BACKGROUND
A healthy investment ecosystem for start-ups and investors is an essential foundation for “Creative Economy”1 and “Creative Finance.”2
Start-up companies are often faced with funding shortages as the early stages of business start- up & growth involve greater risks for investors due to uncertainties and asymmetric information. The expectation gap between start-up owners and investors about commercial value of technology and business profitability often creates a supply-demand imbalance of funds, called “Death Valley” for start-ups.
The government and public financial institutions are called to take the role of addressing such imbalance and create a sound and well-functioning ecosystem.
CURRENT FUNDING CONDITIONS FOR SMES & VENTURE COMPANIES
Overall, SMEs and venture companies are provided with sufficient funds and liquidity through supportive measures by the government.3
The funding structure of SMEs is, however, highly dependent on loans from banks and public financial institutions with 99% of SME financing from loans, while the proportion of investment remain small.
Investors remain risk-averse with most investment disproportionately concentrated towards the latter phase of business cycle which involves less risks compared to the early stage of business start-up. The percentage of venture capital invested in companies with less than 3 years of operation remains a mere 30%.
Loan type investments with high interest burden such as convertible bond and redeemable preferred stock are increasing.
(unit: %, Korean Venture
Capital Association)
|
|
Common Stock |
Preferred Stock |
CB/BW |
PF |
Etc. |
|
2012 |
19.5 |
39.6 |
14.9 |
19.9 |
6.1 |
|
2011 |
27.4 |
35.2 |
16.4 |
17.8 |
3.2 |
|
∙ |
∙ |
∙ |
∙ |
∙ |
∙ |
|
2006 |
46.2 |
19.9 |
12.1 |
12.7 |
9.0 |
|
2005 |
36.8 |
17.2 |
16.7 |
16.2 |
13.2 |
CREATION OF ‘GROWTH LADDER FUND’
The government plans to create a dedicated fund, tentatively named ‘Growth Ladder Fund’, to address such problems in funding conditions of SMEs & venture companies and to provide innovative SMEs & venture companies with sufficient funds.
The fund will be structured in the form of ‘Fund of Funds’ composed of various funds and subordinate funds with different purpose and structure to meet funding needs tailored to different stages of the business cycle.
Funds will be raised separately by public financing corporations and the private sector and then combined together to form each subordinate funds.
*Please read the attached file for details.