Makuake is one of Japan’s largest crowdfunding platforms. It was spun out of CyberAgent in 2013 with Ryotaro Nakayama (or Naka as his foreign friends call him) as CEO.

Crowdfunding has taken off more slowly in Japan than it has in the US, and it has followed a different growth path. It started out primarily as a way to raise money for charitable causes and at the moment crowdfunding  seems to be having a more significant impact on corporate Japan than on smaller Japanese ventures.

Of course, things are changing fast. More and more creative individuals are taking advantage of crowdfunding platforms, and last year the Japanese government amended the law to allow new ventures to raise capital via crowdfunding.

So perhaps we should say Crowdfunding in Japan is not only about startups

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Show Notes for Startups

  • Ryotaro’s journey from driver to CEO
  • Why price is not that important if you have the right product
  • How crowdfunding began as a social movement
  • The unique quality demands of Japanese consumers
  • Vetting projects — in person — to prevent scams and failures
  • Why crowdfunding will be even more important for corporate R&D
  • How VCs use crowdfunding to find new companies
  • Why so many creatives are leaving big Japanese companies and what it means for the future

Links from the Founder

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Transcript from Japan

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

Today, we are talking about Crowd Funding. Now, Crowd Funding has grown more slowly and somewhat differently in Japan than it has in the U.S. The basics are the same of course. Large numbers of people pledge small amounts of money to charitable causes to support them.

Innovative projects to get early access to the finished product, and to new companies to get a small slice of the equity.

Ryotaro Nakayama or Naka as his English speaking friends call him is an entrepreneur. He started working at CyberAgent as a driver. Eight years later he managed to convince his employer to create a Crowd Funding Platform called Makuake. Then to spin it out as a separate company with him as the CEO. It is an interesting journey.

We also talk about how Crowd Funding is at least at the moment benefiting the larger Japanese companies. We also discuss how that is going to change in the future, and how that might lead to a larger shift in Japanese society. One that could very well lead to a start-up renaissance here.

I will let Naka tell you all about that.

Tim: I am sitting here with Ryotaro Nakayama of Makuake, a Japanese Crowd Funding Platform. Thanks for coming in and talking to us today.

Naka: Thank you for inviting me.

Tim: Now Naka. We were talking before about how Crowd Funding is just getting started in Japan. How it might change a lot of things here. Before we get into Crowd Funding in particular. I think the story of how Makuake came to be is very interesting.

You were kind of an entrepreneur, right. You had worked for CyberAgent. You created this Division and they spun it out into a new company. Why don’t you just tell us a little bit about that process.

Naka: Well, first of all when I was 23-years-old, 2006 I joined to CyberAgent. First, my job was Assistant of CEO.

Tim: Okay.

Naka: CEO’s driver.

Tim: Okay, that is a good job. At least you are connected to powerful people.

Naka: The reason why I got this position.

Tim: Mm-hmm.

Naka: I selected this position. I was not interested in actual internet. The things that I wanted to do is to create my new company. Being beside of CEO that is the best way to learn how to create a company.

Tim: Did you just approach the CEO and say hey I have this crazy idea for a new company? You should fund it.

Naka: No. . That time I couldn’t get any funds from my CEO. The next job is to create new business inside of CyberAgent.

Tim: You created a Division within CyberAgent.

Naka: Just Division. . This Division was accumulating site.

Tim: A site to help people manage their loyalty points?

Naka: Yes. Where people buy, they can get the point more than usual purchase.

Tim: Then what happened to that Division?

Naka: That Division became very profitable Division. I get many awards from CyberAgent.

Tim: Right, right.

Naka: Thanks to this experience I got the chance to go to Vietnam as a Venture Capitalist.

Tim: Okay. I guess in that way you get exposed to a lot of different kinds of companies, and a lot of different types of businesses very quickly.

Naka: That was very lucky for me.

Tim: Yeah. Then did you just go to your venture partners, and say I have a perfect investment for you?

Naka: .

Tim: For me.

Naka: Living in Vietnam I did not see many Japanese products product. I saw a lot of Korean product and the Chinese Product.

Tim: What was the reason? Just cost?

Naka: It was not cost.

Tim: Mm-hmm.

Naka: Apple iPhone sells for  $300 U.S. dollars. People borrow to buy iPhone.

Tim:

Naka: That costs around $1,000 U.S. dollars.

Tim: Yes, everybody wants to buy an iPhone. .

Naka: I think they borrow from their friends or parents.

Tim: Right.

