Despite large financial injections from the government, the region has entered a period of decline as population decline and migration to the capital accelerates. As companies and jobs are concentrated in the capital, the quality of local jobs has declined significantly. Many local investments are one-off and small-scale, so the effect of revitalizing the local economy is minimal, and various regulations discourage the private sector from investing in local government projects.

The same is true for venture capital (VC) investment in start-ups. According to the Ministry of Small and Medium Enterprises and Start-ups, venture fund formation and investment performance in the first quarter of this year decreased by 78.6% and 60.3%, respectively, compared to the same period last year. Of these, 73.1% of venture investments by region last year went to the Seoul metropolitan area. Seoul (55.3%) and Incheon and Gyeonggi (17.8%).

“The further the distance between VCs and startups, the further they are from capital. In reality, it is difficult for large VCs to locate in non-metropolitan areas where the number of entrepreneurs is insufficient. The role of regional investment organizations such as accelerators is needed to reduce the distance between investment capital and startups”.

At the Regional Startup Ecosystem Summit 2023 hosted by Startup Alliance on July 28, Youngkwan Lee, chairman of the Korea Early Stage Investors Association and CEO of Bluepoint Partners, spoke about the lack of venture capital in non-metropolitan areas and introduced the concept of the “Capital Distance Index” (CDI), which caught the audience’s attention. The term CDI is a concept borrowed from the Power Distance Index (PDI), which quantifies the psychological resistance one feels when speaking to a boss. It means that the greater the physical and psychological distance to a local startup, the greater the resistance felt by metropolitan investors.

Lee said, “If you look at the statistics, 91.3% of VCs are located in metropolitan areas. That means that there is a long distance between local companies and venture capitalists. The long distance makes it inconvenient for VCs to discover and manage companies, and the cost of understanding the business is high. The reality is that it is not easy for VCs in the metropolitan area to travel frequently to the region to understand startups and make investment decisions. This not only delays investment decisions, but also hampers post-investment follow-up.”

“In particular, it is difficult to identify qualitative factors such as organizational security and business location. When VCs invest in companies, they usually focus on quantitative factors such as business performance and key performance indicators. Startups can only look at non-quantitative factors, which can be difficult to verify locally.”

To reduce CDI, Lee emphasized the need to work with local investment organizations or partners to address the asymmetry of non-quantitative information caused by physical distance. “The number of local startups is not large, so it is difficult for large VCs with scale-up funds to set up shop,” he said. To address the CDI issue, regionally based investment organizations such as accelerators need to strengthen their capabilities and expand their role. If they can identify the factors that can’t be measured quantitatively and democratize trust, we will see an influx of VC capital into the region. Encouragingly, accelerators are less geographically biased than VCs. 34.1% of accelerators are located in non-metro areas.”

Lee sees hope for high-growth companies in non-metro areas. “Overall, there is a lack of capital at the scale-up stage above the Series B round, but there is an opportunity for local tech startups. The tech startup space is a little less regionalized. Companies with great technology can attract venture capital, whether from the metro area or internationally.”

Finally, Lee recommends that “we need to strengthen the link between local investment institutions and large VCs in the metro area, use Silicon Valley-style venture debt, expand regional quotas for government support programs, and increase LP investments by local governments, regional institutions, and local companies.