Why "University Startups" That Drove U.S. Innovation Struggle to Succeed in Korea

Bank of Korea Structural Reform Report

Strategies for Building a Growth Ladder for the Qualitative Transformation of University Startups


Increase in University Startups Based on Proprietary Technologies, but Structural Barriers to Moneti

Although the number of university-based innovative startups leveraging high value-added original technologies is increasing, these startups are facing structural limitations in achieving qualitative growth, such as monetization. Due to the continuity issues in securing funding, they encounter additional funding gaps during the business scaling phase, preventing them from crossing the so-called "second valley of death." Experts point out that for university innovative startups to grow into global enterprises, it is necessary to overhaul support systems for each growth stage—from reforming internal university systems to expanding the public sector's role as a consumer in order to attract private investment.

University Innovative Startups on the Rise, but Profitability Declines as Businesses Grow

On June 4, the Population and Labor Research Office at the Economic Research Institute of the Bank of Korea released a report titled "Mid- to Long-term In-depth Study: Building a Growth Ladder for Qualitative Transition in University Startups," as part of its structural reform series. The report stated, "University innovative startups have shown visible growth through government policies, but it is now time for a qualitative transition to secure stable revenue and profitability."

University innovative startups refer to technology- and knowledge-intensive startups, based on research and development (R&D) achievements within universities or university human resources (master’s, doctoral, and science and engineering undergraduates). The number of such startups is rapidly increasing. According to Korea Data (KoDATA), the number of startups based at universities grew from 987 in 2011 to 2,887 in 2024, a nearly threefold increase. The five-year survival rate also reached 74%, significantly higher than that of general startups (33.8%) and the OECD average of 45.4%.

Infrastructure within universities has also expanded. The number of faculty and staff dedicated to startups increased from about 700 in 2011 to 2,200 in 2024, while the number of entrepreneurship-related courses and students completing them rose by factors of six and three, respectively. Government policy support has broadened the quantitative base and increased genuine interest in entrepreneurship, leading to a positive increase in the number of startups.

However, despite quantitative growth, profitability is worsening. For university startups established between 2015 and 2019 that recorded sales for five consecutive years, the operating margin deteriorated from 1.2% in the first year to -3.3% in the fifth year. This is because, as startups move from the initial phase to business expansion, the rate of cost increase surpasses the rate of revenue growth. The technology transfer rate at universities is also around 26%, significantly lower than that in the US (40.9%) and the UK (61%). The debt ratio stands at 159.2%, far above the average for small and medium-sized manufacturers (111.2%).

This is further reducing R&D activities in university startups, hindering the accumulation of innovation capability. In fact, the average R&D expenditure for university startups is approximately 300 million won, significantly lower than the average expenditure of venture companies in advanced sectors (700 million won).

Additional Funding Difficulties at the Business Expansion Stage...the 'Second Valley of Death' Is Hard to Cross

The Bank of Korea diagnosed that this is because startups are experiencing the so-called "valley of death" not only at the initial stage but also during business expansion (scaling up).

Jung Jongwoo, Head of the Economic Research Office at the Bank of Korea, said, "General startups often face funding difficulties from prototype launch to just before and after entering the market, but the situation gradually improves. However, university deep-tech startups require additional technology validation, global certification, and further R&D even after launching a prototype, so it takes a long time to enter the market." He added, "The valley of death persists longer than for general startups, and even after surviving the initial stage, failure to secure follow-up investment leads to the 'second valley of death'." According to a Bank of Korea survey, 46.3% of respondents with university startup experience said they failed to secure external funding in the past three years.

The current support system is skewed toward initial establishment assistance, making continuity in funding vulnerable and increasing the likelihood of facing the "second valley of death." According to a survey by the Korea SMEs and Startups Agency of startup companies, 36.9% of respondents said that support is most lacking in the third to fifth years after founding. The report especially noted that university startups are relatively weaker in areas such as market suitability verification, global networking, matching with professional managers, and connecting with private investment. University technology holding companies also remain small, with fund sizes around 10 billion won, limiting their ability to make follow-up investments. Jung pointed out, "As a result, excellent original technologies held by universities often stagnate without translating into increased sales or job creation."

The reliance on initial public offerings (IPOs) as the primary way to recover investments is also seen as a problem, as it restricts investment. The average time from founding a company to IPO is 14.7 years, making investment recovery take a long time, weakening investor motivation, and discouraging reinvestment. Layered regulations on general holding company venture capital (CVC) also limit the pool of potential M&A buyers, restricting mid-stage exit routes before IPO.

Include Startup Performance in University Evaluation Systems...Increase Public Sector Demand to Connect with Private Investment

The Bank of Korea suggested that for university innovative startups to avoid being weeded out and to become global enterprises, it is most important to organically link support systems for each growth stage. Specifically, it proposed three principles: reforming university governance, expanding the public sector’s role as a consumer, and inducing private investment.

First, at the business initiation stage, it pointed out the need to strengthen faculty performance evaluations, which are currently focused on academic achievements, to also include technology transfer and startup-related outcomes. The report also noted the importance of clarifying policies on recognizing leave periods as career experience, return procedures, and promotion reviews for faculty or students taking a leave of absence for startups, as well as ensuring continuity in credits and major requirements, all to reduce uncertainty for faculty and students.

At the commercialization stage, a role-separation startup model was proposed. Jung said, "One characteristic of university startups in Korea is that entrepreneurs are expected to handle everything, resulting in significant burdens on faculty involved in the actual startup process. It is worth considering adopting a model like those at Stanford or Oxford, where universities focus on creating and verifying technology and bring in external professional managers."

At the business expansion stage, Jung suggested expanding the public sector’s role as a consumer so that university startups can secure their first revenue, which can then attract private financial investment. Alternative financing options, such as intellectual property (IP)-backed financing, were also proposed as future tasks. At the exit stage, he stressed the need to supplement secondary market infrastructure to provide partial liquidity before IPOs, thereby diversifying exit routes.

Jung emphasized, "To improve policy feasibility, a detailed policy roadmap should be established. Since it is difficult to implement all policy tasks at the same speed, a phased approach that prioritizes tasks based on feasibility and impact is more desirable than pursuing all tasks in parallel." He added, "What can be done immediately is internal university system reform, which costs almost nothing but lays the first step of the growth ladder. Rather than expecting any single policy to be a cure-all, it is most important to ensure the growth ladder remains unbroken and continuously connects to the next stage."

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