In February 2019, Prime Minister Narendra Modi launched the India-Korea startup hub in Seoul. The one-stop platform aims to bring the Indian and Korean startup ecosystems closer and facilitate joint innovation between the two economies. Since then, Korean investors have shown keen interest in the Indian startup ecosystem.
Chief among them is Smilegate Investment, a venture capital and private equity firm that invests heavily in companies that show potential.
Founded in 1999 as MVP Capital, Smilegate Investment invested in Bengaluru-based payments company Cashfree in April this year. The startup raised $5.5 million funding led by Smilegate Investment, the Korean firm’s first investment in India.
“We invest and support outstanding companies to become great companies in the global market. Big growth potential, big markets, and sustainable growth are the criteria for becoming the great companies of the future we are looking for,” says Jungin Park, Director, Smilegate Investment.
The Korean firm has invested in about 200 companies and managed more than 30 investment funds. Its current AUM is about $1 billion. The investment firm’s parent company, Smilegate, develops and publishes mobile/desktop video games, and generates $700 million in annual sales.
In 2018, South Korea, which stands 12th on the Global Innovation Index, drew investment of over $3.3 billion in over 1,400 startups. On the other hand, Indian startups raised $12.68 billion in equity funding, plus $1.14 billion in debt funding in 2018, across a total of 864 deals. There clearly is an increase in the number of investments and deals in India as compared with Korea. Reason enough for Korean firms to eye Indian startups?
The first investment in India
The company’s investment in Indian fintech startup Cashfree was its first in the country. On this, Jungin Park says: “We conducted industry analysis in the Indian market and chose digital payment industry as our first investment target. We used the top-down method to analyse hundreds of companies, excluded saturated sectors, and listed companies with high growth potential. Among them, we discovered Cashfree.”
He adds that Cashfree understood the pain point of the market, discovered business opportunities, and leveraged their strength in technology. As a result, the company is growing rapidly.
Smilegate is now planning to expand its investments in India. The team believes that Series A-B companies are a priority and they have plans to continue to invest in follow-on rounds as they grow.
What about India stands out?
Speaking on why they are looking at India at large, Minjung Kim, Director, Smilegate, says India is a market of opportunities where prospects for innovation in the traditional legacy realm can emerge in many different forms of business.
“There are some business models that are not feasible in Korea but possible in India. This means there are more possibilities that creative and diverse business models with great potential can emerge from India,” Kim says.
Kim adds that startup founders in India are younger, more aggressive, and have extrovert personalities. “Also, the proportion of founders with tech-related majors is higher than in Korea.”
Speaking about Korea and China, Jungin says that in those countries the government plays an important role in the startup ecosystem and even in funding. He adds that in India, too, many policies related to startups and industrial innovation led by India’s Modi government have led to a huge impact on the development of the Indian startup ecosystem. The open and friendly policies on foreign capital are also attractive.
“We look at the largest market and markets with the greatest opportunities for innovation as highest priority. We are interested in fintech, healthcare, commerce, and education,” Jungin says.
The growing interest in India
While last year marked the year of Japanese and Chinese investors looking closely at Indian startups, Korean investors have slowly started making their presence felt in India.
According to YourStory data, 10 startups raised $125.80 million in funding from Korean investors in 2018. This year, already eight startups have raised $453.07 million in funding.
While Korean investors have been investing in India since 2016, there has been a more significant push since late last year and continuing into this year. This is primarily due to increased internet penetration propelled by Reliance Jio.
This has made going online cheaper and easier, and an additional 320 million users are likely to take to the internet by 2023. Already, RedSeer estimates that there are over 230 million internet users who shop, eat, and entertain themselves online, and have an annual spending power of $300 billion.
Also, when we look at the Indian startup ecosystem as a whole, since last November, the clear trend has been of investors placing big bets on late-stage companies: startups that have survived the initial test and have a demonstrated ability to grow.
Investment data also showed an increase in the risk appetite of investors, with a significant jump in the pace and number of deals in 2018.
This shift, in turn, has led to South Korean investors like Smilegate setting their sights on India.
Jungin explains, “We have met more than 10 startups related to market place, fintech, healthcare, and education, including Swiggy, Synapsica, and NIRA, and have continued to contact various companies in Korea. It is impressive that most companies have basic IT capabilities, regardless of the industry. We plan to keep in touch with some companies to explore potential investment possibilities.”
What does Smilegate Investments look for?
Jungin says, “We value entrepreneurial spirit that thrives on sustainable growth, managements’ morality, and strong teamwork that allow a company to overcome challenges. Founders with the above criteria have potential to grow companies into greater ones.”
The team also looks closely at the credibility of the CEO and the team. “The CEO’s humbleness and killer instinct are important factors as they have a significant impact on the company’s sustainable growth. In order to identify these criteria, we try to understand the CEO’s past history and experiences,” Kim says.
Factors like lack of reliability in CEO or disclosed information or when DD contents does not qualify as a part of investment criteria. Also, the team is wary to invest when company’s growth become stagnant during the review period.
Also, rather than the number of founders, Smilegate prefers a balanced mix of founders with different roles and a structure in which one of them can represent the company by holding majority of stake.
So, how do founders get in touch with Smilegate? The duo says, “Cold mail is the most common method; however, references from reliable sources are preferred. When approaching investors via cold mail, it’s a good idea to provide a brief introduction of your company.”