KaKao

The new value created by the synergy of people, items, capital, and timing

 

#People who are sensitive to 'problems'

"Ordinary things repeating every day," which is the dictionary definition of  'daily routine.' Most people regard everyday problems as temporary inconveniences and volatile events, but startup founders consider them differently ― focusing sensitively, digging in relentlessly, and then building a business model. Problems that no one has ever tried to solve finally meet solutions and benefit the public. Venture capitals make this process much faster and more powerful.

 

Startups, venture capitals, investment rounds from Series A to B, C, and D, and 'exit' have become current terms. Ostensibly, the startup ecosystem has matured at a rapid pace. No one can deny that behind the scenes, however, venture capitalists had identified and empowered those startups persistent in solving problems.

 

What has Kakao Ventures, which topped the list in the venture capital review site anonymously rated by startup founders, set over the past decade? Let's look at the traces of "aviation" by those self-proclaimed CoPilots of startup founders who are not afraid of untraveled routes.

 

※For the convenience of presenting the story, K-Cube, Kakao Ventures' former corporate name, will be used interchangeably.

 

#Envy and deficiency

"In a time of transition, people establish a company with a sense of urgency, 'I must do it.' Not 'this will be okay.' We want to help 100 CEOs grow by participating in the incubation stage, making equity investments, and doing management consulting. When a great item is about to come into the market, venture capitalists discover it and invest in it. That was the most enviable part when I stayed in the states. People, items, and capital exploded with the perfect timing."

 

These are the stories Brian (Kim Bum-su, current director of Kakao's Future Initiative Center) unfolded in his welcoming speech at the global app press conference for Podotree (the predecessor of Kakao Page serviced by Kakao Entertainment) on March 28, 2011. It was when one year and ten days had passed since KakaoTalk launched, and the service was on the threshold of 10 million users.

 

The story that iWeLab (the former corporate name of Kakao) struggled without a single hit item for more than three years after its establishment, and KakaoTalk was born when everyone was almost run down is known as far as it goes. However, only a few people know that Brian endured a long-suffering time exhausting the capital he had privately financed. This is because there was no culture where early companies grew with the help of venture capitalists or strategic investors as today. The envy of the Silicon Valley culture and the deficiency privately experienced while commencing a business became the driving force to create venture capital like never before.

 

On March 28, 2012, when the number of KakaoTalk users surpassed 40 million and services like Gift, Plus Friends, Emoticons, and Kakao Story sprouted one after another, K-Cube Ventures (the predecessor of Kakao Ventures) was established. Brian, the founder of Kakao, the "company still in the red," contributed private funds. He felt another sense of urgency: "No one can't stop me."

 

#The advent of an era where each person becomes a platform

K-Cube Ventures was born to invest the initial capital of KRW 50 billion in early-stage companies in their first to the second year of business, such as the Internet, mobile, game, and state-of-the-art technology. Brian served as the first board chairman. The background was the need for initial investment funds he urgently felt while establishing NHN and iWeLab.

 

By then, the term "startup investment" was not commonly used in Korea. Even though "venture capital" also existed at that time, they generally invested in IT services or high-tech manufacturing sectors that had grown to a certain extent. The determination of the adventurous fund represented a new perspective of primarily investing in and partnering with IT companies in the pre-incorporation stage or before achieving full-fledged results ― joining their long and rough journey. The media described the launch of K-Cube Ventures as a mission of "fostering a post-Kim Bum-Su."

 

Around this time, Facebook (now Meta) acquired Instagram, which held 40 million users and 13 employees, at $1 billion. Brian spoke to Maeil Business Newspaper about the M&A case as follows:

"Mark Zuckerberg realized that the mobile isn't an extension of the web." In the web Internet era, vested interests were formed around search boxes. However, small capital services based on small ideas can be platformed in the mobile age. The fact that smartphone penetration exceeded the threshold of 50% and an inflection point was approaching also made clear K-Cube Ventures' investment target of "From seed to series A."

 

#The venture ecosystem is built with vision and waiting.

The yardstick that distinguishes startups from small businesses is whether they have the potential for high-speed growth based on innovative technologies or ideas. Skills and ideas come from people. In other words, legwork and sharp-sightedness to discover promising founders are the competitiveness of venture capital investing in the early stages. Even if an idea-based service or the object of investment dies out, confidence based on legwork and sharp-sightedness is the driving force that keeps investors waiting until a successful service finally appears.

 

Jun from Kakao Ventures at the interview table brought back an old story.

