Nearly 60% of Korean startups go out of business within three years, according to a report from the Korea International Trade Association (KITA). Here’s the accompanying headline in the Korea Joongang Daily: “Korea’s start-ups have worst success records”.
To quote the article:
More than 60 percent of start-ups in Luxemburg and Australia survive three years, while only 41 percent survive in Korea. In the famous start-up meccas of Israel and the United States, more than 55 percent survive beyond three years.
The KITA report said this is because nearly 63 percent of all Korean start-ups do business in less-than-dynamic areas like lodging, eateries and retail. Most start-ups are run by a person who has quit or retired from a career. Technology-oriented, value-added businesses account for only 21 percent of all Korean start-ups.
At this point, many of you are up, out of your chairs screaming, “But they’re conflating two issues! These aren’t startups! The article lumps startups – companies exploring new un-mapped business models – with traditional small businesses!”
And you’re right. Korean small businesses have an incredibly low success rate. Many Korean men (are forced to) retire between the ages of 50 and 60, get large lump sum severance payments, and then use the money to start restaurants, retail shops or cafes. The problem is that these men worked as middle managers and have no practical experience in the service sector, or with running small businesses. Of course the failure rate is high.
When I think of startups, I think of entrepreneurs who are taking a risk by doing something differently. Who are exploring new, possibly disruptive business models, and who stand to make a financial gain that is many times the initial investment. Unfortunately, the report doesn’t provide any statistics broken out for this segment of companies. It does, however recommend that the government and private sector work to make more funding available for young companies.
If we’re talking about the kimbap shacks owned by former Samsung managers, seed money isn’t the problem. It’s small business experience and a willingness to do the dirty work, to keep labor costs low.
If, on the other hand, we’re talking about real startups, then yes, money is one of two much needed components.
Here’s What Korean Startups Need to Succeed
Startups Need Money:
The seems obvious. Startups are trying new things. There’s a necessary period of research and development as the company moves toward product market fit. And for tech startups, the initial costs are generally too high for an entrepreneur, young or old, to self-fund.
The government and the private sector have already made great strides in this area, with Korean VCs better understanding the risks of startups and making smarter investments based on that, and more VCs from abroad making inaugural investments in Korea, or even setting up their own funds. Incubators and accelerators are providing money and offsetting other early costs like office space.
While the money situation is becoming better, the government still needs to reform laws that place near-unlimited liability on entrepreneurs for debts incurred by their companies. If a failed startup means a lifetime of debt, there is less risk-taking and fewer people who can try a second startup. In the case of government money, the application and reporting process needs to be simplified. Startups shouldn’t need to fill out an 80-page report in order to get $50,000 or $100,000.
Startups Need Marketing:
There are some brilliant startups in Korea that simply don’t have the exposure to get the customers and money they need. Often this is because they don’t know how to approach the media, they have limited personal networks, and the way they present their companies is too inward looking.
Exposure is everything for a startup seeking funds from outside. VCs can’t invest in companies they don’t know about. And if the startup doesn’t know how to tell its story, the VC won’t understand why the investment is worthwhile. Startups need to be able to clearly articulate the the value they offer, and what makes them different. This is quite different from just saying what the product does and how it was developed.
Once startups have developed minimum viable products, they need to start attracting customers or users. This early traction is an important metric for showing progress to team members and investors, but its even more important for helping the startup refine its product and eventually for generating revenue. To do this, a startup has to excite potential users and clearly tell them what they’re going to get from the product. How will it make life more fun, easier or more interesting.
Many Korean startups take the Field of Dreams approach: If we build it, they will come. Unless your founder is a celebrity this approach won’t work. Instead, startups need to treat marketing as a core activity that informs product development, customer recruitment and customer retention.