Naka: To buy an iPhone. The reason why Japanese product cannot compete is not cost. Japanese companies do not create the things that people want to buy. That is the biggest reason I guess.

Tim: Hmm. How did that idea lead you to create the Crowd Funding site?

Naka: By using Crowd Funding site product maker can try to create the things that they are not have confidence.

Tim: You were thinking of it more as a way for large companies to test new products and gain marketing information rather than as individuals trying to fund their own projects?

Naka: Yes. In Japan, there are so many huge very famous Hardware Companies.

Tim: From the time you joined CyberAgent as an Assistant to the CEO to the day you got funding for your new Crowd Funding Company. How long did that take?

Naka: 7 years.

Tim: Okay. Well, you were certainly paying your dues inside the company with different projects and understanding different sections. Let’s see, you launched it about 2 years ago, right?

Naka: 2 years ago, yes.

Tim: Why don’t you tell me a bit about your customers. What kind of companies are using Makuake?

Naka: Of course, the individual product maker using Makuake also. Huge company started to use Makuake, for example Sony.

Tim: It is interesting in the difference between Crowd Funding in the States and here. In the States, there has been some big companies using Kickstarter and Indie Go-Go as P.R. In Japan, it seems that big companies were the early adopters. What’s the big advantage to the large companies?

Is it marketing? Is it P.R.? Is it Product Development? What do that get out of it?

Naka: The biggest reason is Test Marketing.

Tim: Okay.

Naka: They want to get the opinion from the user by using Crowd Funding.

Tim: They will launch a project not under their own brand, but kind of a stealth.

Naka: Some project is like that.

Tim: Mm-hmm.

Naka: Because if they put on the runway users start to buy because of that brand. Imagine about Apple. Even this beer. .

Tim: Yeah.

Naka: People call it Apple Beer. .

Tim: People will buy anything with the Apple on it.

Naka:   Yes.

Tim: That’s true. It’s a more honest way of test marketing. In fact, Sony. You mentioned Sony . Sony famously last year in America launched the Mesh Product on Indie Go-Go.

Naka: Yes.

Tim: Before that, their very first experiment was on your platform, right?

Naka: Yes.

Tim: What was it? Was it a watch? What was the project?

Naka: First project was an E-paper watch.

Tim: An E-paper watch.

Naka: Called the MEIS watch.

Tim: What happened with that project? Did Sony turn it into a new product with the Sony brand?

Naka: They don’t have any plan to put their brand to this product. They want to create a new brand.

Tim: In Japan it seems that Crown Funding is being used mostly by large companies for Test Marketing. On the customers side, what people are using your platform and buying these products?

Naka: Users tend to be people who want to get new exciting products.

Tim: Okay.

Naka: They don’t care whether the creator is individual or big company. The important thing for them is the creator is very high quality creator.

Tim: On the customer’s side it sounds very similar to the customers for Crowd Funding in America. It’s so far most of the really big hits from Crowd Funding have been Japanese who have used Kickstarter or Indie Go-Go.

Naka: Mm-hmm.

Tim: Is it starting to take off among individual makers here in Japan?

Naka: Last year, Japanese creator started to use Crowd Funding in Japan. It was very difficult for them to use the Crowd Funding Platform.

Tim: Mm-hmm.

Naka: Because of the language. This is the biggest reason they want to use Japanese Crowd Funding.

Tim: It would seem since the large companies are not using their own brand. It would be very easy for individual creators to compete fairly.

Naka: Even big company doesn’t have big value to create thinks at first time.

Tim: Well yeah, being able to raise funds. Being able to get budget helps you if you are an individual with an idea, or you are the head of a division in a company. . Everyone is trying to funds one way or another.

Naka: Because I was a Venture Capitalist I can understand the situation outside of the big companies, totally new entrepreneur can get more big funds from the Venture Capitalist to their business. The Sony subsidiary companies, or as a big company inside of business.

Tim: . That’s an interesting point. Well, certainly I today’s funding environment.

Naka: Mm-hmm.

Tim: I guess it is easier for individuals to raise money with a new company and a new idea than it is for people inside of a big company to get funding. .

Naka: .

Tim: I had not thought of it that way, but that is an interesting point.

Naka: Even the project inside of the company, not directly. They can easily use very weak amount of the project.

Tim: Right. I remember 3 or 4 years ago when Crowd Funding was clearly becoming successful overseas. A lot of people were very skeptical about Japan. They were just saying that it was suitable for Japan. What do Japanese consumers really expect from Crowd Funding? Japanese consumers are famously hard to please and care about quality, and care about things being exactly right. Has that been a problem for you as you have grown?

