This article was published on March 13, 2025, at 4:46 p.m. on ChosunBiz MoneyMove site.
The fundraising competition among domestic small and medium-sized venture capital (VC) firms is becoming increasingly fierce. The consensus in the industry is that the likelihood of selecting a delegated management company (GP) in government agency investment projects drops sharply without a commitment from other agencies.
According to the venture investment industry on the 13th, government agencies, including the Ministry of Small and Medium Enterprises and Startups, are providing incentives to those who submit letters of commitment (LOC) in the selection process for GPs of the Fund of Funds. The letters of intent (LOI) are also reflected in the preferred criteria based on internal review standards, but the score is low excluding LOIs from banks and local governments. An industry official noted that "this is a measure to prevent failures in fund formation by favoring houses that secure genuine investors."
A letter of commitment is a document in which private institutions or corporations promise to invest a certain amount in a venture fund. The reason investment organizations like the Fund of Funds grant additional points based on other institutions' letters of commitment is to select houses with a high probability of forming a fund. The letter of commitment is treated as a mandatory document in the investment projects of anchor investors, such as pension funds, mutual aid associations, and private financial institutions, which are proceeding with venture fund investment projects in South Korea.
As the harsh period for venture investments prolongs and venture capital firms fail to complete fund formation and give up, it seems to be a last-ditch regulation. However, there are voices in the industry suggesting that the standards created to increase the probability of fund formation are, in fact, acting as obstacles to fundraising for small and medium-sized venture capital firms. It is pointed out that investment is concentrated in corporate venture capitals (CVCs) and venture capitals under financial holdings.
A representative from a domestic independent house said, "It is much easier to secure LOC because corporate venture capital or financial holdings have their parent companies backing them," and added, "Without LOC, the likelihood of being selected for investment projects decreases, causing significant harm to small and medium-sized houses."
Amid this, some houses are emerging that are matching their management fees to the lowest level to secure investment projects. A competitive climate, where firms are lowering management fees for additional points, is ongoing. Management fees, along with performance fees, are considered key revenue sources for VCs managing venture funds. An industry official said, "Recently, some houses have been showing management fees of less than 1%."
The Korea Venture Capital Association is also aware of the issue. Kim Hak-kyun, the association's chairman, emphasized that "recently, there is a trend of decreasing management fees, and we are closely monitoring the issue of investment projects being conducted primarily based on LOC," stating, "According to association data, it is not yet a cause for alarm, but we are preparing to raise our voice to address the areas that are reduced below a specific limit."