 

"One of the companies we invested in and grew into unicorns offered a completely different service after all. The startup's initial and subsequent services didn't get much response from the market. However, the logic behind their business development was solid, and its founder was received as one of the best engineers. So I waited." It's the story about the Dunamu that runs Upbit."

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Some venture capitalists were also investing in early-stage companies. However, K-Cube Ventures were differentiated because they got limited partners involved to take a bold step aside from equity share capital. Even before a business model was implemented, they primarily focused on investing in and encouraging team-building and ideas. Their investment philosophy is to 'find one good reason to succeed and fill in the remaining gaps.' Against this backdrop, the investing flow was so fast in the early days that one new investment was made almost every week.

 

Compared to the speed of executing investment, the liquidation cycle is almost twice as slow as other VCs who started investing in the mid-to-late stages. The VCs investing in the post-Series B stage usually liquidate their funds every five years. However, the liquidation of K-Cube (now Kakao Ventures), or the venture investment fund No.1 formed in June 2012, is a case in point because Kakao Ventures liquidated K-Cube in December 2021. They were not obsessed over defending returns or averting risks. From the general perspectives of VCs focusing on late-stage investments and valuing "numbers," Kakao Ventures' approach seems "full of holes." However, considering that the first venture fund in Korea, ultimately having a payback of 100 times, came from Kakao Ventures, it is crystal clear that a tremendous opportunity exists next to the "hole" only spotted by a few.

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Even the founders, who had already experienced one or two "exits" and had relatively generous capital, sympathized with K-Cube Ventures' philosophy and joined the "family" by putting in their funds. After August 2012, the "family" members met almost every month to cement unity until the COVID-19 pandemic hit the world.

 

There openly voiced common concerns about what they can do when their co-founders are not fully engaged as expected, how they can collaborate on promotions, and how service and technology companies can help each other. Sometimes, they would put aside their work and go on a drinking binge. That was the background of a virtuous cycle created within the family, such as Carrot Market's investment in Naamezip(other people's houses) and Neptune's acquisition of Ool Blue. The chain reaction of entrepreneurs supporting newbies has led to changes in the social atmosphere. Startups were opened by talents who valued "what problem" they wanted to solve rather than "where" they wanted to belong.

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#Becoming the indicator that drives subsequent investments

Kakao Ventures has become a so-called 'guaranteed check' in the investment industry, as its ability to find good teams and persevere in growing them was proven. Jun says, "During follow-up investment rounds for startups, the atmosphere reads that 'we will go with the companies funded by Kakao Ventures'."

 

During Kakao Ventures' 10-year streak, the environments surrounding startups and venture capitals have changed. In the 2010s, when smartphone penetration was increasing, the transition from web to mobile alone opened up various opportunities, but this is not the case now. The market has matured, and the days when it seemed that all the world's problems could be solved with mobile services alone are gone. Several venture capitals under the umbrella of large corporations have also sprung up. In addition, Russia's invasion of Ukraine in 2022 and the US interest rate hike led to a sudden "venture ice age." June explained how Kakao Ventures diagnoses complex issues.

 

"The investment philosophy of finding one good reason to succeed and filling in the rest gaps is rock solid. The momentous direction of digital transformation through software and technology still makes sense. Compared to the early 2000s, when illogical investments were rampant, mobile technology in the 2010s substantially changed much of the world. We are still determining what the 'next big thing' will be among brain science, metaverse, and space technology. But when we go on an animal instinct to embody the original philosophy of venture capital, I'm sure we will be better able to face the following shifts."

 

At the end of the interview, we asked what Kakao Ventures think of 'investment failure.'

 

"There are so many reasons why companies have difficulties, such as antagonism between members or internal conflicts caused by the founder's excessive passion. The most challenging case, however, is a moderately profitable company that sustained itself to the point of survival. You didn't start your business to do that. It's not just business closures or service interruptions considered failures."

 

#The power to continue aviation

It is difficult to specify which one is the best venture capital firm. However, Kakao Ventures, for sure, is the venture capital firm that takes the first move.

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Until 2017, when the name K-Cube Ventures was last named, the amount invested in early startups exceeded KRW 70 billion. At that time, assets managed by AUM were valued at KRW 110 billion. There were more than 120 investment firms in the portfolio. By the end of 2022, this figure is expected to surpass the threshold of 240 companies and KRW 360 billion.

 

June finished the Kakao Ventures story of walking down "untraveled roads" over the past decade with the following remark.

 

"We've been doing experiments that conventional VCs have never tried or couldn't. Now that the experiment results are materialized, the Kakao Ventures Krews are excited to think about what kind of footprints they will make in the next decade."

