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Investing in Korean SME and Local Brands : What is the Blueprint of NEWKIDS Investment?
Investing in SME and Local Brands in South Korea
In Korea, a national policy has been initiated to connect private investment and loans with support programs not only for startups and venture businesses but also for small business owners and local brands. If SMEs and local brands with high growth potential pass the evaluation, they can receive policy funds and investments from private investors without stringent credit assessments.
NEWKIDS Investment is one of the Korean private investment firms participating in this program. Recognized for its expertise in investing in over 30 social ventures, local brands, and early startups, it has been selected as a partner in a large-scale project that matches private investment funds and loans with investee companies.
NEWKIDS is a subsidiary of a company-building firm called NewBlack. NewBlack owns underdogs, the largest entrepreneurship education company in Korea.
If underdogs identifies early entrepreneurs, teams, and local brands with growth potential through its education programs, NEWKIDS takes on the role of investing and business partnership. The entrepreneurs who have grown through this process become investors and business partners for the next generation of entrepreneurs, creating a virtuous cycle.
In line with the national economic policy supporting the growth of local brands and small business owners, NEWKIDS is expanding its scope.
What trends are Korean venture investments following? What blueprint is NEWKIDS, which has been active as an accelerator for years, drawing up?
An interview with Moon Seokjin, investment partner at NEWKIDS Investment, has been published in Asia Tomorrow.
Combination of entrepreneurial education and investment of a company builder
Q.Hello. First, please introduce us to New Kids Investment.
NEWKIDS Investment is a Korean accelerator that specializes in investing in and nurturing small business owners, local entrepreneurs, and very early-stage founders.
It is also an investment firm that has ‘underdogs’, the largest startup education company in Korea, as its affiliate. Levering the experience and expertise of underdogs, which has nurtured more than 15,000 entrepreneurs over many years, it has the strength of being able to quickly meet outstanding entrepreneurs.
Q: It seems there aren’t many places investing in small business owners or very early-stage founders.
A: In fact, if you look at small enterprises that receive seed investments from accelerators, many can be classified as small businesses based on their sales volume or employment size.
However, among SMEs, NEWKIDS invests in those entrepreneurial businesses that have the potential to grow their business and team.
Q: So, is NEWKIDS' investment limited to graduates of Underdogs’ education programs?
A: Not necessarily. Even now, there are people who request investment reviews through various channels, including emails. We continuously review the business potential and respond.
Of course, there are cases where we prioritize those who have cultivated the perspective and mindset to expand their business as a 'company' through Underdogs' startup education.
In discovering very early-stage startups and making actual investments, qualitative evaluations become important as well, not just quantitative assessments.
This includes the entrepreneur's capacity, the team's atmosphere, and how well they fit with the accelerator. Thus, teams nurtured through direct education by an affiliate are attractive investment targets because they have been pre-verified during the process.
The reason behind investing in Korean SME and Local Brands
Q: As an accelerator and investment firm, how do you define 'local' or 'local brands'?
A: Let's take Korea as an example. In Korea, areas outside of Seoul are commonly referred to as "provincial" and defined as local. Even within Seoul, relatively less-known areas, not just well-known districts like Gangnam or Seongsu, can be included as local.
From an investor's perspective, 'local' can be defined as places that are not mainstream, areas overlooked by investment capital, thereby holding potential for growth through new initiatives. Local brands or businesses are those that create products, services, or content utilizing tangible and intangible assets in such regions.
Q: How do you see the differences between startups, social ventures, and local brands?
Generally, local businesses have distinctive aspects that set them apart from startups, social ventures, and venture companies. Their way of growing or continuing business operations differs.
For traditional startups, as the name suggests, the goal is to start a business and achieve rapid growth(UP).
In the case of local brands, it's understood that they pursue other values alongside growth. For example, they might aim to promote the assets of a region externally, contribute to a specific area, or establish sustainable local brands for the purpose of residing in that area.
To sum up, the reasons for becoming a local enterprise extend beyond growth, implying that rapid expansion is not their only goal. Hence, local brands often focus on sustainability and social value alongside their growth.
Entrepreneurs starting businesses in local areas often speak of their business goals in diverse terms. Some feel that simply sustaining themselves is enough, while others aspire to become well-known brands. There are also entrepreneurs who want to demonstrate the viability of living successfully in regions outside of Seoul, showing that it's possible to thrive in local as well.
Typically, startups focus on quantitative aspects such as cash flow, sales, and profits, discussing numbers related to revenue and profit. (Of course, social enterprises and social ventures also have this aspect.)
Local businesses, on the other hand, take a step further by emphasizing 'sustainability' and 'brand' focus. This approach not only includes the traditional metrics of success but also integrates the values of sustainability and brand identity into their core business strategy.
Q.As an investor, the context for investing in such local brands interests me greatly.
In Korea, the Ministry of SMEs and Startups and the Small and Medium Business Administration are hopeful for the emergence of diverse business models and growth stories in various regions, beyond the mainstream.
From a national perspective, there's a trend towards expanding matching loan projects for local brands, in an effort to address social issues like job creation, economic impact, and regional decline.
This indicates a desire for entrepreneurship to serve as both a form of employment and a means to bolster the national economy. Consequently, support programs have been developed to facilitate private investment through 'matched' loans.
