Today we sit down with Dave McClure under the cherry blossoms and talk about startups, funding, failure

Dave has long been involved in Japan and in the startup community here, and in this episode, we talk about the progress Japan has made in the past decade and the changes that still need to be made. We go over what Dave sees as the gaps in the Japan’s venture capital ecosystem and also dispel some of the pervasive myths that have spread throughout Silicon Vally and the entire startup world.

We spend a bit of time diving into what Dave and 500 Startups consider to be a risky business model, and it may not be what you expect, but it’s great advice for anyone thinking of starting a company.

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

Show Notes for Startups

  • Who is doing most of the investing in Japan right now
  • Why Japan needs more angel investors
  • What startups should be looking for in investors
  • How to find a startup idea
  • What Japan should learn from Silicon Valley and what it should ignore
  • Which business models are truly unproven
  • The one thing Japan should change to encourage startups
  • How to really learn from failure

Links from the Founder

 

Transcript from Japan

Disrupting Japan, episode 84.

Welcome to Disrupting Japan, straight talk from CEOs breaking into Japan. I’m Tim Romero and thanks for listening.

Japan, well most of the world really has an unhealthy obsession with Silicon Valley. I’ve been to Japanese language start-up events here in Tokyo where the phrases Silicon Valley, or San Francisco, were mentioned more than twice as often as Tokyo or Japan. And yes, I actually did keep count. And I’m sure none of my friends are the least bit surprised by that. My point is that while Japan can learn a lot from Silicon Valley, the reverse is also true. There are a lot of things going right in Japan, and many things that are developing differently here than they are in Silicon Valley.

Well, today we sit down with Dave McClure, founder of 500 Startups, and we talk under the cherry blossoms about start-ups funding failure, and about some of the most pervasive myths surrounding start-ups and start-up founders. For our listeners who are not familiar with the Japanese tradition of Hanami, or cherry blossom viewing, I’ll explain it to you in both theory and practice because those two can be a bit different. In theory, Hinami is a time to reflect on the transitory nature of beauty, of our possessions, and of life itself. The cherry blossoms bloom only for a few days a year before their pedals fall. And almost everyone in Japan no matter how busy or sick will make at least a little time to go out and walk among the blossoms. The trees really are beautiful, and that beauty is made all the more precious by the fact that they can only be appreciated for such a brief period of time.

In practice, people from all over Japan get together with their friends under the cherry blossom trees, get rip-roaringly drunk, sing karaoke, and have a great and boisterous time.  So when Dave and I are talking and in the background, you hear school girls laughing, drunken cheering, and people suddenly breaking into song, you’ll know what’s going on. It was a great party and a great discussion.

So let’s hear from our sponsor and get right to the interview.

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[Interview]

Tim: Cheers.

Dave: Cheers.

Tim: So I’m sitting hear with the indomitable and encourageable Dave McClure.

Dave: Encourageable sounds right.

Tim: So thanks for sitting down. I really do appreciate your time.

Dave: Yeah.

Tim: You’ve had ties to Japan for a long time.

Dave: Yes, probably about 20 years or more.

Tim: And you’ve been actively involved in investing here for about, what, 10 years?

Dave: Maybe seven. I think the first investment I made was a company called Gengo that was, I guess back in 2010. Although I met the founders a few years before that.

Tim: In the past, you’ve talked a lot about how much the start-up ecosystem has changed here obviously for the better in the last 10 years.

Dave: Yeah, definitely.

Tim: Let’s stroll down a bit on the VC side because those same technological trends, cloud computing, the sharing even information of open source that has allowed start-ups to be started for next to nothing has allowed venture capitalists to start for next to nothing.

Dave: Well, next to nothing let’s say for companies maybe for half a million to a million dollars, and for VCs maybe five to twenty-five million dollars, but that necessarily fall from trees, or from cherry blossoms, I guess I would say while we’re here. But yes, it is a lot easier to secure capital from the entrepreneurs and from investors.

Tim: What’s your opinion of sort of the high level of the current state of the funding ecosystem here in Japan? So there’s a lot of seed funds, there’s a lot of traditional funds that are available for like mezzanine financing.

