South Korea is a shimmering success that is today welcoming of foreigners, but its reaction to profit-seeking private equity funds in the noughties was fury. Photo: Robert Koehler

In the post-Covid-19 era, could Seoul be the next global startup hotspot? For a city once known as the capital of a land of stern-faced economic warriors, laboring away for giant, metal-bashing conglomerates, that could seem like a stretch.

But Seoul and South Korea are changing. Now the concept is not as far-fetched as it may sound.

San Francisco-based research and policy advisory organization Startup Genome’s authoritative 2020 Global Startup Ecosystem Report placed the South Korean capital 20th overall with an ecosystem valued at US$39 billion, nearly four times the global average. It was the first time the city cracked the top 20.

Another major ranking firm, Israel’s Startupblink, put the city 21st overall in 2020, up nine spots from the previous year.

According to global research firm CB Insights, South Korea is also home to 11 “unicorns” – startups worth more than $1 billion. That is the fifth largest flock in the world.

Most of those horned beasts are headquartered in Seoul. And if Seoul’s urban policymakers have their way, the bustling metropolis of 11 million people will soon be challenging the likes of Silicon Valley, New York, Boston, Seattle and Tel Aviv as a venture powerhouse.

The city is investing $1.7 billion through 2022 to become one of the world’s top five startup hubs, aiming to raise the number of South Korean unicorns to 15 by 2022. The funds are being used to train about 10,000 tech specialists and more than double the number of startup spaces in the city to 2,200.

City Hall also recently announced the creation of a separate scale-up fund of nearly $300 million.

This is all a very big change for an economy that has, since it industrialized in the 1960s, been largely a binary one with huge business groups at the top and a plethora of mom ‘n pops at the bottom, but nothing much in the middle tier.

From big boys to SMEs

Seoul’s focus on startups is part and parcel of a larger national effort to boost South Korea’s competitiveness by building a robust startup sector. That process should help the country break free from its traditional economic over-reliance on giant family-run conglomerates, or chaebol

“The chaebol structure was fine 50 years ago because it allowed the government to direct economic development instead of having to deal with a myriad of small and medium-sized companies, as in Taiwan,” said Mike Breen, a Seoul-based business consultant and longtime observer of South Korea.

“The government dealt with a handful of businessmen who covered all sectors for them.”

While the chaebol provided the locomotive for the country’s economy, they are also criticized for monopolizing resources and abusing their power. And that power is considerable.

Samsung is among South Korea’s most powerful chaebols. Photo: Handout

The only democratic Seoul administration that managed to force significant reform upon the chaebol was the one that was in power during the 1997-8 Asian financial crisis.

Since then, and recognizing the importance of the chaebol as major employers, governments have largely failed to reign them in. Now, instead of changing the chaebol, Seoul administrations are working to change the economy.

A chaebol-centric economic system “… is no longer appropriate because the tendency of these large groups is to absorb the best talent, absorb the financing available and even co-opt creativity, so it’s actually very difficult for young entrepreneurs to put their ideas into practice in this market,” Breen said.

“So the idea is to change the system enough to allow entrepreneurial creativity to flourish.”

Just as the chaebol were to a considerable degree a result of government policies in the 1960s and ’70s, so it is governments – both national and local – that are pushing ahead with a startup eco-system.

The plan has had a recent boost. The ongoing Covid-19 pandemic underscored the urgency of this transition by highlighting the need for speed and innovation.

In May, South Korean President Moon Jae-in told a gathering of young entrepreneurs: “Amid this situation, we’ve come to face an economic crisis triggered by Covid-19. A new beginning will be made from this moment on … Before growing into global business unicorns, startups must overcome numerous obstacles … the government will continue to provide support until innovative ideas can be commercialized and stand tall on the world stage.”

In August, the South Korean government laid out plans for a “Korean New Deal,” an initiative that calls for KRW160 trillion ($144.3 billion) in national, local and private funds to create 1.9 million jobs by 2025.

Taking its cue from the Great Depression-era program in the United States, Seoul’s bold plan aims to transform the South Korean economy, in part by digitalizing industries through cutting-edge technologies such as 5G, artificial intelligence and big data.

Ministries are jumping to the bandwagon. 

Soon after the initiative was announced, South Korea’s Ministry of Finance announced the creation of a $339.6 million fund to help promising startups commercialize their technologies.

In September, the Ministry of Trade, Industry and Energy pledged to increase the number of energy-related startups to 4,000 by 2025, and in November, the Ministry of Environment pledged to spend more than $2.2 billion over the next five years cultivating 2,000 “green” startups, including at least one unicorn.

A unicorn siting at South Korea’s Jeju Art Park. Image: Facebook

“Startup ecosystems are government-driven in most Asian countries, whereas they are individual founder or investor-led in Western countries,” said Lee Tae-hoon, director-general of the Startup Fostering Division, Seoul Business Agency, a Seoul Metropolitan Government-run organization that supports small and medium-sized businesses in the city.

“It takes about 10 to 20 years for these private sector-driven entrepreneurial cultures to be rooted in the ecosystem. Therefore, the government plays a leading role until the fundamentals of the startup ecosystem become consolidated.”

Western readers wedded to the concept of laissez faire may look askance at this policy-driven initiative. They should not.

“Seoul Metropolitan Government has been positioning itself based on the policy of not intervening in the private sector to boost their activities,” Lee said. “Instead, we will focus on filling in the gaps not covered by the private sector. It is a win-win collaboration.”

Starting the ball rolling

Support for Seoul’s startup ecosystem long predates the Korean New Deal, or even the current administration. 

The Park Geun-hye administration started the ball rolling with a range of policies to kick-start the creative economy, aiming to “strengthen the role of venture businesses and SMEs” and “mainstream the use of ICTs across the entire economy and in particular to increase ICT adoption within SMEs.” 

That initiative won support across party lines, earning praise even from Park’s opponent and eventual successor Moon. It created spaces, platforms and programs throughout the country to systematically support innovative startups.

One such program was the Tech Incubator Program for Start-ups (TIPS), a state-led incubator program that appoints successful venture founders as incubators and offers services such as angel investor networking, incubating, mentoring and professional support and matching R&D funds. 

When the World Economic Forum named South Korea one of five startup hubs to watch in 2020, it specifically cited TIPS, saying: “As the government takes no equity and provides these funds without any strings attached, startups can aim high without having to worry about potential failure – and this has been a game-changer, especially when considering the risk averseness of South Korean society.”

After Moon assumed office in 2017, he made several pledges to South Korea’s startup community, including increasing funding, making it cheaper to start up, reducing the punishments for failure, encouraging big companies to help smaller ones and easing the exit process.

And his administration created a separate ministry, the Ministry of SMEs and Startups, to cater to the needs of venture entrepreneurs.

Partly as a result of these top-down efforts, new venture investments recorded an all-time high of nearly $3.9 billion last year, while the number of newly established corporations surpassed 109,000. In addition to its 11 existing unicorns, another 235 potential unicorns were in the waiting as of 2019, a nearly five-fold increase from four years earlier.

Nathan Millard runs a startup marketing firm in Seoul.