South Korea start-ups hobbled by red tape and risk aversion

A taxi driver in South Korea protesting in October against a carpool service application to be launched by Kakao Corp later in the year. The banners read: "Stop carpool service application, it is illegal business." Such protests have made it hard for
A taxi driver in South Korea protesting in October against a carpool service application to be launched by Kakao Corp later in the year. The banners read: "Stop carpool service application, it is illegal business." Such protests have made it hard for Kakao to launch its service.PHOTO: REUTERS

SEOUL • When Mr Choi Ba-da pitched his car-sharing company Luxi to Hyundai Motor officials last year, he told them there would be no future for South Korea's top carmaker if it failed to embrace emerging technologies.

His pitch worked: Hyundai agreed to buy a 12 per cent stake in Luxi for US$5 million (S$6.9 million), its first investment in a car-sharing firm as it joined rivals in the race for new-age transportation.

But about six months later, Hyundai sold its stake after thousands of angry taxi drivers, worried about their jobs, threatened to boycott Hyundai cars, said Mr Choi. Hyundai officials said they were also wary of laws limiting car sharing in South Korea.

Hyundai's break-up with Luxi illustrates how rigid rules, strong labour unions and a risk-averse culture among South Korea's family-run conglomerates, or chaebol, have hindered the growth of start-ups in Asia's fourth-largest economy.

President Moon Jae-in's administration says the country's decades-old growth model, powered by a handful of large exporters such as Hyundai and Samsung, has reached its limit in the face of Chinese competition and rising labour costs.

To offset slowing growth in sectors such as cars, ships and chips, it created a new ministry for start-ups last year and has boosted funding to cultivate new technologies.

But the government has been too slow to remove cumbersome regulations for start-ups, wary of upending the country's economic order or upsetting powerful labour unions, according to a dozen entrepreneurs, investors and executives interviewed.

Regulations are another challenge. South Korean laws would entirely or partially block about 70 per cent of the world's top 100 start-ups by investment size from bringing their services to the country, according to joint research by Google Campus Seoul and the Asan Nanum Foundation. Those include Airbnb, Uber and China's Ant Financial.

That has left South Korea resistant to disruptive technologies despite its tech-savvy image.

"After agonising, Hyundai officials told me they had to go slow with the service, before eventually pulling out," said Mr Choi. "But how on earth can a start-up go slow?"

In a statement, Hyundai said it sold its stake in Luxi as the investment "did not fit a business model the company pursued".

Hyundai's chief innovation officer Youngcho Chi also said South Korean restrictions on ride-sharing was one reason, adding that the carmaker had concluded that Luxi was not going to work out.

Instead, Hyundai pumped US$275 million into Singaporean ride-hailing firm Grab this year.

MOST START-UPS ILLEGAL

Hyundai and Samsung both say they invest in both local and overseas start-ups.

South Korean start-ups are easier to communicate with than overseas ones, Hyundai said. Samsung said it has been running a start-up support programme for five years to groom local entrepreneurs.

Still, some said chaebol are moving too slowly.

"The Korean success has been built on a fast-follower strategy, but Chinese rivals are catching up very fast," said Mr Hwang Sungjae, a co-founder of Fluenty, a South Korean artificial intelligence start-up acquired by Samsung Electronics last year. "Companies now have no choice but to innovate and work with start-ups, but they are not investing quickly enough."

"I think Korean companies are at a great risk of falling behind."

Regulation are another challenge. South Korean laws would entirely or partially block about 70 per cent of the world's top 100 start-ups by investment size from bringing their services to the country, according to joint research by Google Campus Seoul and the Asan Nanum Foundation. Those include Airbnb, Uber and China's Ant Financial.

In February, top South Korean mobile messaging operator Kakao Corp bought Luxi for US$25 million, but it remains stymied by carpooling regulations, and has yet to launch amid protests from cabbies.

One protesting taxi driver set himself on fire and died recently. South Korea's Transport Ministry declined to comment.

Regulations also prohibit venture capital funds from investing in financial, real estate, accommodation and restaurant sectors in South Korea. The government has proposed a new law to lift those restrictions, but a senior government official said it would be not be easy.

"The bottom line is that we have to move towards innovation, but it takes a lot of time and is a difficult process to mediate existing interests," said a government official at the Ministry of SMEs and Start-ups.

Many Korean ventures are focused on applications that would only apply locally, making them a hard sell for global companies, a Samsung Electronics executive said, asking not to be named.

Since 2016, Samsung Electronics has acquired minority stakes in nine start-ups, but only one is based in South Korea, according to corporate research firm CEO Score.

Hyundai Motor has invested a total 85 billion won (S$104 million) worth of minority stakes in 15 foreign start-ups over the last three years, compared to 28 billion won spent on five local ventures over the same period, CEO Score said.

San Francisco-based venture fund 500 Start-ups, one of the early investors in Grab, said it considered investing in Korean ride-sharing firms, but decided against it because of legal restrictions.

"The regulatory environment hasn't been favourable to investors like us," said Mr Jeffrey Lim, who heads 500 Start-ups' Korea office.

500 Start-ups has invested 6.5 billion won in 30 South Korean firms since 2015, including radio app Spoon which is now available in South-east Asia and Japan.

Other established foreign rivals have also backed South Korean start-ups despite the challenges. Japan's Softbank has invested in more than 20 tech companies in South Korea since 2012, according to venture capital data provider CB Insights.

South Korean start-up Viva Republica, which operates money transfer app Toss, last week raised US$80 million from US investors including Kleiner Perkins and Ribbit Fund, valuing it at US$1.2 billion.

South Korean conglomerates' tendency to avoid risk makes them slower than foreign rivals to adapt to fast changing technologies, said management professor Rhee Moo-weon at Yonsei University, who advises Samsung and Hyundai.

As conglomerates remain reluctant buyers, only 3 per cent of South Korean start-ups recouped their investments through trade sales in 2017, according to the Korean Venture Capital Association.

That leaves IPOs (initial public offering) as one of a few exit options, but it takes about 12 years for South Korean start-ups to go public - "an eternity" compared to Silicon Valley where it typically takes six to seven years, according to consulting firm McKinsey & Co.

Mr Seo Seung-woo, an entrepreneur who moved his self-driving start-up to Silicon Valley last year, said: "I say, don't think about doing a start-up in South Korea. Think outside Korea."

REUTERS

A version of this article appeared in the print edition of The Straits Times on December 28, 2018, with the headline 'S. Korea start-ups hobbled by red tape and risk aversion'. Print Edition | Subscribe