Dave: Right. Well, there’s not a lot of angel investors. There’s not a lot of funds that are being run by operational ex-entrepreneurs. I think a lot of the capital that you see in Japan is coming from more traditional financial sectors either government related or financial services related—certainly a lot of corporate entities that are doing investments. But some of those folks are maybe less family with the risk-taking that an entrepreneur has. There are a few folks who I think have been—maybe prior to gaming companies like Gree or DeNA—They probably have a little bit better appreciation or maybe Rakuten or SoftBank. But I think still a lot of the capital sources are more traditional. And so there’s maybe a different thought process or framework around how to deploy that capital that’s more conservative.

Tim: Is it hurting the ecosystem, or is it something you just is just different?

Dave: Well, I don’t know if it’s hurting it necessarily any more than in the past. I would probably prefer that at least an early stage of capital come from folks who have operational experience and understand needs of entrepreneurs a little more. But capital is good. I think having some amount of capital is certainly better than none. And as you mentioned, I think there’s a lot more informed sources of capital than there may have been 5, 10, 15 years ago for sure. But there’s definitely got to be people who have an eye for what products are functional, what type of these cases are going to work. Maybe who are more grounded in what the actual problems to be solved are. I think sometimes there’s a little bit too much fascination with sexy topics just because everybody talks about robotics, or talks about AR, VR, or talks about drugs. You get a lot of capital flying at very glamourous, shall I say, types of business.

Tim: Well, the trends happen all over the place. But for example, from a start-up point of view, among young Japanese entrepreneurs, there is this kind of idea that the natural first step is joining an accelerated. An accelerator—The way I see it is an accelerator—$50,000 in working capital is not really going to get you very far. And it seems like you’re—

Dave: Yeah, maybe 6 to 12 months, but it probably won’t get you to a real company of any scale unless you get a little bit more capital or maybe can sell products and bootstrap your way there through cash flow.

Tim: So what should start-ups be looking for? Is it that operational experience that you were talking about before?

Dave: Well, I hesitate to put everything into the same bucket or category because different businesses lend themselves differently to how they grow. And I think sometimes we’re guilty of just assuming that all companies are similar, and that’s not really the case, I think. You have people running a ramen shop, and you have people running an automotive sort of business, and you have people running internet businesses, and there really are different capital needs, and different growth structures, different customer base. So I think sometimes people get too much in this glamorous kind of worship mode about start-ups, when I’d rather they really focus on who is the customer and what is the problem you’re trying to solve, and be passionate about that. Because I think we’ve—We’re at the point where not entrepreneurs are so glamorous, it’s more sexy than starting a band. I feel like people—

Tim: Yeah.

Dave: —do a start-up just to be cool. And turns out running a start-up is actually pretty hard, and pretty painful, and doesn’t pay very well—

Tim: Yeah.

Dave: —and is not for the faint of heart.

Tim: Yeah, I agree. It’s astounding how the attitude has changed. I was in high school, everyone was starting a band, and now everyone’s writing an app.

Tim: I guess for some folks they will find their way to success, but it’s a better structure—In my opinion it’s better when entrepreneurs start businesses because they’ve had a frustration, or a pain, or this problem that they’re trying to solve that they’ve understood for a while, or they know the customer, and what the needs of those customers are, and how they’re going to address that. As opposed to just, ‘Hey, I’m a coder, and I want to be a start-up entrepreneur. And what’s the brightest, shiny object around the corner that I can build some apps around?’

Tim: Well, at the end, it’s you’re building a business. You’re not building a product.

Dave: Yeah, and I think people sometimes forget that. So there’s a giant risk in going from just a concept and idea to a functional product. And even with a functional product, there’s a pretty big risk in getting to product the customers use or buy. And then even further risking getting it to be one that they use regularly. And you kind of grow in scale.

Tim: Looking at the Japanese financing ecosystem as it were. If you could change one thing to improve it, what would you change?

Dave: Well, I’d probably suggest that there were a lot more investments of a lot smaller size. I think that one of the things that is successful in the valley and maybe a few other places where there are active angel investor communities, there’s a lot of supportive entrepreneurs who have been around the block before. And you’re correct in that $50,000 may not get you very far, but 10 $50,000 checks will.

