Crowdfunding is at a crossroads. The inherent conflict of interest in the business model is forcing US firms to either limit their growth or become the online equivalent of late-night infomercials.

In Japan, however, crowdfunding has grown more slowly than in the US, and Japanese companies have had the chance to learn from their  successes and failures. As a result crowdfunding may end up looking very different in Japan than it does overseas.

In today’s discussion, Ryota Matsuzaki, the CEO of Kibidango, one of Japan’s newest crowdfunding platforms his approach. It’s not completely unique to Japan, but the strategy is particularly well suited to Japan.

Ryota details what he thinks the future of crowdfunding will look like in Japan and we argue over the likelihood of Japan’s consumer electronic giants taking advantage of the tremendous talent pool available on crowdfunding platforms in order to supplement their product lines via M&A.

It’s a great discussion, and I think you’ll enjoy it.

Show Notes for Startups

  • Why crowdfunding is the new e-commerce
  • Why e-commerce startups can no longer innovate
  • How to nurture crowdfunding creators
  • Why it’s important to trade high-growth for high-quality
  • Managing Japanese consumer’s expectations
  • How large brands might change the face of crowdfunding
  • How crowdfunding might jumpstart M&A in Japan
  • Can crowdfunding save Japan’s consumer electronics industry?

Links from the Founder

Transcript from Japan

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero and thanks for listening.

Crowdfunding in Japan is at a crossroads. It may or may not take the same path as crowdfunding the US but the end result is going to look very very different. There is an inherent conflict of interest in the crowdfunding model and crowdfunding companies around the world are been told to pick a side. You see, crowdfunding companies make money by taking a percentage of the funds raised by the projects on the site. It’s a great model.

The problem is that some of the most exciting high-profile and profitable crowdfunding campaigns are frankly scams. Exciting products from charismatic founders that capture people’s imaginations but will never be delivered. Many crowdfunding companies are in danger of becoming the digital equivalent of online infomercials. Now some companies have chosen sides. Kickstarter has changed itself into a public benefit corporation to prioritize quality projects over rapid growth and Indiegogo has embraced the dark side actively promoting products that will never be built, but making a lot of money doing it.

In Japan however, crowdfunding has grown more slowly than the US and Japanese companies have had a chance to learn from their overseas successes and failures. Ryota Matsuzaki, the CEO of Kibidango, one of Japan’s newest crowdfunding platforms has a new approach, one that while perhaps not unique to Japan is certainly extremely well suited to Japan, but I don’t want to give too much away. So let’s get right to the interview.

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[Interview]

Tim: I’m sitting here with Ryota Matsuzaki, of Kibidango, a leading Japanese crowdfunding service with an e-commerce focus. There’s a lot of crowdfunding sites in Japan, so why don’t you explain a bit more about Kibidango. What makes it special? What does it do?

Ryota: There are lots of crowdfunding platforms out here in Japan but what we do very differently is primarily focus on small businesses. We’ve seen many crowdfunding services that are good at helping NPO’s with their charitable projects and so forth. We’ve see many of the entertainment based crowdfunding platforms but what I see, I’ve seen many many small businesses that has great ideas yet their great ideas never serves as the white the wall and we just want to help them.

Tim: OK. You mentioned Rakuten and you were there for 10 years or so right? During the really crazy growth times of Rakuten.

Ryota: Right.

Tim: Do you see crowdfunding as kind of the new version of e-commerce? I mean the way that e-commerce sort of changed consumers buying habits 15 years ago. Is that what you see crowdfunding sort of turning into now?

Ryota: Absolutely. What I see crowdfunding now is almost like an e-commerce in 1997 when Rakuten just started and the market itself was very very marginal here in Japan.

Tim: It’s hard to believe looking back on it. The department stores were just saying, “No one is ever going to buy something online, we don’t need to worry about this,” and things have changed.

Ryota: What I see with crowdfunding is just what I saw e-commerce back in 1997. Everyone loves shopping online right now. There are many great platforms that offer a great experience.

