As Samsung Falters, An Opening For Startups

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In the smash-hit movie Roaring Currents, Korea’s naval hero Admiral Yi-Sun Sin defends Korea from an invading Japanese imperial navy, single-handedly using his ship to hold off their advance in a treacherous current that today is considered one of the great naval battles of all time.

The movie may be historical with its gruesome depictions of war and battle, but its themes still deeply resonate in the country today, and it has since become the most popular film ever released in Korean history. The story though also acts as a parable of the roaring currents of the technology industry, where massive change driven by foreign influence has meant constant competition and complaint for Korea’s largest and smallest technology firms.

I spent the last nine months living in Seoul, talking with founders, investors, and other interested in the health and future of startups in the country. At a time when Samsung’s revenues are not just flagging but collapsing, there is increasingly a need for Korea to find its next phase of development. Incredible challenges remain, and that dream remains far off. But the country has built the first steps of an ecosystem, and those in the US interested in the “rise of the rest” should take note as Seoul grows up into a mature innovation center.

The rise and strength of the Korean economy has been driven by one company that today is the country’s most recognizable global brand: Samsung. The company represents approximately 17% of GDP and is the largest exporter of goods from ships to LCD screens and of course, smartphones. In fact, the company is so identified with the government and the progress of Korea that the country is occasionally referred to locally as the Republic of Samsung.

So when Samsung repeatedly presented bad news to investors this past year, particularly its results last quarter that showed a drop of 15% of its operating profit — the first drop in three years — there has been something of a slowly boiling panic underway in the country. From talks with people who work at the company, stress levels are off the charts, intensified by the pressure to return previously-paid performance bonuses.

My colleague John Biggs has already talked about Samsung’s race to the bottom, but that was before these most recent results. With consumers unwilling to pay top dollar for Samsung’s best smartphones and Chinese manufacturers readying a dizzying array of competitive and inexpensive products, Samsung faces what might be considered an almost overpowering inevitability crisis about its downfall.

Samsung’s leadership certainly knows its potential fate, having witnessed the rise and fall of Sony, the Japanese conglomerate from which Samsung takes its historical inspiration. It has experimented with new form factors with its Galaxy Gear device, and the company has made personnel changes to its design team as it pursues new avenues for growth.

Perhaps its most ambitious change is simply to buy up areas of future growth. Its acquisition last month of SmartThings was an attempt to get into a white hot market like Internet of Things through an acquisition. SmartThings is notable for being one of the only acquisitions the company has made in the technology space in its history. The company is also expanding its presence in American innovation centers like San Jose and New York.

There is a very thin window of opportunity for Samsung to change its style and approach to the market, but few are waiting for that moment. Certainly Korea’s political leaders are preparing for a post-Samsung world, with the president emphasizing the phrase “creative economy” to articulate a vision of a more entrepreneurial and disruptive Korean economy.

There is no doubt that there has been a deep verve to build up a startup ecosystem in Korea for sometime, but 2014 may be the year that the country first breaks free of its large conglomerates and starts to take the startup model more seriously.

Samsung’s continuing woes are taking a toll on its image among university graduates. For the first time in ten years, the company was not the most desirable employer, replaced instead by Korean Air in a survey conducted by Incruit.

Positive news from the startup world also has helped draw more attention. Just take the news from Coupang, one of the country’s top startups, which received a $100 million investment capital round led by Sequoia’s chairman Mike Moritz, the legendary investor behind Google, Yahoo, and Paypal. The investment is easily one of the most important overseas venture capital infusions in Korea’s history and demonstrates the country’s increasing profile among U.S.-based investors.

An early-stage success story came from the winter batch of YCombinator, where Korean startup Memebox was voted one of the top three companies presenting at Demo Day by other YC founders. And Korea’s popular messaging app KakaoTalk merged with local portal Daum for $2.9 billion, one of the largest M&A deals among startups here ever.

In short, the country has started to produce case studies for how startups can start, scale, and exit in the market. More importantly, startups have started to develop their own approaches to management and culture, creating open floor plans inspired by Silicon Valley and using English names in communication to avoid issues of social hierarchy intrinsic to the Korean language.

But for the region to move from a handful of case studies into a deeply-integrated innovation center, it will have to overcome immense obstacles, ones that are simultaneously cultural, political, economic, and social.

Perhaps no issue looms larger for the startup ecosystem than its profound isolation. There remains a huge gap in knowledge between startup founders in Seoul and those in the United States, and there seems to be little effective efforts to close it. Local Korean-language publications like BeSuccess, Platum, and VentureSquare provide news, and Under The Radar and other blogs have dedicated posts about entrepreneurship, often translated from Silicon Valley writers.

Part of the challenge is that the ecosystem is so scattered around Seoul, a city of 10 million people. A good number of startups are located in Gangnam along what would be considered Seoul’s Wall Street, a location that may be convenient for venture capitalists, but seems like a poor fit for the startup culture many founders are hoping to develop.

There are programs that are designed to move startups to the US and bring Silicon Valley experts to Seoul like the accelerator SparkLabs and their Next Conference. Such efforts are certainly helpful, but the problem is far more broad. There simply isn’t enough of an emphasis society-wide on supporting and engaging intellectually with new ventures, an issue that founders have confided to me on at least a dozen occasions.

That isolation spills over into other areas of the ecosystem like fundraising. Due to the risk-averse nature of venture capital in the country, many term sheets still mandate a personal liability clause in exchange for an investment. This means that if a business fails, the founders may have to personally pay back the money from their own savings. As one founder told me in frustration, “venture capitalists here want to get venture returns with bank loan-level risk.”

When I look for lessons to extract from Korea and apply more generally, this is probably the most important one. Entrepreneurs are weird people, driven more by the excitement and thrill of starting a new business rather than the life of a wage slave waiting for retirement. But rules, process, and norms can eliminate the incentives to starting a business so entirely, that it is unfeasible for even the most entrepreneurial of founders to try a new venture.

Those regulations deeply undermine the notion that certain cultures have an “innovative spirit,” or that others lack creativity. There is a stigma against failure in Korea, but that comes more from the complete destruction a failure has on an entrepreneur’s personal finances than it does about failure itself. If America had bankruptcy laws or term sheets like those in Korea, we’d see entrepreneurship evaporate as well.

What we are talking about is building a new economic model, one that is built for innovation and change rather than scale and stability. It requires every institution in society to rethink how its procedures can inculcate and germinate creativity. The challenge here comes from the transition itself, when massive companies disintegrate in an orgy of creative destruction and a new strata of startups are built from the ashes.

Few countries have navigated such challenging currents, but if there is one city that has the potential, it is Seoul.

Image by Steve Garfield used under a Creative Commons 2.0 license.