Tim: It adds up fast. Yeah.

Dave: I think a lot of the financing for entrepreneurs in the US tends to happen from a lot of friends, and family, and angel investors first. And then probably accelerator programs, and other small seed funds, and other capital sources after that. In places that aren’t Silicon Valley, I think people get into this cargo cult sort of structure where they kind of worship what they think is happening in Silicon Valley.

Tim: Right, right.

Dave: And so on the investor side, they are looking for entrepreneurs that already have a business that’s already generating revenue, doing really well or something. Or they’re looking for some very—I don’t know—flashy neon sign kind of story in a category that gets a lot of press or something. Sometimes there’s really basic and boring businesses that solve problems and make money.

Tim: I think there’s actually been research done on the returns of the boring businesses are significantly higher than those of exciting ones.

Dave: That’s great to hear because that’s probably the one place that we’re going to try to make money.

Tim: You were saying that there needs to be more smaller investments. Do you think that’s because so much of Japanese VC is corporate VC?

Dave: Well, I think probably it’s hard to raise capital. Once you raise capital, they’re going to give you a million, two million dollars or something. Sometimes maybe people should be kind of taking out a smaller chunk. And I think also we should probably separate types of businesses into ones that are using known business models versus unknown business models. And so a lot of things that people are very excited about right now are things that are really new and very unproven business models. And I think we’re optimistic that people will be able to create big businesses around things like artificial intelligence. Maybe around digital recognition systems. Around augmented reality. But still a lot of those business models are still being explored.

Tim: Sure. But I mean as a seed stage investor, that’s your bread and butter. Right? You want to get into improving a new business model.

Dave: Well, not necessarily. I think what we can do is look at businesses where there’s an existing business model, but there’s a different way of approaching that problem using technology, and there’s certainly a different way of acquiring the customers in technology. And so a business like Uber, it’s really a taxi driver business with a mobile app for locating the driver and the passenger. So a lot of innovation isn’t in the business model, it’s in just figuring out where people are.

Tim: Alright. Alright.

Dave: And being able to integrate maps, and payments, and other information. So I would kind of call that more incremental innovation with a known business model. As opposed to like people may be trying to get into—I don’t know, genetics technology for building new types of organs or doing food business.

Tim: Okay. So you’re talking almost about an undefined business model where you—

Dave: Right.

Tim: —don’t have existing customers. Even your customers are in the future.

Dave: Or you don’t know if you’re charging the customer or going through an indirect model.

Tim: Okay, I can see that being really risky.

Dave: So there’s a lot of innovation and improvements in around business efficiency that can be made with existing business models, and really just applying technology in a more efficient manner, than using technology platforms to reach customers online. And a lot of what we do is really around that type of business.

Tim: Alright.

Dave: And it lends itself pretty straight forward to businesses that are transactional in nature. People who are buying things as a corporate customer or as an adult consumer. They work throughout maybe education, or healthcare, or in tech. They don’t always work so well for the next trip to mars.

Tim: Sure. Before you mentioned that Silicon Valley could almost be a cargo cult of people imitating what they think is happening in Silicon Valley.

Dave: Yes.

Tim: You operated Silicon Valley. You’ve got investments all over the world. So let’s dissuade people of some illusions. Looking at Japan, what would you say is something that is common in Silicon Valley that Japan should not copy?

Dave: Well, I think there’s a lot of businesses in Silicon Valley that don’t have that business model, and are very capital intensive. And so that might be a social platform like Facebook, or Twitter, or Snapchat, or might be a content or media business that doesn’t have an obvious monetization strategy right away. And I think there’s a tendency to want to copy the sexiest things. But sometimes the sexiest things don’t actually make money. Or at least not right away. And there’s the other things that I think are—It’s interesting if you look at the parallel between Germany and Japan. There’s a lot of businesses that Germany did that were knock-off businesses. Samwer Brothers and Rocket Internet were sort of famous for this. And they just took various straight forward business models and copied them into either German or they copied existing businesses took from the internet.

Tim: All over southeast Asia.