Tim: Right.

Ryota: But there isn’t any service that really gives the kind of excitement that I had when I first saw crowdfunding platform in the US, Kickstarter. What you are buying is not necessary the product with the cheapest price or a product that can be delivered the next day. Something that really excites you. At least I was very excited to back many projects on Kickstarter.

Tim: Certainly there is a much closer relationship with buyer and seller than a straight e-commerce company. When was that? When did you decide that crowdfunding was the next thing?

Ryota: That was back in I guess early 2011. It didn’t can take me long to start backing many many product.

Tim: It’s an interesting point to make. I think now e-commerce is mature enough that most e-commerce start-ups we see now are optimization, right? They’re how to increase conversion, how to improve your marketing. They’re useful, but they are not game changing, but crowdfunding much like e-commerce when it was starting up in Japan, most people very skeptical of it.

Ryota: Back in early 2012 they wanted to bring Kickstarter into Japan. The first question they had was because Japan doesn’t have as much culture around the donation or backing culture, they weren’t too sure if the crowdfunding itself would fly in Japan or would be as successful as it is in other places. I had a very different view to it because everyone loves shopping here Japan and to me the experience that I had with Kickstarter was somewhat similar to shopping experience. You are paying money, of course, the product does exist at that point, but then you will spend all that time waiting for that product to be delivered.

Tim: I guess it makes sense because once you move beyond just a commodity product; you’re buying an experience, right? Whether you’re buying a Chanel bag, whether you’re buying a Tesla car. You’re not just buying the physical good, you’re buying a whole experience and idea around that good.

Ryota: Right. You are no longer buying the product just because of its features or functionalities but you’re buying it because you’re feeling our empathy to someone who is running the business or who’s making a product. Maybe it’s only me, but I really want to talk to many people who’s making things. I think those are the story that actually has value.

Tim: Crowdfunding certainly has taken root in Japan. In a six years span it’s gone from the general consensus that no one would be interested to I think there are more than 50 crowdfunding sites in Japan. Was it anything in particular that changed or was it simply that once Japanese consumers experienced it, they enjoyed it just like Americans and Europeans do?

Ryota: I would say that’s still not there yet, I think it’s getting there but it’s not quite there yet. Kickstarter itself did about 2.4 billion I guess in the past. Whereas if you put those 50 companies together, we are only doing probably less than a 100 million.

Tim: Do you think that is just because crowdfunding is newer in Japan or do you think that it will eventually grow to be as big as Kickstarter or Indiegogo in the States?

Ryota: I think it’s a great question and that no one knows the answer. One of the challenges with crowdfunding itself is with the word crowdfunding. It does not explain what Kibidango is or what Kickstarter is. We’re not just raising money from a crowd. It’s more of a joint effort by the community who’s behind the product creators or who’s behind us.

Tim: Let’s talk about Kibidango in particular with so many crowdfunding sites in Japan and some of them are very general and some of them are really tightly focused on a niche. What are you guys doing that’s different?

Ryota: In terms of features and functionality we’re not that different.

Tim: Sure. Everyone is kind of the same.

Ryota: Right. What’s different is most of the platforms I believe are really focused on the single campaign. We really try to focus on making each of the creators successful in the long run. The first campaign is only the beginning of the long sort of mission that they are going after.

Tim: How do you do that?

Ryota: We really spend time with each of the product creators to make their first project successful. That’s why we have more than 80% success rate.

Tim: When you say a success rate, do you mean 80% is funded or 80% deliver a product.

Ryota: 80% is funded.

Tim: What percent deliver a product?

Ryota: 100% so far.

Tim: Really? That’s fantastic. Everything funded is delivered. That’s astounding.

Ryota: We have a very generous guideline so we let anyone launch a campaign but one thing only really try to make sure is that they have profit skills and resources to deliver the product or services that they promised.

Tim: How you do that vetting?

Ryota: Basically we interview everyone, we meet everyone, we try to do reference check, we try to get into the details of who’s going make the product or how and so on and so forth.

