[Reporter's Notebook] The Future of Venture Investment Without Graduates

"What will become of a school where the number of incoming students has quadrupled but the number of graduates is falling?"

At a seminar on the exit market held by the Korea Financial Investment Association last week, one presenter used this analogy to describe the current venture investment industry. The comparison was to a market where the amount raised by new funds has quadrupled, while the number of IPOs in South Korea's venture investment exit market has stagnated at 60 to 80 a year.

Although policies to boost venture investment have released record amounts of capital, venture capital (VC) professionals do not look entirely pleased. Venture investment in the first half of this year hit a record high of KRW 8.9 trillion, but the number of companies listed on the KOSDAQ market during the same period fell by about half from a year earlier, to 16, excluding SPACs.

The exit market through IPOs has become even more uncertain after the Korea Exchange decided to temporarily suspend plans to delist companies for failing to meet minimum market capitalization requirements, following a court's intervention. A senior industry official said, "As much money is flowing into the venture market, the exit market should also expand. As long as a gap remains between the two markets, continued capital inflows will also place a burden on the ecosystem."

Investing in companies to secure core technologies ahead of time is not a bad thing. But a policy that truly supports the venture ecosystem must also consider how to keep that money circulating after it has been invested. To do that, investments must be easy to exit. This would give VCs the means to invest again in new companies.

To use the presenter's analogy, what happens to a school with incoming students but no graduates? In the long run, enrolled students may consider transferring or dropping out. Students preparing to apply may look for another school rather than one with no graduates they can look up to. The system needs to offer a variety of ways to graduate.

Expanding secondary funds, which help existing investors recover their capital by purchasing their stakes in companies, could be one solution. Rather than letting companies' growth strategies suffer because venture funds are under pressure to exit before they mature, investors should be able to sell their existing shares to new investors with available liquidity. The industry repeats the same points at every related seminar, but change has been slow.

Institutional improvements are needed so that investors are not forced to rely on just one way to exit. Examples include easing the risk weights applied to the net capital ratio when investing in secondary assets and improving standard fair value assessment guidelines. A graduation system that keeps capital circulating is just as important as an admissions policy that releases funds.

Reporter Hwang Seoyul

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