Dave: They’ve now expanded in a lot of places. You can argue some maybe strategy and ethics issues that I think maybe challenge a few particular folks. But there’s nothing wrong with taking an existing business model and implementing it in a new geography—

Tim: Absolutely.

Dave: —and making money on that. I think we didn’t really see a similar set of businesses develop here in Japan during the same time frame. Where there’s businesses being run by larger corporates like SoftBank, and Rock Fan, and others. There was a lot of smaller start-ups taking advantage of understanding what opportunities are in ecommerce and SaaS, and getting those off the ground. I think you’re just now starting to see ecommerce and SaaS entrepreneurs in Japan get started when, in my opinion, that could have happened 10 years ago. There’s certainly been an online population here that could have taken advantage of that.

Tim: Well, what about cultural issues? So for example—I’m not saying one is better or worse, but differences. For example, employees at start-ups in San Francisco tend to change jobs very quickly, where in Japan they don’t.

Dave: Maybe every two or three years. I don’t know that people change a lot more quickly than that. But yeah, I think that people tend to look at jobs more as projects. So there’s an interesting project that I’m working on that might last one, two, or four years, or maybe even longer. It’s not easily going to last 20 years, but I believe that’s been changing in Japan for quite a while. I think for the last decade or two.

Tim: Well, we’ve got a baseline that requires a lot more change. 30 years ago, it was a lifetime employment. You never changed jobs.

Dave: Right. My father-in-law was part of Mitsubishi Electric and worked there his entire life. My brother worked there for five years and left, which was kind of a shock to his system, I think, for traditional salaryman kind of world. Yeah, so I think focusing on things that actually provide value to customers. Usually in the form of them paying for it. That can be a very strong guiding force. A lot of times I tell entrepreneurs to stay close to the transaction trends of how they think about business. There’s a lot of things you can do online. There’s a lot of things you can do with technology, but a lot of those may not involve actually making money. And so that’s a good framework, I think. Even though there’s lots of businesses in the US that maybe started out not making money, I think you have to sort of grounded in what customers care about.

Tim: Well, I agree totally, but I’m going to keep pushing you on this because I know you’ve said a lot of times that people should stop fixating so much on Silicon Valley. And I think that Japanese VCs and start-ups really do look at Silicon Valley too much instead of looking at what needs to be done in front of them.

Dave: We’ve invested in probably 30 companies now out of Japan. I think we did 15 before we got the funds started here. And more recently we’ve gotten 15 in just the last year. So businesses have been successful than ones that are kind of more unique to what’s going on in Japan. And Gengo, which is doing language translation primarily for corporate customers that are doing ecommerce products or content products. Another company called Tokyo Otaku Mode that provides really kind of a storefront for anime, manga, and cosplay. You think, ‘That’s uniquely a Japanese business. All the customers here.’ And it turns out, no, actually there’s—

Tim: Much bigger business overseas.

Dave: More than half of their customer base is outside Japan in the US and UK. So I think that is a business that has a Japan flavor but has a global audience.

Tim: Okay, but do you think that studying the way things are done in Silicon Valley really is the best approach to getting start-ups off the ground?

Dave: I think there’s certain things about Silicon Valley that are helpful for entrepreneurs to study, but sometimes helpful to avoid as much as to follow.

Tim: Well, what should they avoid?

Dave: I think trying to build a product in your head that has some—I don’t know—platonic form or structure that’s perfect. Most products I think are messy. Most products hopefully are grounded in customer realities. And so even with the messy product, you kind of want to zero in on what people actually care about and what they’d buy. Not so much like, ‘I’m building a really beautiful product that’s satisfying some very utopian need or something.’

Tim: Someone said that perfect is the enemy of good, I think.

Dave: That’s exactly correct. Yeah. So a lot of the lead start-up methodologies and philosophies I think are probably useful. Strangely, they’re Japanese in original, I think. A lot of lead of start-up methodology came out of—

Tim: Like Toyota?

Dave: —Keisen and Toyota, yeah. So it’s funny how it’s kind of circling back as if it were a US form or best practice, but it’s actually a Japanese form of best practice.

