Korean Startups Join Forces to Take on Family-Run Conglomerates

Sometimes you need a bunch of Davids to take on Goliath. In South Korea, where family-run conglomerates such as Samsung dominate just about every aspect of life, one startup thinks it’s found just such a formula to break their hold.

Yello Mobile Inc., a cross between Rocket Internet and Y-Combinator, is building a coalition of up-and-comers to take on the nation’s chaebol. It’s invested in more than 60 startups in areas from online shopping to digital media, assembling an alliance of businesses last valued at $4 billion. They pool resources and customers, share costs, and help each other out on everything from payments to delivery.

Korea’s never before seen anything like Yello, an incubator-cum-venture capital firm that buys into and supports promising entrepreneurs that’s become the nation’s second-most valuable startup itself. Its ascendancy coincided with the rise of public outrage against cosy chaebol-government ties, culminating with millions taking to the streets to protest the peddling of government favors to entitled corporations.

“Joining forces is the only way to survive in a country like ours,” co-founder Choi Tae-young said in an interview. This isn’t the U.S. or China, where there’s enough land and population enough to spare. Here, “you can perhaps survive up to three years, maybe five years alone, but to last longer and forever, we had to come together and create an alliance.”

It’s a model that’s allowed Yello to thrive, though no one’s suggesting it will break the conglomerates’ lock on the economy. From the stores Koreans frequent to the cars they drive, names like Lotte and Hyundai remain a ubiquitous fact of life in South Korea. The family-run chaebol, literally “wealth cliques,” emerged from a modernization effort in the 1960s and the oligopolistic system has long been accused of smothering entrepreneurship.

The top 10 chaebol own more than 27 percent of all business assets, according to Korea’s Fair Trade Commission. Just 0.01 percent of small companies grew into mid-sized ones from 2011 to 2014, according to a 2016 OECD report.

Investors have been understandably wary of betting on the underdog. Startup funding amounted to just above 2 trillion won ($1.7 billion) in 2016, according to the Korean Venture Capital Association — a pittance by Chinese or American standards.

“We say it as a joke but it’s actually a serious matter. It’s extremely hard to get a 15 billion, 20 billion won funding in Korea,” said Park Hee-eun, a principal at Altos Ventures. But an “increasing number of startups have actually been able to beat the competition with conglomerates, by responding faster to the mobile era than their larger counterparts.”

Yello exchanges shares with its startups but lets founders stay in charge. That’s an echo of chaebol cross-shareholdings, but Choi says the intent is to align interests and not preserve control. Yello embraces startups in fashion, media apps such as Pikicast, digital ad agencies, search, payments and even logistics. Those myriad interests again mirror the chaebol — except they’re all focused on mobile apps.

“It’s a great model,” said Kim Kyong-hwan, a professor at the Graduate School of Global Entrepreneurship at Sungkyunkwan University. “However, there is a risk. If one part of the coalition starts struggling and collapses, the entire team could come down.”

Yello will now curtail its furious pace of acquisitions to focus instead on infusing data and artificial intelligence across services such as ads, said Lim Jin-seock, its chief strategy officer. It’ll explore investments in Southeast Asia, then China and Japan in the longer term, he added.

The holding company’s biggest asset is Yello O2O Co., a mobile hotel and hospital search service run personally by Choi. Revenue more than doubled to nearly 200 billion won in 2016 — about 40 percent of the parent’s sales — and it could seek an initial public offering in three years to bankroll an overseas expansion.

Choi himself is an alumnus of one of those rare self-founded companies to make it to the big time: Naver Corp. Created by former Samsung employees, it’s now Korea’s largest internet player. When he teamed with Lee Sang-hyuk to co-found Yello in 2012, Choi was making ends meet by providing portal services on contract to his old employer. Their first 20 square-meter office had just enough room to cram in five desks and no warm water. There were times it couldn’t pay employees, Choi recalled.

Yello quickly moved beyond the yellow-pages business for which it was named. Aware of the chaebol’s dominance, the pair attacked niches the biggest players eschewed — such as rural hotels. But it was mobile technology that proved the equalizer as the same risk-averse corporate chieftains that kept an iron grip over industry couldn’t keep up with the pace of change in the smartphone era.

Seeing their opportunity, Choi and Lee sank money into mobile-focused twists on e-commerce and travel after convincing investors of their approach. Yello has since raised a total of 380 billion won from Macquarie Capital, Formation 8, SBI Holdings and other backers, becoming one of South Korea’s best-funded startups after SoftBank Group Corp.-backed Coupang.

It’s since moved to new digs in the ritzy district of Gangnam, famed for its surgery practices and Psy’s viral rap video. Yello’s 3,500 employees hail from diverse backgrounds, from teenage high-school grads to entrepreneurs in their 70s. That’s a far cry from the chaebol-staple of business school alumni with Excel-spreadsheet proficiency.

“We have a kind of wild nature, which helps speed things up,” Choi said.

The big players for now aren’t worried: Yello’s businesses barely make a dent in the market. Yet chaebol officials have shown interest in how Yello’s run, and will sometimes pop by to brainstorm with its CEOs, Choi said without naming any. Meanwhile, others are catching on. SK Planet Co., for one, was set up by the chaebol of the same name to drive online businesses in everything from housekeeping and food to beauty.

While the chaebol approach has been to build a platform and manage transactions, Yello also tries to provide an all-round service. Goodoc, a search app linking tens of thousands of hospitals and pharmacies, joined Yello in 2013 after nearly going broke as a solo act. It has since seen sales grow more than a hundred-fold, said Chief Executive Officer Park Kyung-deuk, and now shares clients, information and even financing with other health-related apps in the Yello family.

“I can focus just on managing business,” said CEO Park, adding that Yello leaves him mostly alone except for issues such as employee stock options. “This would’ve been difficult if we were going it alone.”

While some startups have dropped out of the alliance for reasons ranging from low-performance to simple incompatibility, Choi says Yello has been lucky. It takes an average 17.4 years for a startup to start making more than 100 billion won in sales a year, according to Korea’s Small and Medium Business Administration.

“Through an alliance, we can have our own voice,” Choi said. “I think more companies should become like us.”
Source: Bloomberg

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