Foreign start-ups struggle for funding

As South Korea strives to become the next Asian tech hub in its “creative economy” drive, public and private investments into the start-up economy are at their height.

The government has earmarked 180 trillion won ($166 billion) this year to foster a start-up ecosystem, new industries and markets with growth potential, while private venture capital funding passed 1.6 trillion won last year, according to data from the Korea Venture Capital Association.

But foreign entrepreneurs are struggling with onerous red tape and barriers to access those resources.

Danish entrepreneur Mads Roos, CEO of MotoKey -- which makes a remote ignition smartphone app for motorcycles -- has reached the point where he has given up entirely on chasing government funding. This is due to the amount of paperwork required and finding out about grants at the last minute.

He said that with public funding as well as private investment hard to access, he has now chosen to focus on product development instead.

“Over the past year, I’ve stopped chasing that (funding) goal because I can’t rely on investment from the outside -- at least in Korea. You can either develop your product and push your business, or you can chase funding,” Roos said. “And it takes so much time chasing that money.”

The Small and Medium Business Administration earmarked 2 billion won last year to support about 40 teams of ethnic overseas Koreans or international students who studied in Korea, allowing up to 50 million won per start-up. But most public funding, among other support initiatives like incubation space and overseas field trips, is not available to foreigners without those qualifications.

One exception is the Korea Techno-Venture Foundation, which also offers classes as part of the government’s Overall Assistance for Startup Immigration System program created last year to prep foreign entrepreneurs for the D-8-4 start-up visa. The KTVF offers funding to foreign technology start-ups that have global potential, but tapping into it is difficult, recipients say.

Jeet Dhindsa, founder of medical tourism platform My Seoul Secret, is currently receiving public funding through the Global Youth Venture Incubation Project, run by the Small and Medium Business Association and its start-up arm, the Korea Institute of Start-up and Entrepreneurship Development. The program covers 70 percent of his costs, up to 35 million won.

While there are additional benefits to the program, such as space at an incubation center, dorm rooms near the center, and a free marketing research project, there are several restrictions and parental control, he noted.

“It‘s not like they hand you an ATM card. Every expense must be issued as a purchase order and reported to your designated incubation center manager for approval, and once approved, funds are sent directly to the vendor you designated in the purchase order,” he said, adding there is also a spending cap for expense categories.

“And this is not an easy process. You have to be meticulous with the paperwork, and whichever vendor you work with, you have to collect and submit documents from them to prove they are legit,” which can be a time-consuming process and lead to slow product development, he said.

There can also be animosity from Koreans about foreigners receiving funding from the government, said Jason Lee, CEO of social networking platform developer J.J. Lee Company and first recipient of the D-8-4 start-up visa. His start-up received 350 million won in public funding and he is concerned about a backlash from Koreans.

“(The government is) carefully starting this kind of support program really slowly and quietly and they try to release some successful cases. But right now, even me, I’m so scared of this,” Lee said. “Even some of my Korean friends are cursing about this now.”

Private funding

In addition to onerous application and reporting requirements for government funding, foreign start-ups’ access to private funding -- the alternative for foreign start-ups that do not have their own investment -- in Korea is also limited, particularly for their start-up’s early stages.

This is partly because logistically it is easier to hand out larger sums of money to a few companies, rather than smaller sums to many companies, said Aviram Jenik, managing partner at KOISRA Seed Partners.

It is often actually easier for a company to get $1 million than $10,000 due to the higher amount of venture capital, which is typically a larger sum of money at the latter stages of business development, he said. This type of investing in more established start-ups can be less risky for the investor as the business has a completed or nearly finished product or users.

But angel investment, which is made in the planning stage or the initial stage of a start-up, is still a sore point in Korea. Angel investment in the country reached 28.4 billion won in April 2014, according to the Korea Venture Investment Corporation.

The government is working on encouraging more angel investors to enter the market. In 2013, the Ministry of Strategy and Finance announced tax benefits for angel investors, expanding the type of businesses eligible for tax deductions and a fund matching system.

But critics say early investment is still limited and Korea should look to other countries for ideas on how to stimulate early investment.

“For example, Israel is one of the best countries for innovation. They have around 90 clusters for innovation, which is huge for such a small country, so they are very much a system of accelerators. They really take care of all their start-ups and make sure they have a business plan and are able to develop it on a long-term basis,” said David-Pierre Jalicon, French-Korean Chamber of Commerce and Industry chairman.

A time for tweaking

Despite his criticism, Jenik said the Korean government’s approach to the start-up scene is on the right track and commended its vision to promote start-ups. He believes it is now a case of tweaking the model.

“What they’re trying to do is exactly what they should be trying to do. (But) some of the tactics I disagree with,” Jenik said.

Evan Lai, cofounder of educational app Colango, has been the recipient of government and private funding, and commended the government’s support. He said there were few, if any, countries in the world whose government provided money for foreign private business.

Lai also said Seoul could even be better for start-ups than other cities when it comes to private funding opportunities.

“In Silicon Valley I don’t think there’s as much help because the start-up ecosystem is a lot more mature than Seoul’s start-up ecosystem,” he said. “I also think the requirements for seed funding is a lot higher in Silicon Valley compared to Seoul.”

And despite all the barriers for foreign start-ups in Korea, Lai said Korea still holds a lot of potential for growth and diversity. “I definitely think there are a lot of opportunities and in Korea a lot of ideas can still happen.”

By Stephanie McDonald and Elaine Ramirez (elaine@heraldcorp.com)

This is the fifth article in a series on foreigners working in Korea’s technology start-up ecosystem. ― Ed.