[Reporter’s Notebook] The Paradox of the Venture Investment Promotion Act That Hinders Innovation

"Some deep tech companies spend as much as three years just preparing for business. Yet, by the time they are truly ready, it’s often too late for investment."

This is according to an accelerator (AC) industry insider. ACs are required by law to invest at least 40% of their total investment funds in early-stage startups that are less than three years old. The Venture Investment Promotion Act defines ACs as "corporations or non-profit organizations whose main work is professional incubation and investment," reflecting the intention that ACs should exist to foster early-stage companies.

The problem lies in how these regulations affect ACs. Due to restrictions on investing only in companies within three years of founding, ACs often have to pass up promising startups before they can actually invest. For example, a university professor may have established a corporation for research funding purposes but is not in a position to operate the company immediately, or there may be startups growing without external investment for a certain period. As ACs expand and their resources increase, meeting the mandatory investment ratio becomes even more difficult.

Fortunately, at the beginning of this year, the Ministry of SMEs and Startups announced plans to address these issues. In the National Assembly, a bill has been proposed to expand the scope of mandatory investments for ACs where legal amendments are required. The amendment would broaden the mandatory investment target to include startups less than five years old without prior investment history, as well as follow-up investment companies (also within five years of founding), thus expanding the scope compared to the previous regulations. Industry experts say, "It will have an impact," underscoring how valuable the increased number of eligible companies is.

However, the industry believes that more fundamental change is needed. They argue that investment autonomy must be ensured so that a virtuous investment cycle can be created through generating returns. Suggestions such as "unconditional follow-up investments should be allowed for companies that have already been thoroughly vetted," "the condition limiting early-stage startups to five years should be removed," and "the mandatory investment ratio should be lowered," all highlight the need for structural improvements.

Yet, far from such structural debates, even discussions of the proposed amendment in the National Assembly are expected to progress slowly. Members of the National Assembly are likely to be preoccupied with supporting their constituencies ahead of the local elections in June, making it difficult to focus on parliamentary work.

An industry insider commented, "For early-stage investment to succeed, the competitiveness of early-stage investment firms themselves is crucial." This means that a solid foundation for ACs is essential to continuously foster early-stage startups. The recent trend of ACs turning their attention to venture capital (VC) and private equity (PE) out of concerns over sustainability is also closely related to this issue.

The government has even announced measures aiming for Korea to become one of the world's top four venture powerhouses, hoping for a renaissance in the venture industry. However, the longer these regulatory delays persist, the longer it will take for Korea to achieve this goal.

This content was produced with the assistance of AI translation services.