It can be hard to see the connection between My Love From the Star, a freakishly popular Korean drama series which has received some 15 billion views online, and Uber Korea, the local branch of the well-known taxi hailing mobile app. Yet, in the past few days, it has become clear that their fates, as well as others in this nascent startup ecosystem, are intertwined in a bizarre plot that will determine the future of South Korea’s push for innovation.
The heart of the issue concerns the ActiveX controls and security certificates required for secure transactions online, impediments to startups that led the Economist to call Korea an “Internet dinosaur.” Korean government regulations, which were developed in the wake of a 1990s decision by the United States to ban the export of 128-bit encryption protocols, require the use of these controls, which are only usable on Internet Explorer. This has prevented many foreigners, including the millions of Chinese watching the Star drama, from making purchases on Korea’s e-commerce portals.
In addition, payment information is not allowed to be saved on servers, requiring customers to repeatedly retype their credit card numbers for all online purchases. This policy ensnared the launch of Uber Korea, which attempted to offer similar one-click hailing of cabs as its U.S.-based app, but faced strong pressure from the government to desist. In response to these problems, South Korea’s president, Park Geun-hye, promised to see the regulations regarding certificates lifted by mid-year, although only for foreigners.
Faster than a New York Minute
Yet, Korean startups have thrived even in these adverse circumstances, creating compelling products that get continuous use in spite of the payment rules. Locals here believe that two companies, Coupang and KakaoTalk, could become the first billion-dollar-startup IPOs for Korea in this new generation of tech companies. Coupang, in particular, is believed to be imminently filing for an IPO in the United States that would value it in the 10 figures. If such rumors pan out, that would mean that the Korean ecosystem will have developed far faster than New York’s, which only produced its first billion-dollar exit with the sale of Tumblr in 2013.
Their success has led to a palpable excitement in the ecosystem far stronger than when I first visited the country in 2011. Finding startups was challenging then, the infrastructure for funding was quite tough, and the iPhone and the Apple App Store had only been available in the country for a little more than two years. The tenor changed with the election of President Park who has focused on “creative economy” as a central pillar of her proposed policy reforms.
Since her election, Korea’s government has dramatically expanded the number of programs to support entrepreneurs. The government, according to several sources, is now offering venture investment matching of up to 9 to 1, meaning that VC firms can provide a startup with $1 million in funding for only $100,000 of their own capital. That sort of financial leverage has led to a profusion of early-stage VCs and accelerators. One startup, Memebox, has already found success, becoming the first Korean startup to be accepted into Y Combinator.
Even with the infusion of cash, some strange nuances remain in the funding scene. Unlike in Silicon Valley, where partners at venture capital firms race after top entrepreneurs, Korean VCs are decidedly less aggressive in investing in consumer Internet companies. According to the Korean Venture Capital Association, IT-related startups only accounted for 35.2 percent of VC investment in 2013, although this was up from 2012’s 28.5 percent. Since consumer Internet companies have not traditionally been profitable, many top VC firms rely on analysts and associates to make investments in the space, a sort of inverse of Korea’s traditionally hierarchical society.
The Hopes of Founders
But ultimately, won is won, and Korean entrepreneurs seem ready to challenge the perception that the country can’t produce top startups; it has the necessary ingredients to do so. By many measures, Korea is the most advanced Internet country in the world, with the fastest landline Internet speeds in the world. One of the country’s mobile service operators, SK Telecom, intends to launch a 300Mbps bandwidth cell service soon. It has also managed to start exporting its culture, awkward Bulgogi advertisements not withstanding. Awareness of the country has reached high levels, with Korean pop music blanketing much of East and Southeast Asia, and Korean companies like Samsung, LG and Hyundai now among the most well-known brands in the world.
ActiveX aside, there are still serious challenges facing founders willing to risk it for startup stardom. There has long been a glut in the number of computer science graduates, due to government policies that keep quotas of computer science and other engineering majors high. For companies, this deep talent pool has meant a low-cost way to hire additional engineering talent. However, top Korean students have increasingly shied away from programming in recent years as wages have dropped. Many top computer science students hope to move toward business and consulting since such jobs pay better and offer more stability and prestige.
Korean companies also have to learn how to acquire customers better. As one local investor noted to me, startups in Korea often have binary outcomes in terms of distribution, since the social networks within the country are so dense and active. Startups can go from their first few beta users to the entire country in a matter of weeks due to word of mouth, which means that few startups have the time to tinker with their products and learn the craft of effectively building a user base. The lack of skill here is blamed for Korea’s poor past record of expanding its startups into overseas markets.
The Future is Starting
There are certainly other issues: a small mergers and acquisitions market that makes exits difficult; a lack of positive press coverage; and the difficulty of hiring top talent away from Samsung and other large conglomerates. But if more of the government regulations can be modernized, startups will suddenly find that they can compete on a more equal foot with the largest multinational corporations. That would certainly lower the barriers to building a new company and may well mean that Korea can take the mantle of startup leader in Asia.
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