[Startup Must-Know Laws] Venture Studios Connecting Startup Creation and M&A

Column by Attorney Heecheol Ahn, DL Partners Law Firm

Venture investment typically begins with discovering startups that have already been established. Once a founder has concretized their idea, assembled a team, and established a company, accelerators or venture capital (VC) firms evaluate its growth potential and decide whether to invest. The Korean venture investment system has also developed based on this structure for a long time.

Recently, however, a slightly different approach has been spreading: the venture studio. A venture studio goes beyond simply investing in existing startups, taking an active role in the entire process—from idea discovery and market validation to founder recruitment, incorporating new companies, product development, hiring, and initial investment. In short, it is an organization focused on creating startups. In the United States, companies such as Idealab and Flagship Pioneering exemplify this model.

The importance of venture studios lies in their ability to systematically reduce the trial and error of starting a business. Especially in deep-tech sectors like artificial intelligence (AI), semiconductors, robotics, and biotechnology, possessing good technology does not immediately translate into building a successful company. It is necessary to determine the commercial direction for the technology, secure intellectual property (IP), recruit suitable founders and key talent, and find initial customers and follow-on investors. Venture studios accumulate these functions within a single organization and utilize them repeatedly to create multiple companies.

The problem is that existing legal frameworks have not fully anticipated this model. Regulations for startup accelerators are fundamentally based on the assumption that investors will invest in external startups. To prevent investors from excessively taking control or supporting their own affiliates, regulations have limited investments made for management control and the holding of shares in affiliated companies. However, a significant change occurred following the revision of the Enforcement Decree of the Venture Investment Promotion Act. Previously, startup accelerators could invest for management control purposes only in early-stage companies they had directly selected or nurtured, but this restriction has now been relaxed.

Nevertheless, one issue remains. In principle, startup accelerators are required to invest at least 40% of their total investment in early-stage companies within the first five years after registration. Meanwhile, the Small and Medium Enterprise Startups Act excludes new companies from being recognized as "startups" if existing corporations and their executives collectively own more than 50% of the voting shares. The more capital, talent, and risk a venture studio invests in a newly established company, the harder it becomes to meet the required investment ratio.

Korea has excellent research talent, technology, manufacturing infrastructure, and venture capital. What is needed going forward is not only the ability to select established startups, but also the capability to repeatedly create companies by combining strong technology and outstanding people. Policy should evolve from merely selecting promising startups to establishing a system that continuously enables the creation of excellent new startups. In bridging this gap, venture studios can become a crucial element in the ecosystem.

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