Even in These Times We Will Continue to Invest
Just when it seemed that the trauma from the impact of the COVID-19 pandemic was easing, war between Russia and Ukraine erupted, sending shockwaves throughout the already unstable global political and economic landscape. Oil prices have skyrocketed, and Western powers who had been crying out against Russia are now showing signs of a more conciliatory stance to the aggressor nation. Amongst the major shocks to the global economic order is that of the food supply chain. Russia is the world’s leading wheat producer, with Ukraine near behind in fifth position. Kansas, America’s largest wheat producer, is bracing itself for reduced output due to drought. Concurrently, fertilizer prices have soared as Russia, a supplier of more than 10% of the world’s fertilizer, has been restricting exports. The cumulative effect has led to steep interest rate hikes to combat accelerating inflation which has in turn contributed to the recessionary trends of 2022. The Fed has indicated its commitment in the battle against inflation, most recently continuing its 75 basis point interest rate hikes (effective July 28th) in the face of slower growth and volatile stock markets.
Looking back, 2007 is the year I joined Softbank Venture and began my career in venture capital. Just as I joined the industry with excitement and high expectations, within a year came the subprime mortgage-fueled Great Financial Crisis. Intricately structured financial products like CDOs and other derivatives, with their layers of leverage and opaque asset trails soon drove a wave of massive defaults as housing prices fell and borrowers were unable to service their debts. Soon products like these CDOs were worth less than toilet paper, economic recession was certain, millions of lives and households were impacted, and age-old elite institutions like Lehman Brothers and Bear Stearns were no more.
As a junior starting out in venture capital, the market environment added tension to my already existing anxiety. It was very burdensome to pursue new investments as no market participants were willing to aggressively execute new deals in a strained capital market. As a result, I instead focused on the portfolio companies that I had invested in, paying close attention to their business and financial situations.
What’s interesting is this – which companies were founded just before, during, and after the financial crisis in Korea? Kakao, Coupang, Yanolja, Bluehole Studios (nka Krafton), Baedal Minjok etc. In the United States, the epicenter of the financial crisis, generational companies like Whatsapp, Venmo, Slack, Uber, Instagram, Pinterest, Square, and Cloudera etc. were founded.
Modern IT behemoths (in both stature and corporate value) Microsoft and Apple were born during an era where the gold standard was eliminated and massive inflation occurred, leading to then-Fed Chair Paul Volcker implementing interest rates as high as 20% in the early 1980s. Despite this, Microsoft and Apple persevered and endured to what we know them as today.
As an individual who has been a VC and worked in tech for the last 15 years, I have witnessed with my own eyes time and again the efforts and success of great companies rising to the challenge and solving fundamental problems. As such, it is impossible for me to stay idle, and thus we will continue to invest!
Certainly, in times like this, we are respectful of the significant efforts founders make to progress forward step-by-step and day-by-day, and we are dedicated to providing portfolio companies with meaningful advice and guidance on the importance of managing (or deploying) cash, valuation expectations, a focus on the fundamental essence of their business, and maintaining direction by managing the expectations of themselves, executives, and team members.
However, as bad as a situation may seem to be, there is always some form of counter reaction or view. If the economy gets worse, competitors will face more difficulty. There is less competition in hiring engineers as large companies restructure or startups fold. In addition to large tech companies, the downturn in crypto and DeFi has also contributed to engineers flowing back to the traditional tech scene. And so to those who are able to survive, there is more fruit to bear.
From another perspective, it could be fortuitous to be a startup in Korea at this time. While VC investment activity in the US and other countries have almost grinded to a halt, VCs in Korea have not had significant reduction in activity as on the whole, they still have a lot of resources on hand. One of the primary reasons for this is that there is broad public policy support in the form of public fund of funds programs for venture capital built to drive and sustain growth in the tech ecosystem. This has not only been a key theme throughout changes in government administrations, but has broad support of both the private sector and society for the future of Korea. Whatever the reason, Korean startups receive relatively wider support than most other tech ecosystems. With its already leading positions in the sciences, technology, and engineering, Korea has been building on this momentum to continue being amongst the global leaders in many areas. Needless to say, we are excited and invigorated to play our part in the ecosystem.
Of course, the protagonist of this story going forward could be YOU and YOUR startup!