Tim: I wish more Japanese start-ups realized that actually. I’ve noticed that in both Tokyo and in Silicon Valley, the influence of immigrants on the start-up community. Number of start-ups that have been started by immigrants is really high based on their general population.

Dave: Yep. Hybrid vigour I believe.

Tim: Yeah. Is that something you’ve seen in other markets around the world?

Dave: Well, I think we’ve always found people who are creative in approach. I think in some places where there’s more structure than formal cultured society. I think you find that creativity comes from people who are new or different from that society. And so having the immigrant population or younger generations are people that have a different perspective will be able to break the rules and break out of those structures more easily.

Tim: So is that a universal thing? Have you seen that in Germany, in London, and Indonesia?

Dave: Well, I don’t know that I can make a uniformly stereotypical statement about that. But I think entrepreneurship is typically more from people who are not fitting into society.

Tim: That’s true. Yeah.

Dave: And they take shortcuts, and they break rules, and sometimes they even break laws. But in maybe more formal societies like Japan, or the UK, or perhaps some parts of India, that’s harder for people to bust out of.

Tim: Well, that makes sense because immigrants most likely have not gone to the top university in their country. They’re not on the fast track to anything in particular.

Dave: They may not be stuck in the more traditional rules, or structures, or cultural expectations.

Tim: Right, so both the risks and rewards kind of push them into the entrepreneurial path.

Dave: And there’s probably a strong merchant class that has a level of familiarity and comfort with a lot of immigrants.

Tim: Okay. I’ve got a question that I usually ask as my last question. But I’m going to ask it in the middle because I think you’re going to have more than one answer.

Dave: Okay.

Tim: And it’s what I call my “magic wand” question. And that is if I gave you a magic wand, and I told you could change one thing about Japan—anything at all. The legal system, the educational system, the way people think about failure and risk. Anything at all to make it better for start-ups here. What would you change?

Dave: Well, I think probably the formalism of society and the concerns about saving face. Which is kind of strange to say that because I think that one of the things that’s great about Japan is the very polite society in a lot of ways that allows 30 million people to live together in Tokyo without killing each other. But at the same time, I think it prevents people from moving faster. Kind of they move fast, break things sort of story.

Tim: So how would you change it? Would you change it more so it’s just people be more willing to do it, or more forgiving of the screw ups, or—

Dave: Yeah, I think the fewer public failure is probably the biggest challenge to get over. I think in order iterate the success, you need to be able to fail quickly and without too much ordeal. And sometimes that’s hard in Japan.

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Tim: Well, it is. But let’s dig into this because this is something that has always kind of bothered me about sort of start-up culture in America. There is this macho bullshit, fail fast, fail forward, ‘I’m not afraid of failure.’, attitude that’s celebrated. But in fact we don’t celebrate failure in America. I went to to Fail Con—

Dave: It’s not a good thing to fuck up something.

Tim: No, no. But for example I went to Fail Con here in Japan. It was a great event, but it was all successful failures. So one failure was a guy who was forced to sell his company for 200 million dollars.

Dave: Oh, wow. That’s hard.

Tim: Yeah, I’d love to fail like that.

Dave: That’s a huge fail. Goddammit. That sucks. 200 million.

Tim: So even in America, failure sucks. It’s not something that we celebrate. What is it really that’s different?

Dave: I think there’s this approach to being a little to careful. And so not being as careful—It’s not so much about failure as it is—‘Okay, there might be an outside risk scenario if I fuck this up, but I’m willing to deal with that.’ And so it’s more about pushing the envelop with the possibility of failure, not so much the actuality of it because the actuality kind of sucks.

Tim: Yeah, yeah. It does.

Dave: And I think some more basic things is you’d like to reform bankruptcy law here in Japan and make it easier for people if they should fail to not have a long-term debt hanging over their heads or their family’s heads for a long period of time.

Tim: I think the attitudes towards failure in America are—I mean it sucks despite all the fail fast, fail forward stuff. But I think structurally, America’s set up to be more forgiving towards failure. You mentioned bankruptcy. Are you more likely or less likely to invest in an entrepreneur who has failed in a previous attempt versus one who’s succeeded?