Naka: Not only me, but also any Makuake Crowd Funding user in Japan. Want to get the very new and very exciting, very innovative product. Japanese Crowd Funding Platform started as charity site.

Tim: That’s right. The first ones were charities for the Earthquake.

Naka: Yes. Many Japanese users image of Crowd Funding is charity site.

Tim: Okay.

Naka: That was a very big hurdle for us to create the creative Crowd Funding Platform like Kickstarter and Indie Go-Go.

Tim: Right, right, right.

Naka: Many high quality creators didn’t notice that Crowd Funding is for them.

Tim: One of the things that overseas platforms had trouble with has been products that have not been delivered, products that the founders couldn’t make for example. Have you run into those problems in Japan and how did you solve them?

Naka: One thing I can say is Japanese creator has a very big responsibility for their product compared to foreign countries, so that Japanese product quality is a number one quality. Japanese creator has pride.

Tim: In a sense I guess you are saying yes the Japanese customers are very demanding about quality.

Naka: Mm-hmm.

Tim: That’s matched because the creators are also very demanding about quality just as much.

Naka: Mm-hmm. You know many Japanese are not good at presentation over here.

Tim: Right.

Naka: So that many creators presentation is lower than actual quality.

Tim: .

Naka: . The final product tends to be better than the presentation was. .

Tim: Okay, so they under promise and over deliver.

Naka: .

Tim: That’s a happy situation for everybody. How are you planning on handling the things as it grows? For example, Indie Go-Go has had products that were almost scams. Like they had a Heal Bee last year that raised like about a million dollars. Are you concerned that as your platform gets more and more popular that there will be either people trying to sell low quality products, or outright scams? How are you going to stop that from happening?

Naka: Before the project, I put it on Makuake. We checked in the interview with a creator. We checked, they have an ability to create their idea or not.

Tim: You actually check their backgrounds. You talk to them on the phone over IM. How do you vet them? How do you check them out?

Naka: About all of project creator we meet directly.

Tim: Face-to-face.

Naka: Yeah, face-to-face.

Tim: Oh okay.

Naka: People who definitely being in Tokyo or near by Tokyo at least we call and talk with telephone or Skype.

Tim: That’s a very interesting approach. I mean so in a sense. Well, sometimes it is important to do things that don’t scale. Really Crowd Funding Platforms, or any platform is based on trust. I guess you are really trying to insure that Makuake is a trusted platform. Even if it means you grow more slowly.

Naka: The most important thing is platform should be very trustful platform. We very carefully check the creators .

Tim: About what percent do you say no sorry you can’t list on my Makuake?

Naka: It is around 30 percent, is a very low quality creator that cannot create the idea. Twenty percent they need brush-up.

Tim: You have 30 percent that just aren’t ready to use your platform.

Naka: Yeah.

Tim: Twenty percent that need brush-up and 50 percent that are okay. For the 20 percent that need brush-up do you help them and give them advice about how to use your platform and run a good project?

Naka: Yes. We advise how to use Crowd Funding into the creating we want. How much goal should be. Something like that.

Tim: How many projects are active? How many projects did you run last year, or how many projects are active right now? So, we get a sense of size and scale.

Naka: Today, around 200 projects is running in Makuake.

Tim: Okay.

Naka: One project tends to be around 2 month project. One month around 100 projects is starting at this time.

Tim: What percentage of those end up fully funded and making a product?

Naka: In terms of this very hard to say. I can say around 50 percent projects can get fully funded and reach the goal. We have two courses. One course is like Kickstarter.

Tim: Okay.

Naka: The other thing is maybe Indie Go-Go, flexible Course.

Tim: Okay. You can bet people get paid whatever goes in. Fifty percent are fully funded, and the other 50 are partially or?

Naka: The important thing is the ratio or success rate environment or the most fear to try everything is very important thing for Crowd Funding Platform. Because 100 percent project can success. Really, I hesitate to use Crowd Funding. If my project, only my project fails. .

Tim: Certainly the large companies. I bet the attitude about what is failure is changing. Because it sounds like a lot of these big companies are looking for feedback and information. Even a failure, it still is far cheaper for them to find out that the market does not want this product using Makuake. Than it is using traditional market research and study groups. Even the failures are really failures in some cases.

Naka: People’s failure, say to ask they are happy to use this because they can understand what matter. What the user is thinking about in a product.