This change is welcomed by NEWKIDS. We have already invested in local brands and businesses through a total of 16 equity investments. Even if these entities do not grow rapidly through exits or IPOs, they possess significant business and social value.
Thus, NEWKIDS found it suitable to participate in a national program that matches up to five times the loan amount to the equity investment we make, seeing it as fitting for promoting local brands.
How to evaluate and invest in early startups or local brands
Q.What are the key considerations when deciding to invest in early startups or local brands?
When deciding to invest in early startups or local brands, NEWKIDS and its parent company NewBlack, as accelerators and company builders, have played the role of a running mate for entrepreneurs. This means, beyond the investment amount, we look forward to playing a helpful partner's role in the business.
The first criterion for our investment decision is whether the entrepreneur needs the company building that NEWKIDS provides or if there is a clear way we can contribute.
We examine what the core values of the entrepreneur are, what synergies can be expected with our investment, and if they have completed Underdogs’ education, how effectively coaching has been reflected in their business.
The second decision-making criterion is the 'startup team.'
Entrepreneurship is a team sport. More than any individual founder, it's crucial whether the team functions as a trustful one team. This is because teamwork significantly impacts the operation of an early business. NEWKIDS makes investment decisions after thoroughly verifying the team's mutual trust.
Thirdly, we check whether the startup team has validated their business's marketability. For example, we prioritize whether they have experience generating revenue by selling products or services to actual customers through crowdfunding, if there's market demand for the item, and if they have successfully secured it.
If these three criteria align, NEWKIDS proceeds with the investment.
Q.It seems you also have a variety of decision-making criteria beyond quantitative metrics.
Ultimately, both accelerators and early-stage startup teams must consider how they possess and utilize non-financial, qualitative resources to create synergy.
Having met with 30-40 teams and invested in some, we've learned that the key for very early-stage startup teams (due to their high volatility) lies in their flexibility and qualitative capabilities. We believe that the success of company building hinges on the ability to solve problems together with an open mind.
Q.Are there any examples of small businesses or brands that have successfully grown through financial/non-financial investments?
PaperPop serves as an example of a business that completed underdogs' education and then underwent investment and company building.
When discussions about investment began, PaperPop was a sole proprietorship, operated by three people, including the founder. They were a unique startup team with plans to purchase a paper-folding robot once revenue or profit started coming in.
(Refer to : How tech startup in South Korea expands its business into Japan, Europe with paper furniture?)
NEWKIDS contributed to this team's transformation into a corporation and helped in its growth as a company.
The CEO of PaperPop often reaches out to us regardless of weekends or evenings, actively utilizing the company builder and accelerator to fully immerse in making the business successful.
This dedication makes us feel more compelled to pay attention. Responding to various inquiries and dedicating our efforts to solve problems together naturally become our top priorities.
Now, PaperPop has become a promising brand, with its sales volume increasing by more than tenfold and its corporate value growing approximately 34 times compared to that time.
It has become a case where a very early-stage startup team generated sales through private investment and received follow-on investments. This could be considered a model of how a small business can become a company through investment.
Through various investment cases, it's evident that sole proprietors can also become 'growing brands' by pursuing company growth, creating employment, and building scale, even without transitioning into a corporation. NEWKIDS aims to increase the accessibility of private investment opportunities and business financing for such entrepreneurial local brands and small business owners.
What is the best strategy for SME and local brands to thrive?
Q.Early entrepreneurs, within their first three years, might ponder whether to seek seed investment. If they decide to receive it, how should it best be utilized?
Startups can adopt three main methods for resource linkage: grants, loans, and investments.
Unlike government grants, which are essentially free money, investments are based on trust in the representative and come with a promise of returns, making them akin to a form of 'debt.'
Therefore, early entrepreneurs must assess whether their business model requires initial investment. They need to question if investment is crucial for strategies like quickly growing the business to create barriers to entry in a competitive market.
If the investment is not absolutely necessary, deciding 'who' to receive investment from becomes critical.
It's not just about financial investment; the investor's network, experience, and infrastructure—non-financial investments—need to be considered. Receiving seed investment signifies stepping onto a completely different track, necessitating a comprehensive consideration before making the investment decision.
Q.Is there any advice for making local brands attractive investment targets?
To become an attractive investment target as a local brand, it's crucial that the brand demonstrates the potential of its products or services to be loved beyond its local area, appealing to a wide range of users, customers, and regions. Starting as a local brand but showing marketability and growth potential beyond that is key.
A good example is the "Potato Bread" from Chuncheon, Korea, which completed the Underdogs education. Initially starting with an offline store, this entrepreneurial team expanded its sales channels online, significantly growing its market size. This demonstrates that entrepreneurs should explore their growth potential diligently. Local brands can indeed generate greater demand and expand their reach.
Q.Could you highlight once more the strengths that NEWKIDS possesses?
NEWKIDS can be described as an 'accelerator participated in by senior entrepreneurs.'
Its investment funds come directly from the contributions of these experienced entrepreneurs, known also as the Unsung Hero Fund. Various Korean entrepreneurs are participating in this investment fund to support the cultivation of new entrepreneurs. They contribute as mentors during office hours or as partners in company building.
Furthermore, NEWKIDS dispatches key talents or supports software that aids in essential operational tasks such as HR and financial management, which early-stage companies often struggle with. We invite you to join the NEWKIDS network, a 'community of entrepreneurs', and grow together!
Written by underdogs
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