Dave: Well, it depends on what they learned and what their path was out of that. And I think we’ve definitely written checks for entrepreneurs we’ve funded previously that did not have positive outcomes. We’ve also not invested in entrepreneurs who’ve had successful outcomes who wanted to try a second venture. Usually, that’s around price evaluation.

Tim: Okay.

Dave: But yeah, I think we all want to see that people handle adversity well or they handle success well. I think we’ve seen the examples of both handled poorly.

Tim: So as an investor, would you favor an entrepreneur who has failed miserably over one who’s never tried before?

Dave: I think if they failed miserably, and they can’t demonstrate any success, that’s not somebody we want to invest in again.

Tim: Okay, by miserably, let’s say they learned from their mistakes. It wasn’t—

David: Well, let’s just use a real example. There’s a woman who we invested in who is building a travel-oriented business. The original idea wasn’t terrible. There were some possibilities there. And the ended up having to pivot that business into something else that was trying to work better, and they ended up building kind of a mobile app that was reviewing local restaurants and bars. And that’s a competitive space. There’s a lot of other products there. That company eventually was not successful. They raised about 20 million dollars. They spent a couple of years building a variety of products that didn’t get to a large level of traction. Now the experiences that person gained were tremendous, and the product manager building mobile apps incorporating customer use, and dealing with a lot of fundraising efforts. I feel like she learned a lot. And so I would easily write her a check again because I think that that “failure” could have, quote on quote, that she went through was a very useful and learning experience. On the other hand, I don’t think we could trust that with another person who had a modestly successful exit in, let’s say, the five to ten-million-dollar range, that only really returned about one X, maybe 1.5 X investors. And then did another business the second time that I thought was maybe a too high evaluation, but we still wrote a check anyway. And again, he had an exit, but it was not a great exit. For him, it was a great sort of move for his career, but for us, it was not great as an investment. So I probably, even though I respect him as an entrepreneur, I’m not sure I would write another check for that person because he didn’t seem to prioritize his investor’s returns that highly.

Tim: So it sounds like the really useful frame, whether it’s you in Silicon Valley or a Japanese VC here in Japan is, what does this person know? And whether he got that knowledge through success, through failure, through working with someone else is kind of irrelevant.

Dave: Well, I think you can learn from success, and you can learn from failure. I had a small business of my own that we grew to about 20 people, maybe two million in revenue. We got acquired. It was not a big exit. In fact, I probably put more money into the company that I got out of it. But I got some money out of it. But I learned a lot. Right? There was a lot of things I learned about managing a small 10 to 20-person group, and about manging finances, and fundraising, and a lot of things. I also worked at PayPal, a very huge organization that was growing. I didn’t necessarily build the company. I was employed there, but I also learned a lot from watching that story happen.

Tim: Yeah.

Dave: But I think a lot of people give me way more credit from working at PayPal than I would consider failing and running a small business. And I think that I actually probably learned as much or more from “failing”, quote on quote, as I did working at PayPal.

Tim: What I’ve noticed from my own companies over the years, a lot of times, there is a one-inch difference between success and failure. And there’s a thousand things that go into it besides your own decisions—

Dave: True.

 

Tim: —but people tend to view you through that lens.

Dave: Oh, yeah. Oh, yeah.

Tim: Whether you were a mile over the line or an inch doesn’t matter.

Dave: Yeah, I think that’s true in a lot of things. People analyse sports in the same way. If you look back at basketball last year, the Cleveland Cavaliers won in game seven by just four or five points, but people acted like they were geniuses. And that game could have gone either way. And unfortunately for me, I’m a Warriors fan from the Bay area. As opposed to a blow-out where somebody won four games to nothing. It’s different. I think that the hardest thing for me as an entrepreneur is to be grounded in reality. Well, and I would say really there’s two things going on. Is you have to have this cognitive dissonance between a vision that you can see in the future that is achievable and not bullshit, and the current reality, which you are in at the moment. And the difference between great entrepreneurship and not so great entrepreneurship is whether you can connect the dots between the current reality and the future prediction. And are you actually prediction the future or is this life?

Tim: So whether or not you believe your own bullshit?

