Many newly established venture capital (VC) firms in South Korea are turning into “zombie” companies, struggling to stay afloat amid a wave of financial warnings and capital losses, painting a stark contrast to the optimistic startup boom of recent years.
This year alone, five VCs in South Korea have been warned about their poor financial health due to significant capital loss. Despite their ambitious goals set during times of abundant funding, these firms are now struggling in tough times for investments.
As a result, many VCs facing capital loss are voluntarily giving up their licenses and shutting down operations. This year, the number of new VCs is equal to the number of those whose licenses have been canceled.
Some firms, to avoid penalties from the Ministry of SMEs and Startups, are barely surviving by making small investments with their own money instead of forming funds. What is worse is that Industry experts believe this is just the beginning, predicting that many more VCs will close down starting this year.
According to the investment banking industry, five VCs have received warnings for capital erosion from the Ministry of SMEs and Startups this year. These firms include Neo Insight Ventures, NPX Ventures, Oracle Venture Investment, The SEED Investment, and Dowon Investment.
If this situation continues, the number of VCs losing capital this year could exceed last year’s total of eight. The number of VCs experiencing capital loss has been steadily increasing: two in 2020, four in 2021, and six in 2022.
Also, some VCs have completely shut down due to worsening management problems. Firms like Root Ventures, IDG Capital Partners Korea, Platform Partners Asset Management, ELAND Ventures, and Yewon Partners closed in the first half of this year.
This is due to many new VCs struggle to attract limited partners (LPs) and form funds. Consequently, they cannot generate fund management and performance fees, leading to unavoidable fixed costs like salaries, resulting in capital erosion or closures.
According to the “Enforcement Decree Of The Venture Investment Promotion Act,” VCs in S. Korea must maintain a capital erosion rate of less than 50%.
If they fail to meet this standard, the Ministry of SMEs and Startups imposes management improvement measures such as capital increases and profit distribution restrictions. If these measures are not carried out within nine months, the VC’s registration license will be revoked.
The wave of VC closures and capital erosion starkly contrasts with the venture investment boom of 2020-2022, during which 104 VCs began operations. These account for 41.7% of the 249 currently operating VCs.
Among the ten firms that received warnings or returned their licenses this year, nine obtained their VC licenses between 2021 and 2022. Although many VCs were established during the boom, they are now being hit hard as the market faces a severe downturn..
Additionally, many VCs are barely operating, even if they haven’t shut down completely or experienced capital erosion. By the end of last year, there were 45 VCs with no blind funds and no investment activities over the past year.
The number of such VCs has been increasing rapidly: 19 in 2020, 30 in 2021, 36 in 2022, and 45 in 2023. By the end of the first quarter this year, there were already 29 VCs with no funds and no investment activities.