Tim: It gives them a direct connection to customers that they can’t have any other way right now. I am sure they are delighted to use it. One thing I am curious about, so Japan in general both consumers and business are very conscious of brands and trends and hierarchies. How do you break through this? Right now your customers are mostly people who are super early adopters. They are people who want the latest cool thing. That even in Japan is kind of a small group. Do you plan on being able to break out of that and to have a larger audience, or are you really trying to stay focused on these new super early adopters?

Naka: It is going to be very difficult to get up to the majorities.

Tim: Yeah.

Naka: Yes. Gradually we should try to ask makers to use Crowd Funding when they create new products.

Tim: Step-by-step.

Naka: Yeah, step-by-step.

Tim: Do most people who are starting a project, do they bring their own funders and do their own marketing? Is there a pool of people, a pool of Makuake fans who invest in lots of different projects?

Naka: Maybe, 30 percent of the backers from Makuake users.

Tim: Okay.

Naka: The other comes from maybe promotions.

Tim: Right.

Naka: That’s kind of promotions can send user to Makuake.

Tim: Of course, every project is different, but in general about 30 percent are the core Makuake fans looking for new things and about 70 percent is the product team marketing and articles written about it coming in.

Naka: What creates Makuake’s P.R. Marketing is very unique things.

Tim: Okay, tell me about that then.

Naka: Makuake has a very good P.R. Team. Their quality is almost number one in entire industry I guess.

Tim: Well, the CyberAgent connection. I am sure it helps quite a bit there.

Naka: Yes, very useful. The team has a relationship to many medias.

Tim: Right.

Naka: So that which medias is suitable to this project. They introduce the project to public media and of course the media writers all like this project.

Tim: Is this the P.R. Service? I guess it is an optional service that the projects can use.

Naka: Yes. That is a freebie.

Tim: You don’t charge for it.

Naka: Yeah, we don’t charge.

Tim: Right now, what is the most popular kind of projects on Makuake?

Naka: Same as U.S. Hardware.

Tim: Internet things.

Naka: Yeah. IoT, we usually say I.O.E.

Tim: Internet of Everything. .

Naka: Everything.

Tim: Okay. . Yeah, sure. I think outside of Japan most of our listeners won’t know about CyberAgent. They are in Japan a very powerful and innovative force in the, well mostly online internet space.

Naka: Mm-hmm.

Tim: They have been branching out into Venture Capital and quite a few other things. You sister company, CyberAgent Ventures. Have they invested in companies or projects they found on Makuake?

Naka: Happily, last month or 2 months ago the one sort of company can get venture funding from CyberAgent Ventures after they used Makuake Crowd Funding Platform.

Tim: Awesome. What do they make? What’s the company?

Naka: That start-up is making their platform for Haircut Stylists.

Tim: For Hairstylists.

Naka: Cut models.

Tim: It’s a platform for Hairstylists and for Cut Models. People to practice on.

Naka: Yes, people –.

Tim: Yeah, I never thought about it. I guess you need people to practice on. .

Naka: Very specific industry.

Tim: Yeah. That is a vertical.

Naka: Yes. You know to get to professional position Hairstylists Training to do Cutting.

Tim: Sure, they have to practice I’m sure.

Naka: Then they need a huge amount of hair. .

Tim: .

Naka: Opposite side, people want to cut their hair.

Tim: Yeah. They are matching up Hairstylists who want to cut hair with people who want free haircuts.

Naka: Yes.

Tim: And, are willing to take a chance. .

Naka: That’s right. Of course, after finish. The professional haircut stylist can train.

Tim: Yeah, double check and fix anything if there is too much. You know I love businesses like that. It never occurred to me before, but yes obviously that is a matching service. What was their product on Makuake?

Naka: They applied to Crowd Funding to create their service site.

Tim: Oh okay. They were Crowd Funding for the product itself.

Naka: Yes. Very, feed, feed, feed the funding around I remember $3,000 U.S. dollars because they was a University student.

Tim: Right.

Naka: Going to University and creating their start-up. They don’t have any money. Given they don’t have any money, so that they should use Crowd Funding to create their first product.

Tim: Right. I am going to ask you to predict the future here. Crowd Funding is still very new in Japan. It’s growing rapidly. It started out for charities, social causes. It is now being used a lot for projects and artistic work. Just last year the Japanese Government changed the law allowing companies to raise equity using crowd funding.

Over the next 5 to 10 years what do you think Crowd Funding in Japan is going to look like? What are the changes we are going to see?

Naka: I think the Kickstarter like the Makuake continue growing by being used from many product creators.

Many big hardware companies employees starting to quit their company to create a new start-up.

Tim: Right.

Naka: Sometimes they must wait. There are so many creators this time from now. The number of the independent creator is increasing.

