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4 December 2017

South Korea is ready to boost spinouts

The government of South Korea is ready to support university innovation, launching several initiatives and passing deregulation.

Author: Hicheon Kim, professor of strategy and organisation and director of the Korea University Business School Startup Institute

Ten years ago, the government of South Korea changed the law to allow universities to have technology holding companies to commercialise the university’s technology and research, and to facilitate the formation of spinouts.

In 2008, Seoul National University, Hanyang University and Samyook University launched their holding companies – modelling them on Oxford University Innovation, University of Oxford’s tech transfer office, and SRI International, a non-profit research institute spun out of Stanford University. As of the end of 2016, there were 48 university holding companies owning 435 subsidiaries.

Nonetheless, the actual performance of the companies does not match their increase in number. For instance, the businesses of Seoul National University Holdings recorded an annual sale of $25m in 2016, which represented less than 1% of that recorded by the portfolio of Tsinghua Holdings, the commercialisation arm of Tsinghua University.

Regulations account in part for the lacklustre performance of university holding companies. For instance, until recently, universities have been allowed to invest in spinouts only through holding companies. And by law, they were required to own stakes of at least 20%.

Such requirements work as more of a hindrance than a help to promoting the formation of and  investment in spinouts. To begin with, faculty members and researchers may not be willing to relinquish 20% equity, which gives them an incentive to try to work around university holding companies. This reluctance to hand over a significant equity stake is greater for ideas and projects with big commercial potential.

Every time portfolio companies seek to secure additional external investments, university holding companies are bound to make follow-on commitments so as to maintain their minimum 20% equity. This, in turn, means outside investors are less willing to invest since 20% or more is already taken by university holding companies.

Recently, the government relaxed the regulations to promote university spinouts and entrepreneurship.

First, the change means university holding companies are now able to raise, and serve as general partners of, angel or venture capital funds. As such, they can invest in spinouts as general partners and are no longer required to take the minimum 20% equity.

Second, the government now allows universities to operate their own accelerators. In the past, institutions were encouraged to operate incubators to help spinouts, but by law they were not allowed to invest in them.

Now, however, the government even plans to assign a larger role to accelerators that provide funding as well as workspace, mentoring and networking. To qualify, accelerators need to meet minimum requirements on the amount of paid-in capital, staff size and qualification, and the size of their investment fund. Accelerators that meet the conditions will be favoured for various government grants and initiatives.

By launching accelerators, universities can provide an end-to-end service for and multiply the routes of investing in spinouts.

Third, the government has pledged funds to incentivise investments in spinouts. For instance, the Ministry of Education announced the creation of a $15m fund dedicated to spinouts, the credit guarantee scheme Korea Credit Guarantee Fund announced a plan to invest $275m in spinouts, and the government pledged a $910m fund to support startups in general, part of which will go towards spinouts.

Of course, more should be done to promote spinouts than deregulation and new initiatives. Too often, university holding companies are understaffed and not professionally managed. Korea University Holdings and Seoul National University Holdings recently recruited outside staff with a background in startups and the venture capital industry to lead their operations. However, this is an exception rather than the norm. University holding companies are often run by university faculty or staff who lack the necessary skills and experience.

Students in South Korea have traditionally been quite risk-averse, preferring to work for big companies such as consumer electronics companies Samsung and LG or conglomerate Hyundai. However, this seems to have been changing in recent years as many students show a growing interest in startups and entrepreneurship. Over the past four years, the number of entrepreneurship courses has more than doubled, while the number of student entrepreneurship clubs has increased more than fivefold.

The former administration acted as a planner and strong supporter for establishing a creative economy by encouraging entrepreneurship and startups. The Moon Jae-in administration – inaugurated in May this year – continues, maybe even furthers, its support for entrepreneurship and startups. The government also recognises the importance of the roles of universities, relaxing some regulations and introducing new initiatives aimed at university startups. It remains to be seen how the university innovation ecosystem will evolve and interact with the existing startup ecosystem.

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