South Korea's internet giants Naver and Kakao have slashed funding in start-ups this year, according to data released by venture capital information firm DerbyC.
As higher interest rates and a looming economic downturn dampen sentiment for fledgling company investments, Korean start-ups brace for a prolonged funding squeeze.
The venture capital arms of the two companies, Naver D2SF and Kakao Ventures, invested a total of 15 billion won ($11 million) in 15 start-ups between January to September this year, which is a significant drop from a total investment of 54.4 billion won in 106 start-ups last year.
Both companies have previously invested heavily in innovative start-ups, fostering their growth and profiting from their eventual initial public offerings (IPOs) or buyouts. This trend peaked in 2021 when their combined start-up investments reached 86.1 billion won.
However, higher borrowing costs and economic uncertainty in the past two years have made it less likely for startups to exit through mergers and acquisitions (M&A) or IPOs, leading to the current funding crunch.
Total investments in start-ups in Korea in the first half of the year amounted to 2.32 trillion won, down 68.3 percent compared with the same period last year, according to Startup Alliance Korea, a non-profit organization that supports domestic start-ups. As funding runs dry, even start-ups valued at over $1 billion, such as Jigbang and Yanolja have had to take measures to cut costs.
"Naver and Kakao are also dialing back funding in start-ups because both companies are betting big on investing in generative AI within the company," said an industry insider familiar with the matter. Building generative AI tools such as large language models (LLMs) is capital-intensive. Naver has invested approximately 1 trillion won in AI over the past four years.
Intensifying political scrutiny over Naver and Kakao is further exacerbating the current funding downturn.
The ongoing stock market recession has made IPOs an unlikely exit strategy for start-ups. Incorporating start-ups as subsidiaries of the two companies is also proving to be a challenge, as public sentiment towards Naver and Kakao monopolizing the tech sector is increasingly becoming negative.
Korean start-ups are not alone in the struggle. Venture capital funding of start-ups in the United States plunged 29 percent in the third quarter of this year to $32.7 billion compared with the same period last year, according to the National Venture Capital Association.
This article was originally published on Oct. 13, 2023.