IDG's Excellent Korean Venture

The first U.S. venture capital fund to be operated from within South Korea sees opportunities in the country's booming, high-tech economy

by Spencer E. Ante

IDG Ventures, a network of venture capital funds spanning North America and Asia, is embarking on what it considers the next frontier in startup investing: South Korea. IDG Ventures has created a $100 million venture capital fund based in Seoul.

While U.S.-based VC firms have been setting up shop in China and India over the last few years, and Intel's (INTC) venture capital arm has funded Korean startups, the IDG Ventures fund is the first started by a U.S. firm with a focus on, and office in, South Korea. The fund, to be formally introduced on Nov. 16, will invest in new media, mobile applications, online entertainment, health care, and software for businesses.

Wireless Broadband Wonderland

Although it's unprecedented, the move is hardly fraught with risk in a country filled with technology addicts. The densely populated peninsula ranked fourth on a list of countries with the highest percentage of high-speed Internet users, according to figures released in April (BusinessWeek, 4/25/07) by the Organization for Economic Cooperation & Development. Only Denmark, the Netherlands, and Switzerland ranked higher. The U.S. meanwhile, came in 15th. South Korea has been in the forefront of adopting wireless broadband technologies and is a global leader in the high-technology industry, boasting such conglomerates as Samsung and LG Electronics.

Also making South Korea an ideal place to fund startups are the country's strong economy, booming stock market, and growing support of small companies, says IDG Chairman Pat McGovern. "They are a great marketplace to anticipate technologies as people depend more on their mobile devices," he says. "We will get very good levels of capital appreciation."

Venture capitalist Paul Kedrosky says IDG may benefit from South Korea's scarcity of savvy Western VCs. "As far as these new markets go, South Korea is probably the least serviced," says Kedrosky, who is also a senior fellow at the Ewing Marion Kauffman Foundation, a think tank focused on entrepreneurship. The biggest challenges, Kedrosky says, will be convincing Korean entrepreneurs of the value of venture capital financing and gaining a deep knowledge of the local market. "If I fire the CEO of a Silicon Valley firm, I have seven CEOs I can call up immediately,"he says. "God only knows who I am going to find in Korea. When you do deals outside the U.S. there are a totally different set of issues."

Venture Financing's Local Talent

IDG, the venture capital arm of tech publishing and research giant International Data Group, is trying to lower that risk by hiring top Korean talent. To run the fund as managing partner, IDG tapped Duk-Hwan Oh, the 50-year-old former managing director of IDC North Asia, IDG's research arm. Under him will be vice-president and general partner Sung-Tae Jin, and junior partner Hak-Kyoon Kim, two Koreans with considerable experience in venture financing.

As a lead fund manager at Korean venture fund STIC Investments, last year Jin was named "Venture Capitalist of the Year 2006" by the Korean government's Small & Medium Business Administration. Kim was a principal with LG Venture Investment, one of the leading venture capital firms in Korea.

Asian Track Record

By focusing on media, software, and health care, McGovern and Oh will steer clear of the chipmakers and other hardware companies that are often the focus of local Korean venture capitalists. The executives expect to fund 30 to 35 companies over the next three years, with the first investment coming as soon as December. About 70% of the $100 million will go to Korean companies, while the rest may be invested in other Asian startups that do business in Korea.

Already, one of IDG's Chinese venture funds has invested $8 million in a Korean company, a leading online game operator named G10 Entertainment Korea. Expect more investments like these, says IDG. "We are very, very focused on the new media market," Oh says. The new media industry has grown on average 15% a year and is now a $50 billion market, IDG says.

IDG Ventures has produced spectacular returns in other parts of Asia. So far, it has $1.8 billion under management in China, and has financed 220 startups, including companies that pulled off blockbuster IPOs such as Baidu.com (BIDU), Ctrip.com (CTRP), and Home Inns & Hotels Management (HMIN). IDG chairman McGovern says its China funds have produced 40% annual returns. And he sees no reason why the Korean venture can't generate a similar payback. McGovern is already planning a second Korea fund, this one with $250 million.

Ante is Computer Editor for BusinessWeek .