Why "University Startups" That Drove U.S. Innovation Struggle to Succeed in Korea

Bank of Korea Structural Reform ReportStrategies for Building a Growth Ladder for the Qualitative Transformation of University StartupsIncrease in University Startups Based on Proprietary Technologies, but Structural Barriers to Monetization RemainFacing the "Second Valley of Death" Not Only in Initial Stages but Also During Scaling Up"Expanding the Public Sector's Role as a Demand-Side Actor Should Lead to More Private Capital Linkages"

While the number of university-based innovative startups leveraging high value-added proprietary technologies has increased, these companies are facing structural limitations in terms of qualitative growth, such as monetization. This is because they often encounter additional funding gaps during the business advancement stage due to a lack of continuity in financing, making it difficult to overcome the so-called "second valley of death." Experts point out that in order for these university innovative startups to grow into global companies, it is essential to overhaul support systems at each stage of growth, ranging from institutional reforms within universities to expanding the role of public sector as demand-side actors to induce private investment.

On June 4, the Population and Labor Research Division of the Bank of Korea's Economic Research Institute released a report titled "Mid- to Long-Term In-Depth Study: Building a Growth Ladder for the Qualitative Transformation of University Startups" as part of its structural reform series. The report stated, "University-based innovative startups have achieved noticeable growth through government policy support, but now it is time for a qualitative shift to secure stable revenue and profitability."

University-based innovative startups refer to technology- and knowledge-intensive startups founded within universities, based on research and development (R&D) outcomes or human resources such as graduate students and undergraduate students in science and engineering fields. The number of such university startups has been rising sharply. According to Korea Evaluation Data (KoDATA), the number of startups based in universities increased from 987 in 2011 to 2,887 in 2024, nearly a threefold rise. The five-year survival rate also stood at 74%, significantly higher than that of general startups (33.8%) and the OECD average of 45.4%.

Infrastructure within universities has also expanded. The number of faculty and staff dedicated to startup support grew from about 700 in 2011 to 2,200 in 2024, while the number of entrepreneurship-related courses and participants increased six-fold and three-fold, respectively. The expansion of quantitative foundations through government policy support and growing real interest in entrepreneurship have led to a positive increase in the number of university startups.

However, despite quantitative growth, profitability has been declining. The operating margin of university startups established between 2015 and 2019 that recorded sales for five consecutive years fell from 1.2% in the first year to -3.3% in the fifth year. This was because the rate of cost increase outpaced the rate of sales growth as these companies moved from the initial startup stage to business expansion. The technology transfer rate of universities was only about 26%, far lower than the United States (40.9%) and the United Kingdom (61%). The debt ratio was also 159.2%, much higher than the average for manufacturing SMEs (111.2%).

The report concluded that this trend is even reducing R&D activities among university startups, hindering the accumulation of innovative capabilities. In fact, the average R&D expenditure of university startups is about 300 million won, which is significantly lower than the average expenditure of 700 million won for venture companies in advanced sectors.

The Bank of Korea pointed out that university startups face funding difficulties not only in the early startup stage but also during the business expansion (scaling up) stage, facing the so-called "valley of death" twice.

Jung Jongwoo, head of the Economic Research Division at the Bank of Korea, explained, "General startups tend to experience financial difficulties around the launch of prototypes and initial market entry, but the situation usually improves over time. In contrast, deep-tech university startups require technology validation, global certification, and additional R&D even after launching prototypes, resulting in a longer time to market entry." He added, "The valley of death lasts much longer than for general startups, and if follow-on investment is not secured after initial survival, these startups are likely to face the 'second valley of death'." According to a Bank of Korea survey, 46.3% of those with experience in university startups said they had failed to secure external funding in the past three years.

The current support system is heavily concentrated on initial establishment, making continuity in financing weak and increasing the likelihood of facing the "second valley of death." According to a survey by the Korea SMEs and Startups Agency of startup companies, 36.9% of respondents said that the period 3-5 years after founding was when support was most lacking. The report pointed out that university startups are particularly vulnerable in areas such as market fit validation, global networking, matching with professional management personnel, and linking with private investment. The fund size of university technology holding companies also remains small, at around 10 billion won, limiting their own capacity for follow-on investments. Jung pointed out, "As a result, many cases have been observed where excellent proprietary technologies held by universities fail to translate into increased sales and job creation, remaining stagnant instead."

The fact that capital recovery mostly occurs through initial public offerings (IPOs), which restricts investment, was also cited as a problem. The average time from founding to IPO is 14.7 years, resulting in a long wait for capital recovery, which weakens investor motivation and dampens reinvestment. In addition, the report pointed out that multi-layered regulations on general holding company venture capital (CVC) restrict the pool of potential M&A buyers, limiting interim exit routes before IPO.

The Bank of Korea recommended that, to prevent university-based innovative startups from being weeded out and to help them grow into global companies, it is most important to organically connect support systems at each growth stage. Specifically, it proposed three principles: reforming university governance, expanding the public sector's role as a demand-side actor, and inducing private investment.

In the initial business stage, the report suggested that the faculty performance evaluation system, which is mainly academic, should be strengthened to include technology transfer and startup-related achievements. It also pointed out the need to clarify policies for recognizing career breaks and reinstatement procedures for faculty and students taking leave to start a business, as well as how to ensure continuity in credits or major requirements, thereby reducing uncertainty for both faculty and students.

For the commercialization stage, a role-separated startup model was suggested. Jung commented, "A unique characteristic of university startups in Korea is that entrepreneurs are expected to handle everything, which puts significant pressure on faculty members involved in startups. It may be worth considering adopting a model similar to those at Stanford or Oxford University, where the university focuses on creating and validating technology, while bringing in outside professional managers to run the business."

For the business expansion stage, the report recommended expanding the public sector's role as a demand-side actor so that university startups can secure their first sales and such track records can lead to private sector financial investment. Alternative financing tools, such as IP-backed loan guarantees, were also suggested as areas for review. For the exit stage, the report emphasized the need to diversify exit routes by supplementing secondary market infrastructure that can provide partial liquidity before an IPO.

Jung stressed, "To improve the feasibility of these policies, a detailed policy roadmap must be established. Since it is difficult to pursue all policy tasks at the same pace, it would be more desirable to prioritize them based on feasibility and impact, rather than trying to advance everything in parallel." He added, "What can be done immediately, without significant financial burden, is to reform internal university systems to lay the first rung on the growth ladder. Rather than relying on a single all-encompassing policy, the most important thing is to ensure that the growth ladder remains connected so that companies can continue progressing to the next stage."

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