Tim: So you meet in person?

Ryota: Yes.

Tim: Wow. It’s interesting. I’m in two minds of that. On one hand, that’s going to absolutely keep your success rate high and the quality high but it seems like that’s going to really slow down growth n the platform.

Ryota: That’s true. We just want to make sure that people who’s backing the product will get the product.

Tim: I think from crowdfunding companies point of view there is this dilemma. Some companies have tried be very strict and tried to turn down projects that they think have a low chance of success. Some companies like Indiegogo is probably the most famous for it are perfectly happy to back projects and promote projects that there is almost no way they could deliver on it because they make money on it, they make a percentage. It’s very hard to turn down money when you are trying to grow.

Ryota: It’s a big challenge for us as well. We of course would like to see more volumes but at same time make sure the creators of the each of the businesses will get excited that they were able to successfully raise that money and be able to deliver the product that they can come back to us and sort of continue on.

Tim: You’re looking for a repeat business.

Ryota: Exactly. We try to really focus our KPIs around how many times each of the project owners have actually launched the product. One of the more successful project owners is in the middle of raising money for her sixth project.

Tim: Japanese consumers are famous worldwide for just being incredibly detail-oriented and incredibly intolerant of mistakes. Has this ever caused a problem with the crowdfunding campaigns?

Ryota: That’s a great question both for project owners and for consumers. Many of our project owners also happens to own their own like normal online stores that we have put on Rakuten and what they are really surprised and telling us is that the consumers attitude are completely different when they are selling something on Rakuten and when they’re raising money on Kibidango.

Tim: Really?

Ryota: Right. So if you are late delivering the product for a day on an online store, you’ll see lots of complaints coming in, right? Whereas with Kibidango there are products that cannot deliver on time and then deliver late for about one month or sometimes a couple of months. When they are open about that and they sort of try to explain what happened, people react very differently. That’s when I see that they are not just consumers just paying for a product.

Tim: Do you think it’s a personal connection they have with the backers?

Ryota: Yes. Each of the backers actually becomes involved in the project itself. It was interesting for me to hear from one of the backers, he backed many of the products on Kibidango. This guy was saying that when product got delayed, he was saying that it was my ability to screen the right product when there. It was his fault that he chose the project that got delayed.

Tim: That is a really different reaction than an E-commerce situation.

Ryota: Exactly. This is the right kind of backers because he’s really trying to carefully pick and choose the right project for him or her.

Tim: This is a great situation but in the States we saw the same trajectory. Early on there was this close relationship between backers and makers and then as the projects got bigger and bigger, the money involved got larger and larger, large companies started using it, scammers started using it. Right now, there’s this real friction. I think a lot of that trust and innocence and connection is being lost. Do you think that crowdfunding in Japan is going to face the same challenges or do you think that there’s something unique about this market that will allow it to maintain that personal connection?

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Ryota: I think it’s still a big challenge for everyone. There are lots of platforms out there and many of them have very different agenda. While we can maintain and focus on making every project successful in making and acquiring each of the businesses, I think it’s our responsibility to grow this market the way it should be. I think to certain extent we’ve seen some of the successes and some of the failures outside of Japan that are really trying to scale their businesses. I think we really need to and really learn from the experiences. We need to make every product the right way.

Tim: In terms of the industry as a whole, do you think that we’ll see a future where crowdfunding in Japan is much smaller but perhaps more trusted than crowdfunding in America or do you think that crowdfunding in Japan will scale up to proportionally the same size and the same types of problems that we’ve seen in the US and Europe?

Ryota: I certainly see the latter to happen. It will definitely scale but with all the kind of challenges and problems and we will need to face that problem and one of the concerns that I have is that crowdfunding will become just another buzzword and when it becomes a buzzword, it’s Japanese are very easy to forget get through this.

Tim: They do follow trends.

Ryota: Yes. I think that’s one of the concerns because many of the people have started to use crowdfunding not to accompany what they’re in something that they cannot accomplish themselves. It’s more or less just a marketing campaign.

