Finally Japan. It was the last leg of my Asian Trip. If I can summarize with one sentence the relationship between Europe and Japan in the early stage investment sector I could say that Europe doesn’t see Japan and viceversa. I didn’t know that much about what was going on in Japan in our sector and I didn’t think I could have enough material to write about it. Instead after 5 deep meetings with investors and entrepreneurs I received consistent information that allowed me to write an article.
First let’s give a bit of history of the venture capital market in Japan. The venture boom arrived a bit later then US and Europe in the early 2000. There was very few institutional money at those times and the early success entrepreneurs money and angel money played a major role up until 2006 when the scandals around false business information, given by the leading Japanese ISP Livedoor (called the Livedoor Shock), caused a downturn in the Tokyo Stock Exchange and an aloe of mistrust around internet related businesses.
In 2010 the market started back again and more institutional money came in with the major corporations, media groups and banks playing a major role with their corporate venture arms.
The fiscal year ended in March 2013 registered 103 bil Yen in investments (1 bil $) with a market still recovering from the 2006 record of 279 bil Yen (2,7 bil $) and a low of 87,5 bil of 2009 (850 mil $).
At the moment approximately 30 funds operate in the market between seed activity and development capital.
Major players in the digital space are the ecommerce Group Rakuten, with an aggressive international acquisition strategy and Softbank, the telecom and internet group who has a relevant stake in Yahoo Japan, independent from Yahoo US.
The IPO market is developed while the merger & acquisition activity struggles because of the difficulty to integrate different corporate cultures in Japan.
As you can appreciate the corporations philosophy is so strong in the business and social environment in Japan that is influencing in a significant way the venture capital space.
Japanese investors and corporations show a relevant interest towards the foreign markets, mostly Asia (China and South East Asia) but also US and only occasionally Europe.
On the other side Japan is not a very easy market to penetrate for foreign operators, investors and companies. Not many people speak English while business culture and markets are quite peculiar. During my meetings the most mentioned US investor in Japan was indicated as 500 Startups (as usual…) with more than 10 companies recruited here for their accelerator program and other independent investments done. Of the Europeans only Atomico Ventures was mentioned as having a base here.
Japanese startups look at US as a financial and business market to go to. Several of them are setting up their base there, also quite early in the development phase, being financed by 500 Startups, Y Combinator or SV Partners just to mention a few.
Company valuations are higher here then in the rest of Asia, especially for seed rounds (nearly double then South East Asia and higher then China), while for series A/B Chinese valuations can be higher then Japan’s.
The government seems not to be very active, providing grants and a couple of public funds. While the entrepreneurial attitude (i.e. approach to failure, working in teams and critical thinking) seems to be one of the aspects that more stops the further development of a market.
During the exploration of the Japanese market I noticed a recurring statement towards the corporate VC money as been evaluated to be more “dumb money” then other. Then it happened to me to link this to other statements towards public money made by investors in Asia, towards Singapore Government money for example, or in Europe in many different Countries.
Having seen in the past years of international investment activity some of the most significant ecosystems for startups in the world and having invested in most of them, I think it’s possible to deduce that to build a strong ecosystem we need many things but for sure we need a lot of money. Then let’s think about the metrics of the sector: every 100 entrepreneurs, approximately 5 are financed by professional investors and, between the ones that are financed and the ones that are not, 2 maybe 3 make it in a success. On the investment side the metrics are not that different. The average returns of venture capital funds are poor, especially compared to the risk related to the investments. But this is not a market where averages represent what most of the players do. Many investors lose their money or make low returns and few investors make a lot of money or very good returns. Therefore we cannot think that all the money deployed in the market is smart money. We need some less smart money or more dumb money to make the market. Some times it can be the corporate money, some other times can be the public money and many other times will be the private money. It is not possible to make a market with few tens of millions dollars of investment. We need many hundreds of millions or billions of investment. These are the numbers of the most important markets like US, China, Japan, UK, Germany, France and Israel. And in many of these markets the stimulus given by governments has been crucial to push angel and institutional money investments. Some times it has been done in a dumb way, some other times in a smart way. I think that both entrepreneurs and professional investors should take this into account before judging money, sometimes in a snobbish way, as smarter or “dumber”.
But let’s come back to Asia with some final considerations. At the moment Singapore has shown to be the best positioned to be an international hub for tech startups but the contest is still open and maybe some newcomers could come in and take the role. During my travel in Asia, Jakarta has probably been the most mentioned place to be where I have not been to and one of the potential new comers with its 250 million people potential market of Indonesia. But watch out to Ho-Chi-Min and Bangkok too.
Next trips will be to US, Europe and Israel, less exotic places then Asia. I don’t know if I will have something interesting to write about, but who knows? Stay tuned.
Contributor: Lorenzo Franchini Traveller-in-chief – International Startup Hubs Grand Tour
Lorenzo Franchini is an Italian angel investor and entrepreneur, who co-founded IAG, the main Italian angel group. Last February he left his operative role as MD in IAG and began a long trip around the world for the discovery of the best emerging hub and ecosystem for startups. He will be posting on Startupbusiness about this issue.