Super hot Korea gets a new startup fund

Korea is sizzling, and the fact isn’t lost on Altos Ventures or its backers. The early-stage venture firm, with an office on Sand Hill Road and in Seoul, has just raised an oversubscribed $110 million fund to invest exclusively in the country, the second fund of its type for Altos, which raised its last Korea-focused fund with $60 million in 2013. (The firm has also raised four U.S.-focused funds over the last decade.)

It’s easy to understand LPs’ enthusiasm. Korea boasts the world’s 12th largest economy, with more than 50 million inhabitants and GDP per capita of roughly $25,000, according to the World Bank. Its inhabitants are entrepreneurial, with 28 percent of the population self-employed versus 10 percent in the U.S. Korea also has among the world’s fastest and mostly broadly deployed broadband.

Also very notably, Korea has produced more than a dozen internet companies worth more than a billion dollars over the last decade or so, including the web search giant Naver, a now publicly traded company valued at $17 billion; the web search company Daum Kakao, formed when Korean internet firm Daum merged with domestic messaging app company Kakao in a $2.9 billion deal in 2014 (it’s now valued at $5.5 billion); and Yello Mobile, whose mobile apps business was valued at $4 billion during its most recent funding round in December.

Yesterday, we talked with Altos Ventures managing director Anthony Lee to get a better picture of what’s going on, and how his firm is going to invest its new fund.

TC: When and why did you start investing in Korea?

AL: About 10 years ago. We started seeing this opportunity that was very much overlooked in many ways. Everyone knows the country for LG and Samsung, but there are now a lot of very real, billion dollars companies, and there’s almost zero Western capital in those companies. Many bootstrapped themselves. They were almost entirely missed by VCs in Silicon Valley.

TC: That must be changing. What other investors are you starting to see who you didn’t see five years ago?

AL: There’s now a domestic VC market, investing $1.5 billion annually in all sorts of things, from internet stuff to hardware, movies, medical, and manufacturing. We’re seeing a lot more foreign attention now, too. At the later stages, you’re seeing Chinese hedge funds, Japanese corporates — Softbank invested $1 billion in [our portfolio company, the e-commerce startup] Coupang last year. Goldman Sachs is coming in. Blackrock also led an investment in Coupang in late 2014. At the earlier stage, you’re also starting to see, Japanese, Chinese, and more U.S. investors start to venture over there.

TC: There’s a much stronger focus on profitability in Korea than in the U.S., is that right?

AL: Yes. Korean venture has been more merchant banking and corporate in its nature, meaning it invests for very quick returns. The government is a large LP in many funds and they’ve [accordingly been] optimized for lower risk. We sometimes find ourselves pushing companies in the direction of growth and not profitability. At the same time, of the 30 companies we’ve invested in there, we’ve only had one loss. It’s a bit emblematic of the way Korean entrepreneurs work. They hate to fail.

TC: Who are your investors in this new Korea fund?

AL: Most are institutional investors from North America and Asia. Maybe a quarter comes from Korean entrepreneurs, foundations, and internet companies.

TC: A lot of tech is pioneered in that part of the world. 

AL: It is. Korea was home to the first social network, Cyworld; the first virtual goods, online games . . . I remember being there in 2000 and watching full-motion video on its subway cars. People have large phablet-style cells phones and often more than one phone as Korea is way ahead in 4G penetration, so what people do on their mobile devices is way ahead of us in the U.S. More than half of e-commerce happens on the phone. [Editor’s note: in the U.S., that percentage is 30 percent.]

There’s this other really interesting layer where Korea used to be perceived as a really backward kind of country, but it has gone from OECD debt recipient to donor. It’s industrialized so quickly that it’s actually now known for its cultural exports. Korean dramas are popular through Asia. Korean cosmetics are huge — there are more cosmetics companies in Korea than in the U.S. It’s really become a bit a trend setter.

TC: What are you tracking now?

Half of our investments are focused on companies that can become big category leaders within the country itself. The other half are global companies that happen to be run by Koreans. Retrica, for example [a photo application for Android that lets users add filters to their snapshots], is one of the top apps in Europe and Latin America and it’s based in Seoul.

As for different areas, we’re very interested in fintech in Korea. There aren’t efficient mobile payments platforms there yet. They don’t have peer-to-peer lending. So those are two places where we’ve met bets recently. We’re also very interested in healthcare IT. Korea has a very advanced healthcare system. And we’ve interested in mobile entertainment. One thing we’ve seen recently are far more sophisticated mobile games that we’re used to playing on the Xbox.

TC: Have valuations been impacted by some of the global turmoil we’ve seen of late?

AL: There hasn’t been a big rush of supply of capital, so valuations haven’t gone out of whack. Deals are on an order of three times less than in the U.S., and burn rates are also much lower. So it’s not only more reasonable to invest in a company, but the companies are more reasonable to run.

TC: Meaning no hot air balloon chairs in the office?

AL: Actually, the companies are starting to look more like Silicon Valley companies. All the entrepreneurs speak English. They all read TechCrunch and they know what SV companies look and act like, and so to compete for talent, they start to adopt those kinds of things. In fact, Google has these entrepreneurial campuses and opened its first Asia-based center in Seoul and [stepping inside it], you would think you were in Mountain View.

TC: How are deal terms different, if at all?

AL: Our term sheets are exactly the same here as there. We don’t want to be taking advantage of the fact that there’s less capital there. We compete on the basis of offering a plain, standard, Silicon Vally term sheet; we even published it publicly to educate the ecosystem there.

The entrepreneurs are very savvy. Many are Western educated and many have worked for large Western internet companies. On any day, hundreds of startups are flying between the two countries. We see them in our offices all the time.