Caught in the middleWhat is the consequence of having a government that lacks a communicative and coordinating system within? Should a civilian pay the price for a malfunction in the administrative system? Those are the questions the start-up community and angel investors are posing to the government. The start-up industry was recently stunned by the arrest of Ho Chang-seong, head of the start-up accelerator firm The Ventures on charges of defrauding a government agency. Ho, who is among the first generation of technology entrepreneurs, had long been considered a darling of the start-up scene.
In 2013, the Small and Medium Business Administration (SMBA) launched a Tech Incubator Program for Start-ups (TIPS) as its contribution to President Park Geun-hye’s signature initiative to build a so-called creative economy. It was modeled on the Israeli start-up incubating system.
TIPS was designed to rationalize promotion of the start-up industry while pumping in about 18 trillion won ($15.7 billion) a year by borrowing expertise from investment experts. If a private investor put up 100 million won in a start-up, the government would arrange technology support as well as funding up to 900 million won. The private investor would be allowed to secure up to 40 percent of a stake in the company. It was a kind of reward for risk-taking.
The program needed a credible figure to star in its publicity. Ho fit the description, having hit a jackpot with his start-up business. The successful entrepreneur had the credentials bureaucrats approved of — graduating from the Seoul National University’s engineering department and Stanford University with an MBA.
After founding a community-driven platform for Internet protocol television content provider Viki in Silicon Valley, he sold the company to Japan-based Rakuten for $200 million five years later in 2013. Ho started up a social networking platform with his wife and drew 5.5 billion won from the SMBA to create another investment company and invest 10 billion won in a startup. After he joined the program, 21 asset managers came under the TIPS school. The SMBA bragged that of 133 start-ups that received funding, 91 have extended their reach overseas.
The program, however, came under scrutiny after a director of The Ventures was arrested during a prosecution probe on misuse of government funding to companies. The suspect was accused of embezzling 500 million won worth of government subsidies. The prosecution suspected Ho knew of the scam. Prosecutors assumed Ho had secured a 3 billion won stake in five start-ups in return for arranging 2 billion won worth of funding from TIPS. They slapped him with charges of influence peddling and commission fraud. The Ventures issued a statement denying all the charges.
Start-ups and the angel investor community sided with The Ventures, as it was a government requirement that a fund must own a certain stake in the start-up company it invests in. Under the prosecution’s reasoning, all 21 companies engaged in the TIPS program could be charged with similar illegalities. The SMBA is embarrassed, but says it can not comment on the ongoing judicial process.
The fracas will take a heavy toll on angel investing activities in start-ups for some time. In the United States, over 50,000 individual angel investors spend 20 trillion won annually to help start-ups, while that kind of funding amounts to less than 100 billion won in Korea. Moreover, 90 percent of all start-ups in Korea fall apart in the face of the Death Valley — the arduous terrain before mass production and significant sales.
The prosecution wants to ensure that no illegalities are involved in the TIPS program to create a healthy habitat for start-ups. It wants to make sure that tax money is put to good use and not wasted. Ho regrets that he got involved in a government program. He is reportedly thinking of moving his business to the U.S. once the case settles down. It makes one wonder if a creative economy has any hope in this land.
JoongAng Ilbo, Apr. 9, Page 26
*The author is an editorial writer of the JoongAng Ilbo.