No Uber or Airbnb in South Korea: Red tape, risk-aversion hobble start-ups

When Choi Ba-da pitched his car-sharing firm Luxi to Hyundai Motor officials in 2017, he told them there would be no future for South Korea's top automaker if it failed to embrace emerging technologies.

His pitch worked: Hyundai agreed to buy a 12 per cent stake in Luxi for US$5 million, its first investment in a car-sharing firm as it joined rivals in the race for new-age transportation.

But about six months later, Hyundai sold its stake after thousands of angry taxi drivers, worried about their jobs, threatened to boycott Hyundai cars, Choi told Reuters. Hyundai officials say they were also wary of laws limiting car sharing in South Korea.

Hyundai's breakup with Luxi illustrates how rigid regulations, strong labor unions and a risk-averse culture among South Korea's giant family run conglomerates, or chaebol, have hindered the growth of start-ups in Asia's fourth-largest economy.

President Moon Jae-in's administration says the country's decades-old growth model, powered by a handful of large exporters such as Hyundai and Samsung, has reached its limit in the face of Chinese competition and rising labor costs.

To offset slowing growth in sectors such as autos, ships and chips, it created a new ministry for start-ups last year and has boosted funding to cultivate new technologies.

But the government has been too slow to remove cumbersome regulations for start-ups, wary of upending the country's economic order or upsetting powerful labor unions, according to interviews with a dozen entrepreneurs, investors and executives.

That has left South Korea surprisingly resistant to disruptive technologies despite its tech-savvy image, they say.

"After agonising, Hyundai officials told me that they had to go slow with the service, before eventually pulling out," Choi told Reuters. "But how on earth can a startup go slow?"

In a statement to Reuters, Hyundai said it sold its stake in Luxi as the investment "did not fit a business model the company pursued", without elaborating.

Hyundai's chief innovation officer Youngcho Chi also said South Korean restrictions on ride-sharing to unspecified "commuting hours" as one reason and said the automaker had concluded that Luxi was not going to work out.

Instead, Hyundai pumped US$275 million into Singaporean ride-hailing firm Grab this year.

Hyundai and Samsung say they invest in both local and overseas startups.

Close to the company's headquarters, South Korean startups are easier to communicate with, Hyundai said. Samsung told Reuters it has been running a startup support program for five years to raise local entrepreneurs.

Still, some say chaebol are moving too slowly.

"The Korean success has been built on a fast-follower strategy, but Chinese rivals are catching up very fast," said Hwang Sungjae, a co-founder of Fluenty, a South Korean artificial intelligence startup acquired by Samsung Electronics last year. "Companies now have no choice but to innovate and work with start-ups, but they are not investing quickly enough."

"I think Korean companies are at a great risk of falling behind."

Regulations are another challenge.

South Korean laws would entirely or partially block about 70 per cent of the world’s top 100 startups by investment size from bringing their services to the country, according to joint research by Google Campus Seoul and the Asan Nanum Foundation. Those include giants Airbnb, Uber, and China's Ant Financial.

In February, top South Korean mobile messaging operator Kakao Corp bought Luxi for US$25 million, but it remains stymied by carpooling regulations, and has yet to launch amid fierce protests from taxi drivers.

One protesting taxi driver set himself on fire and died last week, and unionised drivers say they plan a huge rally this week.

Kakao said it pushed back the launch schedule of its carpool service in the wake of the suicide.

South Korea's transport ministry declined to comment.

Regulations also prohibit venture capital funds from investing in financial, real estate, accommodation and restaurant sectors in South Korea.

The government has proposed a new law to lift those restrictions, but a senior government official acknowledged it would be neither easy nor quick. "The bottom line is that we have to move toward innovation, but it takes a lot of time and is a difficult process to mediate existing interests,” the government official at the Ministry of SMEs and Startups told Reuters.

“Realistically, we can’t simply ignore existing interests. There’s no clear answer."

He declined to be named due to the sensitivity of the matter.

Many Korean ventures are focused on applications that would only apply locally, making them a hard sell for global companies, a Samsung Electronics executive told Reuters, asking not to be named as he was not authorised to speak to media.

Since 2016, Samsung Electronics has acquired minority stakes in nine startups, only one based in South Korea, according to corporate research firm CEO Score.

Hyundai Motor has invested a total 85 billion won (US$75.11 million) worth of minority stakes in 15 foreign startups over the last three years, compared to 28 billion won spent on five local ventures over the same period, CEO Score said.

San Francisco-based venture fund 500 Startups, one of the early investors in Grab, said it had looked at Korean ride-sharing firms for a possible investment, but decided against it because of legal restrictions. "The regulatory environment hasn't been favorable to the investors like us," Jeffrey Lim, who heads 500 Startups's Korea office, told Reuters.

There were, however, Korean industries offering interesting opportunities, such as pop music, online games, and cosmetics, Lim said.

500 Startups has invested 6.5 billion won in 30 South Korean firms since 2015, including radio app Spoon which is now available in Southeast Asia and Japan.

Other established foreign rivals have also backed South Korean start-ups despite the challenges.

Japan's Softbank has invested in more than 20 tech companies in South Korea since 2012, according to venture capital data provider CB Insights, including a US$2 billion stake in online retailer Coupang in November.

South Korean startup Viva Republica, which operates money transfer app Toss, last week raised US$80 million from US investors including Kleiner Perkins and Ribbit Fund, valuing it at US$1.2 billion.

Korean conglomerates' tendency to avoid risk and shun outside partnerships makes them slower than foreign rivals to adapt to fast changing technologies, said Rhee Moo-weon, a management professor at Seoul-based Yonsei University, who advises Samsung, Hyundai and the South Korean government.

In 2003, Samsung missed the opportunity to acquire the then small maker of the Android smartphone operating system, just two weeks before Google bought it for US$50 million plus incentives, according to a 2013 book by Fred Vogelstein "Dogfight: How Apple and Google Went to War and Started a Revolution".

When Android creator Andy Rubin pitched his firm to Samsung, a Samsung executive told him, "Are you dreaming? You and what army are going to go and create this? You have six people. Are you high?," according to the book.

Samsung said it could not confirm the content of the book.

As cash-rich conglomerates remain reluctant buyers, only 3 per cent of South Korean startups were able to recoup their investments through trade sales in 2017, according to the Korean Venture Capital Association.

That leaves IPOs as one of a few exit options, but it takes about 12 years for South Korean startups to go pubic - "an eternity" compared to Silicon Valley where it typically takes six to seven years, according to consulting firm McKinsey & Co.

Only last year, South Korea introduced the so-called "Tesla listing rule" which allows loss-making startups to list on its junior, tech heavy Kosdaq market. It's named after the US electric carmaker that remains loss-making eight years after going public in 2010, but is worth US$63 billion.

So far, only e-commerce platform Cafe24 Corp has used the Tesla rule to go public. Since its February listing, its shares have risen 25 per cent.

South Korean entrepreneurs say there is a long way to go.

“Government officials are trying to meet every stakeholder's demands in a way that doesn’t lead to a solution," said Seo Seung-woo, a professor and entrepreneur who moved his self-driving start-up to Silicon Valley last year.

“I say, don’t think about doing a startup in South Korea. Think outside Korea."