Gazing East: Lessons from Korea and Japan – and opportunities
Revaia's focus for the past few years has been on expanding our presence in Europe. While we’ve gained great insight into this region, it’s also good to step outside of your comfort zone and see the world from different perspectives.
In that spirit, a few months ago Elina had the pleasure of joining a trade mission to South Korea and Japan organized by Jean-Noël Barrot, the French Minister for Digital Transition. The delegation included 20 representatives of French startups and investors.
The trip offered a chance to spread the word about France’s surging tech economy that remains resilient despite the current economic headwinds. This includes the massive investments being made in Deep Tech and reforms that have made the country one of the three most attractive destinations in Europe for foreign investment. On a practical level, it was a forum to do business, with a number of Memos Of Understanding being signed that will lead to tangible expansion possibilities for French companies.
But this was also a moment for many of us to learn about the Korean and Japanese tech economies. Certainly, the timing seems to be right. No less an authority than famed investor Warren Buffett has expanded his focus on Japan which has remained an outlier for taking extraordinary measures to hold interest rates down while its economy remains solid. His Berkshire Hathaway took stakes in Japan’s 5 largest trading companies, and has done so well that his partner Charlie Munger recently declared: “It was like having God just opening a chest and just pouring money into it.”
Of course, Korea and Japan are associated with some of the biggest global brands in technology. Korea is home to Samsung and LG, while Japan is the birthplace of Sony and Nintendo. Those names alone make them formidable players in tech economies.
However, as we learned on the trip, it’s another story when it comes to startups and innovation. While it felt counter-intuitive, it turns out that both countries have had a hard time translating the historic success of those giants into a thriving ecosystem of startups and entrepreneurship.
According to CB Insights, Japanese startups raised $4.4bn in 2022, down from $6.1bn in 2021. Meanwhile, South Korean startups attracted $5.4bn in 2022, down from $6.45bn in 2021 (sources: White Star Capital report, South Korean Ministry of SMEs and Startups). Now consider that Japan has a population of 127m, and South Korea has a population of 51.7m.
Compare that to France, with about 70m people, where startups raised $12.6bn in 2022, according to Pitchbook. You can see that both are lagging on a relative basis, particularly Japan.
The good news is that both regions are hungry to boost their respective startup ecosystems and eager and open to help from foreign companies and investors. During our trip, as we networked with local investors, LPs, startups, and entrepreneurs, a few key themes emerged that we think will help our portfolio companies better understand these markets and begin to build more bridges.
We’re sharing them in the hope they will offer some insights to others trying to understand the region as well:
1. Emerging VC: As noted, these ecosystems are essentially where France was 6 or 7 years ago in terms of size. And as was the case in France, a large portion of the venture capital investment is either coming from corporate VCs, or independent VCs that were spun out of corporations. It’s worth noting that the name most people likely know, Softbank, doesn’t invest in Japan.
In both countries, their state equivalents of Bpifrance have created a fund of funds to catalyze the growth of the local venture industry. But for now, there is a big venture gap here and the local markets are courting foreign investments. They need this money to grow past the early stages and expand beyond Asia.
2. Corporates rules: As is also the case in France, legacy corporates still dominate the economic landscape. Yet there is a key difference. In France, these corporates are sector focused: luxury, finance, or health. In Japan and Korea, the economy is driven by conglomerates whose activities span a wide range of verticals. In Japan, these are known as “keiretsu” and include players like Fuyo, Sanwa, Sumitomo, Mitsubishi, Mitsui, and DKB Group. In Korea, these family-owned conglomerates are called “chaebols” and include LG Group, Lotte Group, Hanwha Group, and GS Group. The South Korean chaebols accounted for 60% of that nation’s GDP in 2021.
The bottom line here is that if you are going to do business in these countries, you can’t ignore these conglomerates. Whether you are a scaleup or investment fund considering entering these markets, there is a good chance that one of these giants will be a competitor
At the same time, they make for potentially enticing and reliable partners for companies looking for a foothold. On our trip, several companies signed Memos of Understanding with some of these players. For instance, Ÿnsect, the insect-based alternative protein scaleup, signed an MOU with the Lotte R&D center in Korea to jointly develop insect-based food products. This will accelerate the company’s presence in a region thanks to a partner with solid financials and piles of cash.
3. Demanding consumers: These big corporates are extremely sophisticated when it comes to refining the performance of their products, especially tech products. As such, consumers are very tech-savvy and have high expectations when it comes to quality. So the requirements to make a product that sells well in these countries is very high.
4. Regulatory challenges: Any new region will have its own particular set of regulations and rules that will require any newcomer to adapt. In the case of Korea and Japan, one such area involves labor rules, which can be quite restrictive. In Korea, for instance, the country until recently had rules that set a 20% limit to the number of foreign workers a company can employ. Facing worker shortages, the government has been relaxing that rule. But it poses a challenge for both local startups and scaleups entering the market. In one case, a subsidiary of Naver, the South Korean gaming company, set up a subsidiary outside of the country so it could hire the talent it needed to expand its metaverse business. These kinds of rules were originally designed to protect traditional industries, but they create serious constraints in the tech space.
5. Beyond Asia: Many of the startups we met wanted to expand their businesses beyond their traditional Asian playgrounds. They are particularly interested in Europe but aren’t sure where to start when they look at a continent that has dozens of countries, languages, and cultures. For investors or countries that can establish themselves as gateways to understanding Europe’s markets, there is a huge opportunity. In that context, it makes sense that VivaTech, the Paris mega-conference, featured South Korea at its last edition in June
Finally, it should be noted that we’re not alone in the tech world in looking more closely at Japan and Korea. Given the global lull in funding, a lot of US VCs now are spending time there to set up shop and invest. The window of opportunity remains wide open for now, but that also means plenty of others are ready to rush in.
For Revaia, this trip was an opportunity in the short term to help our portfolio companies find the right context to broaden their networks there. It also opened a number of doors for our fund as we gained a better understanding of the region’s LPs. We are also optimistic about possibilities that will be actionable over the mid-term as well.
Obviously, this was just a start and there is much more for us to explore. We returned to France extremely enthusiastic about what we had learned. It's clearly an important opportunity for non-Asian investors to position themselves and bring value to a region looking for partners.