 

#The 'family' talks about Kakao Ventures

"How many people in your store can you call regulars?"

"Do you know how much outstanding money you must pay soon?"

 

There is a company taking care of these questions that even those bosses working 24/7 would be bound to hesitate to answer. That company is Korea Credit Data (KCD), the unrivaled No. 1 in the related market. As of October 2022, the 'Unicorn' KCD has attracted more than KRW 100 billion ― a company that Kakao Ventures put in seed investment in 2016. This was before the launch of 'Cash Note,' its flagship service and the first product, in May 2017.

 

KCD, which started with the idea of making it easy for local shop owners to start, operate, and grow a business, has become the No. 1 company in the market only in five years. Kim Dong-ho, the CEO of KDC, shared his story of 'flying together' since 2016 when he secured seed investment from Kakao Ventures.

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Kakao _ You successfully grew Open Survey, founded in 2011, so there might be plenty of startup funds. Why did you attract seed investment despite diluting equity while founding Korea Credit Data?

 

CEO Kim Dong-ho (hereinafter, "Kim") _ That was because we saw attracting investment as the starting point of strategic cooperation. The initial service by CashNote was operated within KakaoTalk, and we could interact with KakaoTalk from various aspects until the service was finally released as an independent app. Another seed investor, DeCamp, is the startup foundation funded by Banking Association. Similarly, we could explore various collaboration opportunities with the financial sector. It also helped me with back-office skills, media response, connection with next-stage investors, and critical decision-making that early-stage startups tended to lack.

 

Kakao _ You could have been worried about local financial or telecommunication companies directly entering the KCD's business area or similar overseas operators competing with your company. How did you build the moat?

 

Kim _ Many then companies, when founded, collected and analyzed financial information like today. They targeted enterprises and consumers. Companies had yet to do business targeting small business owners. Important is preoccupancy. However, we thought it was too vast to move forward alone. That was why Kakao, Shinhan Card, Kookmin Bank, and some telecommunication companies became our shareholders and built an ecosystem altogether. As a result, we were able to offer attractive and multi-sided proposals to our customers, the bosses, which naturally enhanced our competitiveness. On the other hand, we could head off the entry of similar business operators. Looking back on my two startup establishments, legacy operators in the relevant industries moved slower than I expected. They looked at entering the market only after a business model was proved valuable, and our moat was built to some extent.

 

Kakao _ It took Cash Note less than four months to ensure 10,000 stores signed up after its first product launch. And at the end of April 2022, five years after since, Cash Note secured its millionth store. What was the critical key to growth?

 

Kim _ Suppose that you are self-employed. Then, there are indicators or factors you should look at every day. What percentage of sales did regular and new customers yesterday account for? How much is the unit cost of card sales? How much of the delivery app sales are made of online payments? Cash Note was the first pioneer that made it easy to overview such things at a glance. Unsurprising, perhaps. But we believe that providing satisfactory user experiences at our customers' eye level was the main thing. Vivid experiences collected from our product lead Ahn Tae-hoon's self-employed wife also helped us immensely in designing products.

 

Kakao _ A graduate of the Science Academy For the Gifted. Successfully exiting the first business established at the age of 24. Making the second startup a unicorn. To put it mildly, you seem to have only walked the 'silk road.' What challenges did you encounter during the operation of two startups?

 

Kim _ From a distance, it seems like a movie, but up close, it's a documentary. I started my own business when I was 24 years old. I was young and short of social experiences. In the case of Open Survey, I worked there until the number of employees increased to about 70. It was really tough to manage employees. In the case of Korea Credit Data, my second startup, I could easily solve similar problems I had already encountered in the first business. However, various regulations unique to the finance-related industry were a new challenge. Aligning organizational culture after the merger ad acquisition was also an assignment I first experienced in the growth process.

 

Kakao _ When adversities such as high-interest rates and the war in Ukraine phase out, startups and investments will resume. Can you give tips to junior entrepreneurs, such as "You should meet these kinds of  VCs"?

 

Kim _ Shareholder composition is fundamental; however, it seems often overlooked. Maintaining a certain proportion of investors who can go with your company in a long breath is essential. You should meet individual angel investors who can share your worries or venture capitalists who can solve your problems together for a long time. It's also crucial that the judge in charge has such experiences. Plus, check the remaining days until the liquidation deadline if the fund comes in. Kakao Ventures is a VC that became KDC's seed investor when our valuation was estimated still at billions won and then reinvested when our value grew more than 100 times. The term 'CoPilot' suits it well.