When viewed through an American lens, Japan’s venture capital industry is one strange animal—Large corporations, not startup-centric venture capital firms, provide the bulk of financial support for the country’s entrepreneurs.
Corporate venture capitalists (CVCs) accounted for 80 percent of Japanese startup fundraising in the second quarter of this year, according to investment database CB Insights. In North America, by contrast, where raising capital from corporate investors is often seen as a last resort, less than a quarter of startup investments came from CVCs.
There’s also the issue of scale. Japan as a whole made just under $2 billion available to entrepreneurs in fiscal 2014—half from venture capital firms and half from angel investors. As James Riney, head of 500 Startups Japan, points out, the United States made $48 billion available to its entrepreneurs in the same year.
Riney, an American, is keenly aware of corporate venture capital trends in Japan—he was the principal investor for mobile gaming giant DeNA for a year and a half before joining 500 Startups in September. Prior to becoming a venture capitalist, Riney founded his own startup, Storys.jp, which produces crowdsourced content.
What’s more, 500 Startups founding partner Dave McClure, one of the most prominent VCs in both Silicon Valley and around the world, was in Tokyo in September to announce Riney’s appointment and the firm’s re-commitment to Japan.
The firm’s new domestic fund is valued at $30 million and will focus on early-stage investments and follow-on rounds, up to series A. Individual investments will fall in the $100,000 to $500,000 range.
Speaking to The Journal, Riney and McClure outlined their plans to re-shape the way Japanese entrepreneurs raise cash. They also talked about how such founders can make their companies go global.
500 Startups left Japan, but now it’s back. Why is that?
McClure: To be clear, we never really “left”—we started investing in Japan in early 2010, and, over the next several years, we invested in 15 Japanese startups; more than many local Japanese VCs over the same period of time.
For two years [2012 and 2013], former 500 partner George Kellerman was a frequent visitor to Japan. After George left to work on another project on the US east coast, it took us a while to find the right person to lead our efforts in Japan. Now that we’ve hired James Riney, and have a local Japan fund, we are excited to increase our efforts [here].
More recently, the local Japan startup ecosystem has developed substantially more than five years ago, and the level of startup activity and investment in Japan is full of opportunities.
What’s missing from the current Japanese VC landscape, and how will you fill that void?
Riney: First of all, there are no well-known Silicon Valley seed-stage VCs actively investing here. What we hope to bring along with our investment is Valley best practices into the local ecosystem—Basic things like Silicon Valley standard financing documents in English to more complicated areas like resolving founder disputes, recruiting, and fundraising.
The other area that is seriously lacking is the ability of local VCs to pull in capital from overseas, through both investment and acquisitions. At the moment, the Japanese ecosystem is a black box, due in part to almost all information on the venture world here being in Japanese.
We’re a globally recognized name, so when we invest, people tend to write about us. Startups that we invest in here will be significantly more likely to get covered by foreign media, meaning they will reach more investors, partners, and even acquirers.
The other component of this is relationships. Investing and mergers and acquisitions are very much relationship driven, and we hope to use our network to build bridges with investors and management at companies abroad very early on. Almost anyone in the tech elite is probably within one or two degrees of separation from us, so that can go a long way for our startups.
There are companies here that are serious businesses that go totally unnoticed by a global audience. I had lunch with a corporate development person from a foreign company the other day that had just acquired a Japanese startup. While everyone I had talked to locally thought that this company had paid too much, these guys couldn’t believe how much of a bargain it was!
Considering the multiple on revenue, it was ridiculously cheap by global standards. But things like that go largely unnoticed because of the lack of bridges between Japan and [the rest of the world].
Will Japanese startups have an opportunity to join your accelerators in California?
Riney: If they have those aspirations, yes. Absolutely.
What are the biggest challenges in finding the right startups in Japan to invest in?
McClure: Our biggest challenges certainly aren’t because of the market—there are plenty of business opportunities to go after, with a country of [more than] 100 million people who are all online.
However, while there are plenty of skilled engineers in Japan, there is a notable lack of experienced entrepreneurs, and a limited number of mentors around to help younger entrepreneurs.
In addition, there is a strong tradition of the brightest Japanese going into finance, government, or larger corporate business roles rather than startups. However, that is beginning to change, and we hope to accelerate a path for talented [Japanese] to become startup founders.
There are some significant cultural issues for Japanese entrepreneurs to overcome. Fear of failure, lack of spoken English skills, and the business culture here are certainly areas that Japanese can work on improving. In particular, fear of public failure—and the cultural penalties of failing in front of friends, family, and business colleagues—is one of the biggest hurdles for Japanese founders to overcome.
Are there specific verticals that you’re looking at?
Riney: [VCs] aren’t experts on every vertical, and we’re not the ones running the company, so it’s important to keep an open-minded approach. The core goal is finding that really top-quality talent, and if we focused too much on one or two specific verticals, we might miss something. That being said, I’m personally excited about [Virtual Reality], robotics, drones, and healthcare.
Say, for example, you have farmers in the countryside that have kids that decided to move to Tokyo instead of tend to the farm with their parents. A robotics system—and in particular, the software on top of it—could be used to help manage the farm and maximize yield. It’s not only important in light of the aging, shrinking population, but also because there’s not a lot of [farmable land] to work with here.
As an American who speaks bluntly but is well versed in Japanese language and culture, how to you deal with the nuances of doing business in Japan?
McClure: Yes, there are some definite challenges for a hillbilly gaijin (foreigner) and Silicon Valley geek—who wears T-shirts, shorts, and flip-flops regularly—to operate in Japan. But I’ve gotten used to the differences and have come to appreciate the many wonderful things that Japan has to offer. I hope to continue to learn how to blend US and Japanese culture in ways that can bring out the best of both countries and people—especially when it comes to investing in startups!