Tim: This has started to happen a lot in Japan now. Not only with small start-ups using it for marketing but like Sony has been very active in using crowdfunding to launch products.

Ryota: Sony doing crowdfunding has its own merits. I think it’s actually great. It’s not that Sony doesn’t have the financial resources to make that happen. It’s the younger set of entrepreneurs inside the company that wants to do lots of interesting product but that didn’t get an endorsement from the senior management.

Tim: Obviously the program has endorsement because Sony’s doing a lot of this. What do they want out of this? Is this product marketing for them or is it market research? What’s their goal in their use of crowdfunding?

Ryota: I think with Sony, they want to see if the consumers are backing the idea or not. It’s more of an approval process without their senior management involvement. It’s more than approval process by the consumers. It makes sense for Sony.

Tim: I think it certainly makes sense for Sony but do you think having companies like Sony or Pioneer or Panasonic involved in this changes the nature of crowdfunding?

Ryota: Actually it could. The kind of crowdfunding that Sony or Panasonic may do and the kind of crowdfunding that we do and pairing small businesses could be completely different but overall I guess the idea of having all the international support or sort of backing from consumers way before the product is actually born is actually something in common and that boosts the small businesses and large businesses can actually benefit from.

Tim: OK. There is one thing that kind of occurs to me that it might not work out too well for Sony or the big companies that are using this for test marketing because all of these big brands, they are not using their bands, they’re not using really market it out, there’s a tiny little team watching on crowdfunding. I think with enough successors a lot of these tiny little teams will realize that they don’t need the big company behind them. They might just go out and start their own companies.

Ryota: That could actually be a very interesting set of evolution if we are going to see that happen. Kind of like Sony should encourage that kind of evolution because in the end if it was the company who had helped all those small teams to be successful, they should be some ongoing relationship even after they’ve moved on and started their own businesses.

Tim: It’s certainly going to be interesting to see how things change in the next decade or so. Have we seen a case on either Kibidango in or in other crowdfunding site where a large company has picked up a product for distribution?

Ryota: Yes. It’s a great question. We had a product, a camera bag, it’s a camera bag that acts more like a messenger bag, very easy to carry when you’re riding a bike, easy to take your camera and shoot pictures. They had a really successful Kibidango crowdfunding campaign and because of that the media picked up and wrote an article, one of the biggest consumer electronics retailers called the project reader and ask if they would be able to carry that product.

Tim: Fantastic.

Ryota: I think it’s one of the good examples of us being able to help small startups connect with large retailers.

Tim: I think right now Japan’s consumer electronics industry has got a real problem with product development. They make such amazing products in the 60s, 70s, and early 80s but recently their internal research just isn’t turning out good products. It would be wonderful if the large Japanese consumer electronics companies and other companies could actually start looking at crowdfunding as an alternative to their own R&D.

Ryota: Right. I think that’ll be great if large companies start looking at each of the teams, small teams and be able to work together either as a license or sort of acquihire and so on.

Tim: That’ll be great. I think the large companies have a lot of pride though. Do you think they’ll be able to kind of get past their pride and start looking at these creators as the source of R&D, as a source of new products?

Ryota: We’ll see, I think there are a couple of small startups that has started to launch mini project over crowdfunding campaigns could be a potential, an opportunity for large companies to get that sort of design, product design expertise through acquisitions.

Tim: The US in particular, US corporations are very comfortable using M&A to supplement their products for R&D. I think it’s a very new concept for most Japanese companies.

Ryota: It is. We don’t see as many exit opportunities for small startups here in Japan and that’s definitely right. I used to lead the corporate development of Rakuten but there aren’t as many companies like Rakuten who is really aggressive on acquisition.

Tim: It’s sort of like the new generation of companies that came up after 2000 are very aggressive whether it’s Rakuten, Gree or DNA but the older ones haven’t gotten onboard with that yet.

Ryota: I think it has something to do with the corporal culture and the way they see the acquisition and have had a very negative notion to it.