Tim: This is something when I travel to the U.S. and Europe. The image of Japan is as a non-creative country. In truth, there is amazing amounts of creativity in Japan. I think the problem Japan has always had is it’s very difficult for that creativity to kind of bubble up and get exposure. You are saying that Crowd Funding is perhaps the best way for that creativity to bubble up and get exposure now.

Naka: Mm-hmm. Encouraging their creators by funding. The number of creators should be increasing I guess. As I said, there are so many big successful hardware makers in Japan.

Tim: Yeah.

Naka: Recently, people quit their big hardware companies starting to join to the hardware ventures. Almost every hardware venture in Japan has people who have experience to work in Sony and Hitachi and Toshiba, so on. Either independent or start-up companies has ability to create very good hardware or –.

Tim: They understand quality control and outsource process.

Naka: Yeah.

Tim: I think the flipside to that though is that a lot of the creative talent that companies like Sharp and Pioneer and Sony have not really been treated that well over the last 30 or 40 years. If this trend continues I think it is going to cause some of the large Japanese companies to change the way they treat employees. To treat these people better to prevent them from going out and starting their own companies and leaving.

Naka: On the other hand of the start-up situation the big company starting to create the startup Division.

Tim: Why?

Naka: Sony started to have innovation division to create new product. Many employees of Sony started to create new products. One of them is Mesh, as you said.

Tim: The watch.

Naka: One of them is a Face watch. One of them is  Smart Watch and Sony create a new company to create new products that use Sony Technology.

Tim: Okay.

Naka:  coming from outside of Sony that the companies can use Sony Technology.

Tim: The big companies are reaching outside of themselves to find creative talent.

Naka: I guess many big companies should imitate this kind of way to create.

Tim: This is a big change for Japan. Traditionally, I mean forever basically in Japan big companies had their own RND staff. It was highly secretive. The whole concept of open innovation is still kind of mistrusted here.

Naka: Mm-hmm.

Tim: This is a big step, and I think a good done.

Naka: Yes. I think the only way to survive is very competitive hardware era in a Japanese Company should try to create new products as many as possible.

Tim: You think that even the larger companies will try to create more and faster and smaller batch?

Naka: Yes. Maybe this should be quarterly start-up I guess.

Tim: I think so. The lean start-up I am always amazed people don’t know this. The lean methodology was invented by a large Japanese Corporation. The lean methodology, you didn’t know that.

Naka: No.

Tim: Toyota invented lean.

Naka: Kaizen?

Tim: Yeah.

Naka: Oh.

Tim: Everything kind of comes full circle.

Naka: Yes. When the Crowd Funding is one of the best way to do really development I guess.

Tim: Before we wrap up is there anything else you want to tell our listeners about Crowd Funding, or the future of Japanese innovation?

Naka: Many of your listeners are Japanese, so please wait very innovative products from Japan, not Apple. .

Tim: I think there are amazingly innovative products coming out. I think that is a wonderfully optimistic to wrap up on. Thanks for sitting down and talking to me.

Naka: Thank you.

Tim: All right.

 

And we are back.

The amount of effort that Makuake invests into insuring that projects are valid, and that the end result is high quality is really impressive.

It really should not be that surprising to anyone who has done business in Japan for a long time. Still though, meeting their creatives face-to-face as part of their due diligence was something that I had not expected.

Then quality and trust really are everything in Japan. Growing more slowly, doing things that don’t scale. Doing it in a way that allows you to maintain quality and trust makes a lot of sense here.

I also found it interesting that the quality equation cancels out I that the exceptionally high quality demanded by Japanese consumers was balanced out by the exceptionally high quality bar that Japanese makers set for themselves.

The other key takeaway from this, and we will explore this in detail in an upcoming podcast, is the migration of top talent from Japan’s manufacturers into small start-ups.

There are a lot of Hardware start-ups here that are staffed with people of decades of real world hardware development and production experience.

No matter what country you live in you will be hearing a lot from these founders and their companies in the near future.

Now, if you want to see the links and the information that Naka and I talked about during the show, or to get in touch. Go to DisruptingJapan.com/show 019.   You will find all of that and much, much more in the resources section of the post.

If you have got an interesting Crowd Funding experience or are thinking of giving it a try, drop by the site and let us know what you think about it. We would love to hear from you.

If you get a chance please leave us an honest review on iTunes. That is really the best way you can help support the show and get the word out.

Most of all thanks for listening. Thank you for letting people interested in Japanese start-ups know about the show.

This is Tim Romero and Thanks for listening to Disrupting Japan.