It's a relief that the track records of investment targets, a long-held wish, have been extended, giving the ecosystem breathing room. The next mission is to remove the restriction that allows only fifth-year startups with "no record of fundraising."
Jeon Hwa-seong, head of the Early Investment Accelerator (AC) Association, said in an interview with ChosunBiz on the 3rd, "For now, we have expanded the investment targets, so the goal is to gradually lift follow-on investment regulations next year."
An amendment to the Act on Special Measures for the Promotion of Venture Investment to expand the operating history of investment target corporations, a long-standing goal of the venture and startup sector, passed the National Assembly plenary session on the 2nd. As a result, the operating history of startups that can receive investment from individual investment associations managed by ACs was widened from "three years or less" to "five years or less."
The so-called "three-year rule" had been a burden for both the AC industry and startups. ACs had to rush to invest in early-stage corporations with less verified technology, and startups missed investment opportunities and fell into funding gaps. The damage was particularly severe in deep-tech and bio fields, where research and development periods are long.
Jeon said, "Because we had to fill nearly half the ratio across the entire fund within three years, the investment timing was distorted," adding, "Even after completing the technology, funding gaps emerged in years four to five, and the actual closure rate is highest in this window." Jeon pointed out, "For deep tech, it's natural not to see results within three years, but the system failed to keep up with reality."
There were many hurdles to improving the system. Investment discussions fall under financial regulation, and the interests of the financial sector, the Ministry of SMEs and Startups, and the National Assembly differed over who should invest in fourth- to fifth-year corporations. Venture capital (VC) was also not structured to actively invest in corporations in this segment, prompting criticism that a gap between ACs and VCs was inevitable.
Jeon said, "Everyone knew it was necessary, but there was no entity to step up and execute," adding, "In particular, when the associations were split in two, it was difficult to even bring this issue to the table."
The association's integration played a major role in resolving the issue. The existing Korea AC Association and the Early Investment Institutions Association were integrated in May last year and launched as the Early Investment AC Association. The industry assesses that Jeon, who was then the AC Association head, spearheaded the integration and created momentum for system improvements.
A visible first achievement came right after the integration. The "venture studio (company building)" system, in which ACs establish subsidiaries to directly create startups, was formalized. Through this, ACs can assemble founding teams themselves and handle early investment and incubation, establish suitable founders, and quickly exit.
But tasks remain. The amendment includes a proviso that only "fifth-year startups with no record of fundraising" are included as investment targets. The industry views this as the biggest stumbling block. Even when fourth- to fifth-year corporations need follow-on investment after early investment, ACs cannot invest because it would be a second investment, creating funding gaps during the growth stage. There is also skepticism about how many "fifth-year startups with no record of fundraising" actually exist.
Jeon emphasized, "If we had tried to remove all of this proviso from the start, the amendment itself would not have passed," adding, "Now that the associations have united, the next task is to remove the 'first investment' restriction for fourth- to fifth-year corporations."
Jeon cited "overhauling the secondary market" as a task that must be addressed to ensure the sustainability of the AC ecosystem. Secondary funds buy and recover equity held by VCs and angel investors in existing funds, but Korea's secondary market is currently concentrated around VCs, leaving ACs' exit channels blocked.
Jeon said, "As supply and demand in the KOSDAQ market have collapsed, exits are virtually blocked," adding, "VC exits can revive only when KOSDAQ funds are formed and capital flows in, and only then can ACs exit through secondary funds." With the parent fund expanded, Jeon also projected that introducing secondary funds with the "primary purpose" of purchasing AC equity would be possible.
Jeon said, "This amendment is only the beginning," adding, "Overseas, negative regulation means there are no time limits, while Korea operates under positive regulation that codifies everything, so changing even one system takes time." Still, Jeon noted, "Once things start to be loosened one by one like this, a foundation will be laid for technology-based startups to grow properly."
Jeon, immediately upon taking office as the inaugural head of the Early Investment AC Association, also institutionalized venture studios (company building), enabling ACs to establish subsidiaries and directly create startups. ACs formed founding teams in-house, took charge of early investment and incubation, and created a foundation to establish suitable founders and exit quickly.