Dave: Or whether the bullshit that you create is believable?

Tim: Right, right.

Dave: If you stretch that vision to far, it’s not believable; it’s not achievable. But it’s to keep it realistic.

Tim: But I can see that because as a founder, you got be out there in front of people saying, ‘This is what the future looks like. I’m painting this picture.’ And then you’ve got to turn around and go to your team and say, ‘Well, this is where we really are, and here’s the next steps we have to take next Monday.’

Dave: But you have to manage the gap. And I think that’s the difference is how do you get from point A to point B when point A and point B look very different? And can you convince people to follow you from that path? Do you have a compelling vision about the path from A to B that a hundred other people get in line behind you and follow you there? Because you’re not going to get there by yourself for most businesses.

Tim: Excellent. Listen, before we wrap up, I want to ask you. So you’ve been involved in Japan and Japanese start-ups for close to two decades now.

Dave: Japan for two decades, and start-ups for maybe one.

Tim: One decade. Okay. But you’ve seen tremendous progress.

Dave: Yes.

Tim: And looking at all the changes both positive and negative, what can you point to in Japan and say, ‘This is going really well. Do more of this.’?

Dave: It may not be a start-up sort of model, but if you look at some of the larger companies that have been successful here. I think certainly Rock Ten and SoftBank are very large companies that have been able to invest in new binds of business, acquire companies, roll that out to the customer bases, be successful. I think you’ve seen some smaller, but still larger companies maybe in mobile gaming like DeNA and Gree have reasonable amounts of success. And I think you’re starting to see companies go after ecommerce, and financial services, and SaaS here. But I think you need to see successful role models that look like local heroes. Whether that’s Masa-san, or Mikutani-san, or some of the founders of other companies, I think.

Tim: Or even just looking around at the people here.

Dave: Yeah, we have probably 25 founders that are hanging out here with us. Even just getting from point A to point A1. Raising amount of capital, hiring a bunch of people, delivering products to folks. That’s commendable. Right? And so you don’t necessarily measure progress over a decade in just one jump, you measure a lot of little jumps.

Tim: So a lot of steady progress?

Dave: Yeah.

Tim: Excellent. Listen, Dave, thanks so much for much for sitting down with me—

Dave: You bet.

Tim: —I really appreciate it.

Dave: Hopefully some of that made some sense.

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 [Outro]

And we’re back. You know, maybe there is something fitting in that we were having a conversation about how people underestimate how much work is involved in start-ups, and how too many founders are misled by the false

You know, maybe there is something fitting in that we were having a conversation about how people underestimate how much work is involved in start-ups, and how too many founders are misled by the false glamor that start-ups have today. And we were trying to make these serious points in the middle of a giant party. It’s kind of a metaphor for what’s actually involved in running a start-up or a VC fund these days.

I thought Dave’s point about the kinds of business models that he considers risky was an interesting one. And it’s different from how most VCs view it. The first cut that differentiates risky models from the non-risky counterparts is not whether it has been done before, or the strength, or the age of the competition. But how well defined the relationship to the customer is, and how close the start-up is to their customers. With all the attention placed on the technologies and the “wow” factor, it’s important to remember that a start-up is a business. And success depends to a great degree on the ability to repeatedly and scalably sell something to your customers.

Amazing technology without customers is often worthless, but a boring product that delights its customers is often incredibly valuable. And as Dave and I discussed, things really are getting better for start-ups here in Japan. Slowly, steadily, but they are getting better. It’s easy to look at San Francisco and think about how far Japan has to go. But maybe it’s better to look back just 10 years and realize just how far Japan has come and just how fast she’s traveling.

If you have an opinion about Hanami or risky business models, Dave and I will love to hear from you. So drop by DisruptingJapan.com/show084 and let us know what you think. And when you drop by the site, you’ll see all the links and notes that Dave and I talked about and much, much more in the resources section of the post. And hey, I know you’ve been meaning to do this for a while now, but when you get the chance, please leave us an honest review on iTunes. It’s really the best way you can help us get the word out and support the show.

But most of all, thanks for listening. And thank you for letting people interested in Japanese start-ups know about the show.

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