firms when they invest a certain amount or more in startups, in order to further stimulate private investment.
