[Focus] Korean unicorns face reality check from US startups poised for IPOs

  • 2020-08-31

With a number of high-profile US startups in line for initial public offerings, investors in South Korean startups may be looking to Wall Street for color on their own valuations.

Snowflake Inc., a US-based software developer, and Palantir Technologies, a US data analytics company, filed for IPOs last week. Home-sharing platform Airbnb also submitted an IPO application this month, as liquidity-driven stock markets are bouncing back from March lows.

In South Korea, games developer Krafton Inc., 13.2% owned by Tencent Holdings’ investment arm, is preparing for an IPO. The startup, behind hit game titles PlayerUnknown’s Battlegrounds (PUBG) and TERA, is poised to become the country’s first unicorn, or a startup valued over $1 billion, to go public.

According to CB Insights, a research company, 10 South Korean companies have achieved unicorn status as of August this year. Online platform operators make up the bulk of them.

Most of them have hardly made any profit yet. But their valuations were marked up by foreign venture capital firms, including Japan’s SoftBank and US-based Sequoia Capital.

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SoftBank’s Vision Fund has poured a combined $3 billion into South Korea’s top e-commerce platform Coupang Corp. since 2015, valuing the loss-making startup at $9 billion.

The estimated value of Coupang outweighs the combined market cap of the country’s top four bricks-and-mortar retailers – E-Mart Inc. at 3.3 trillion won, Lotte Shopping at 2.2 trillion won, Shinsegae Corp. at 2 trillion won and Hyundai Department Store at 1.3 trillion won.

Founded in 2010, Coupang is considering an IPO but has not set out a timeline.

Musinsa Co. Ltd., Korea’s leading online fashion platform, was valued at 2.2 trillion won when it received 200 billion won in investment from Sequoia in November of last year. It is one of the very few Korean unicorns in the black. Its estimated value is the same as the market cap of Lotte Shopping, whose operating profit was nearly 10 times that of Musinsa’s last year.

Despite uncertainty surrounding unicorn companies’ valuations, foreign venture capital firms continued to bid up their value.

On August 28, Korean fintech startup Viva Republic Inc. announced fresh funding of $173 million raised from existing investors, including Sequoia Capital and other foreign venture capital firms.

They valued the operator of the country’s popular digital wallet app Toss at around 3.1 trillion won ($2.6 billion), surpassing its previous valuation of 2.7 trillion won put in December of last year by VC investors.

LITMUS TEST

The US startups’ IPO filings followed blockbuster public offerings by Uber Technologies Inc. and Lyft Inc. last year. The two US ride-service companies, however, have suffered sharp price falls since their listing.

Shares of Uber remain 25% below its IPO price, with Lyft trading at less than half the IPO value. Both companies have yet to turn to the black.

Some venture capitalists have said upcoming public offerings by the US startups would serve as a litmus test for Korean unicorns’ valuations.

“This year and next, startups will face judgement for their high valuations, which were at the center of the controversy during the venture capital boom,” said a Korean venture capital investor working for a global fund.

Sequoia Capital, Goldman Sachs and Singapore’s GIC were among the very few VC firms to see returns from a South Korean investment. They offloaded shares in Woowa Brothers when Germany’s Delivery Hero acquired the country’s top food delivery app operator last year.

Delivery Hero valued Woowa at $4 billion, a 30% premium from the $3 billion valuation set by GIC, Sequoia and China’s Hillhouse Capital in 2018 when they invested $320 million in the startup.

ROAD TO EXIT

But the profitable exit from former Korean unicorn Woowa may not justify the high valuations at other Korean startups, considering unclear exit paths.

South Korea’s secondary market for venture capital remains unfledged with less liquidity than in the US. Korean VC firms are smaller than their US counterparts, depending heavily on state-funded institutions and pension and retirement funds for fundraising. That may mean no bullish bets on loss-making startups.

South Korean conglomerates, potential buyers, are not inclined to pay a premium for a startup that provides no clear timeline for reaching profitability.

The limited pool of buyers may signal a narrow exit road for Korean startups. Further, once the US startups are listed, any share price weakness may cloud the outlook for Korean unicorns.

By Jung-hwan Hwang

jung@hankyung.com

<Edited by Yeonhee Kim>

(Photo: Getty Images Bank)