Tim: Yeah, absolutely. I mean traditionally acquisitions; you bought distressed companies, you bought companies that were in trouble.

Ryota: Right exactly. For any startups acquisition is actually a success story.

Tim: Let me ask you to pull out your crystal ball for a moment because there is one aspect of crowdfunding that I think is very interesting in Japan and I know Kibidango doesn’t do this, last month the US government legalized crowdfunding for equity.

Ryota: Right.

Tim: This is one of those rare things that Japan was actually ahead of the US in and the Japanese government legalized this two years ago in 2014, I think. It hasn’t really caught on here in Japan but do you think crowdfunding for equity is a good thing? Do you think it will be a positive result for society or do you think it’s going to result to more of scam type companies coming out?

Ryota: It could go either great or awful. It could go both ways. One of the challenge for equity-based crowdfunding is that if you’re a venture capitalist, you will know that the companies you’re sort of making investment may be successful and see great exit, if you’re lucky.

Tim: Right.

Ryota: So one out of ten companies, you may be able to see a great exit but the retail investors are not accustomed to that kind of risk return. They mean sort of to investing in stock market which is regulated and they have disclosure and so on and so forth.

Tim: In that way it is very similar to product based crowdfunding where the consumers at first weren’t used to the idea that they might not get the product or it might not be exactly what they have and the consumers has taken to that.

Ryota: Yes and no. For reward based crowdfunding, the amount of money you’re putting in is going to be relatively similar to the price of the product. The average price would be around $100 whereas for equity-based crowdfunding, you’re talking about $5,000 on investment. It’s not going to be at the same as you’re buying a product or you’re backing a project on Kibidango or…

Tim: So both of levels on the expectations are really different.

Ryota: Exactly. You’re usually talking about someone who has not really be in a professional investor.

Tim: This is my concern that it might open it up to an awful lot of scams.

Ryota: Yes, it’s very easy for you to get into that kind of situation where people are casually raising money and people are casually making all the promises which will not be fulfilled. The idea is you will need to have an investor who is sophisticated enough to make their own risk reward judgment but I just don’t see that any time soon.

Tim: Yeah? You are not optimistic about it?

Ryota: I’m not optimistic to see the market to really be running in the right way.

Tim: OK. Let me ask a different question because you are also a very active investor here in Japan. You’ve had a number of very different types of investments; you were invested in CrowdWorks I believe and Mercari  which is E-commerce and crowdsourcing respectively. What do you think is the most attractive area in Japanese start-ups today?

Ryota: The reason why I made those investments is not necessarily I had a really smart idea or anything like that. I just get to know those people and I really love the team who is behind it and they’re starting a whole new idea about making changes to the world.

Tim: It was more on knowing the team and having the opportunity rather than some high level of strategy?

Ryota: Finding my way to put a skin in the game I guess. I really want to help people with great ideas and when I want to help them, we can make all this random comments and advices to those entrepreneurs but what makes you more convincing than others is to actually put your money into the business and then to make the advices and to make all of the introductions. It doesn’t really matter how much you’re putting in. If you’re putting money in it means that you are really behind the idea.

Tim: It’s a commitment.

Ryota: Exactly.

Tim: I want to ask you what I call my magic wand question.

Ryota: Sure.

Tim: And that’s if I gave you a magic wand and I told you could change anything about Japan, Japanese society, its educational system, the attitude towards risks, anything at all to make it better for startups in Japan. What would you change?

Ryota: I think Japan has a very, very good culture.  People here are generally really, really hard working. Many people tell me that I look different when I’m talking in English compared to when I’m talking in Japanese.

Tim: They told me that too.

Ryota: One thing that I would like to see happen is that when you are in the global setting, I want to see everyone have more confidence in what they do. What I always feel that is that, people in Japan or companies in Japan, they’re motainai; there are so many great people, so many great ideas, so many great products here.

Tim: It just means that you want individuals to be more assertive or more willing to talk about the good things that they are doing?

