Venture capital companies

Venture capital companies (신기술사업금융회사, 벤처캐피탈) are financial firms that pursue profits by providing investment funds to enterprises launching high risk-high return businesses, in return for acquisition of portions of their shares or by acquiring, merging or restructuring such enterprises.

Venture capital companies pursue returns not only by providing funds, but by participating in business plan development, marketing, business management and other areas of the invested enterprises in order to improve enterprise value.

Key words
venture capital, new technology, start-up, small and medium-sized enterprise establishment investment companies, venture businesses

Types of Venture Capital
In Korea, venture capital companies consist of
 * new technology venture capital companies (신기술사업금융회사) and
 * small and medium-sized enterprise establishment investment companies (중소기업창업투자회사).

They engage mainly in the business of supplying funds to start-up firms. The businesses of the two types of companies are similar, but the legislation on which they are based, the enterprises they support, the regulations pertaining to their businesses and other factors differ to varying degrees.

New technology venture capital companies back enterprises as stipulated by the Korea Technology Credit Guarantee Fund Act (기술신용보증기금법), based on the Specialized Credit Financial Business Act (여신전문금융업법), and can concurrently conduct other credit financial businesses, including leasing and installment financing.

Small and medium-sized enterprise establishment investment companies are regulated by the Support for Small and Medium-sized Enterprise Establishment Act (중소기업창업지원법), support venture businesses and their founders pursuant to the Act on Special Measures for the Promotion of Venture Businesses (벤처기업육성에 관한 특별조치법), and specialize in venture capital services directed toward the establishment of small and medium-sized enterprises.

History
New technology venture capital companies are enterprises that pursue profits by offering services including the provision of funds and supply of managerial and technical assistance to firms with advanced technological skills and potential but weak foundations in terms of their funds and management. As of the end of June 2011 there were 12 new technology venture capital companies in operation in Korea, and their total assets amounted to 4.9 trillion won.

The Korea Technology Advancement Corporation was founded in 1974, to be followed by establishment of the Korea Technology Banking Corporation (1981), the Korea Development and Investment Corporation (1982), and the Korea Technology Finance Corporation (1984). Among these four, the three companies excluding the Korea Technology Banking Corporation were converted into new technology venture capital companies in December 1986 with establishment of the Financial Support for New Technology Project Act. In 1999, the Korea Technology Banking Corporation was privatized and registered as a credit-specialized financial company, while the Korea Technology Finance Corporation was merged into the Korea Industrial Leasing Company. Since that time, five new technology venture capital companies have been established.

Businesses
New technology venture capital companies mainly undertake businesses including the investment in, and provision of loans and supply of managerial and technical assistance to new technology enterprises, as well as the establishment and administration or operation of new technology venture capital associations.

Investment in new technology enterprises is made through the acquisition of shares or corporate bonds, including convertible bonds and bonds with warrants. Loans may be provided by means of conventional or conditional loans. The term “conditional loans” refers to a method of financing whereby a new technology venture capital company receives license fees if the new technology project is successful, depending upon performance over a certain period of time. If it is not successful, the company collects part of the principal of the loans in minimum installments.

Similar to other credit-specialized financial companies, new technology venture capital companies raise funds through borrowing from financial institutions, issuance of corporate bonds or bills, sales of retained securities, transfer of retained loans, and other methods. They are in addition allowed to borrow funds required for investment in and loans to new technology businesses, from government funds including the Public Capital Management Fund and the Korea Credit Guarantee Fund.

Establishment
Small and medium-sized enterprise establishment investment companies (중소기업창업투자회사) are corporations that conduct businesses including investment in small and medium-sized enterprise initiators (창업자) and venture businesses, organization and operation of enterprise establishment investment associations, and overseas investment for the recommendation and diffusion of foreign technology.

Small and medium-sized enterprise establishment investment companies are set up as corporations with five billion won or more in paid-in capital, under the Commercial Act and based on the Support for Small and Medium-sized Enterprise Establishment Act.

They must be registered with the Small and Medium Business Administration (SMBA 중소기업청). As of end-2000 the number of small and medium-sized enterprise establishment investment companies amounted to 147, thanks to government support measures for venture businesses and a boom in the KOSDAQ (Korea Securities Dealers Automated Quotation) market in the late 1990s. It then decreased owing to their reduced profits, and there were 107 in existence as of end-June 2011.

Businesses
Small and medium-sized enterprise establishment investment companies engage mainly in the business of providing funds to small and medium-sized enterprise initiators and others, through the acquisition of shares, convertible bonds or bonds with warrants, or investment under agreed terms and conditions. They must invest 50 percent of their paid-in capital with business initiators, venture businesses, enterprise establishment investment associations, and other enterprises within three years of their registration.

Small and medium-sized enterprise establishment investment companies in addition conduct businesses designed to improve enterprise value, including the offering of management advice to invested corporations, and the provision of information and assistance for marketing, initial public offerings and making inroads into foreign markets.

Meanwhile, their investment intended to control management was initially restricted, but then allowed from October 2005 in order to facilitate the raising of funds by start-up firms and the restructuring of companies displaying signs of insolvency.

Small and medium-sized enterprise establishment investment companies may obtain loans from the government, government funds, financial institutions and other resources in order to raise the funds necessary for conducting their businesses. They are also allowed to issue corporate bonds up to 10 times the total amount of their capital and accumulated funds.

The volume of start-up investment by small and medium-sized enterprise establishment investment companies has declined since the early 2000s and remained stagnant until recently.