Ryota: They should have more confidence in what they do, not just within the Japanese market. What they need is the confidence and willingness to think beyond the Japanese border and the Japanese culture setting or cultural frame art.

Tim: Do you mean just the confidence to enter overseas markets or the kind of self-confidence that what they are building is suitable for overseas markets without changes? Practically what do you mean?

Ryota: Just try to have their ideas either their products or services being known to other parts of the world. That may mean that you will need to start communicating in English languages or other languages. You will need to make that effort so that more people will find you but because Japan and Japanese markets is the third largest market in the world, many people are too comfortable I guess being in this market.

Tim: I think so. This is a theme that so many of our guest talk about that in the 60s and 70s Japanese companies had to go overseas. There was no choice. The only way you could survive was to go overseas and in the 80s and the 90s Japan kind of got lazy. It had a huge profitable domestic market and focused on it. I do think from the startups I talked about I think there’s so much greater awareness of overseas markets. It still seems to be an abstract concept. The number of Japanese companies that actually have the guts and the financial backing to go overseas, it’s a very small percentage.

Ryota: Part of the reason is the disconnect between the Japanese entrepreneurs and the connective resources outside of Japan. There are many startups that gets funded by the Japanese VCs but not by VCs outside of Japan.

Tim: Is that changing because VCs in Europe and San Francisco are always talking about global investments and the importance of a global portfolio. On the ground in real life here, do you think the foreign VCs are having much of an impact at all on this situation?

Ryota: The very few examples of that kind of venture capital is someone like 500 startups.

Tim: They are very aggressive.

Ryota: Right. The model of venture capital is also evolving and I think they are still a very small number of them but there are certain VCs that are sort of thinking outside of their local community. Maybe they’re just skipping Japan and going to Southeast Asia or Chinese market. If the idea is great then they should definitely look into Japanese market and I think Japanese entrepreneurs haven’t done their job to really make that happen or show their ideas to the people outside of Japan.

Tim: You think the Japanese founders themselves should make a greater effort to appeal to global capital? That makes a lot of sense. It seems like that it’s starting to happen now. Hopefully we’ll see more and more of that in the future.

Ryota: Right, exactly and I think that you will need to have a certain role model if there is a company that has been successfully able to get funding from outside of Japan because of that their business has not been able to grow internationally and I think people will start to…

Tim: In the last couple of years we’ve seen a dozen, two dozen companies that have left Japan and moved to San Francisco and successfully raised money there. It seems like the trend is starting.

Ryota: I think so.

Tim: OK, cool. Listen, thanks so much for sitting down with me.

Ryota: Thanks so much. It was great talking to you.

Tim: Likewise.

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[Outro]

And we’re back.

It’s no surprise how Ryota and Kibidango have chosen slower growth and higher quality. It’s a rare Japanese company that makes the opposite trade off. What I found interesting was the effort put into creating long-term relationships.

Obviously, all crowdfunding sites want repeat business but few Western companies that are willing to make that kind of investments that Kibidango is making; interviewing people in person, working with them one-on-one on sourcing and managing expectations and gaining the support of their backers. Kibidango is clearly focused on building a real community. Now that might and it probably will limit their growth both in the short-term and in terms of their ultimate size but that’s a decision they’ve made carefully and consciously.

As to whether large Japanese companies will start looking to small startups and crowdfunding as a source of product development and M&A. They really need to and the talent is out there and can be bought cheap but corporate culture can be hard to change here in Japan. Of course, we’re seeing the very first baby steps in that direction today. There is certainly hope that these trends will accelerate.

If you’ve run or backed a crowdfunding campaign in Japan, Ryota and I would love to hear what you thought of it. So come by to disruptingjapan.com/show048 and let us know what you think. When you drop by, you will find all of the links and sites that Ryota and I talked about and much, much more in the resources section of the post.

Most of all, thanks for listening and thank you for letting people interested in Japanese startups know about the show.

I’m Tim Romero and thanks for listening to Disrupting Japan.