Japanese university and government venture funds play a much larger role in Japan than in the West.

I’ve always considered this difference to be, on balance, neutral, today’s guest makes a convincing case that these funds are actually hurting the startup ecosystem here.

Today we sit down and talk with Hiroaki Suga, co-founder of PeptiDream.  PeptiDream is now a $7 billion biotech company, but it started out as a couple of university faculty members funding operations out of their own pockets.

PeptiDream succeeded by using a very different model than that used by either the current generation of university spin-outs or biotech startups in the West. It’s an interesting blueprint that other biotech firms might want to copy, but only if they are really sure that their technology will actually work.

It’s a great conversation, and I think you will really enjoy it.

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Show Notes

  • Japanese Univstities’ problems with applied research
  • The challenge in moving from academia to startup operations
  • How to hire a CEO
  • What most professors don’t know they don’t know about business
  • How to land large sales contracts as a small startup
  • How to sell new technology to Japanese pharmaceutical companies
  • Why biotech investment is so hard in Japan
  • Why you want to step away while you are on top
  • Japan’s next biotech unicorn
  • Why most Japanese government startup money is misused

Links from the Founder

Transcript

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs.

I’m Tim Romero and thanks for joining me.

We’ve talked a lot before about how there are not many life sciences startups in Japan and what can be done to change that. But there are, of course, some and some incredibly successful ones. PeptiDream is one of those startups. Founded by a small team at a university lab, PeptiDream has grown from nothing to a $6 billion company.

Today, we sit down with the founder of PeptiDream and fellow guitarist, Hiroaki Suga, and he’ll explain how they’re working with pharmaceutical companies all over the world to discover new drugs and new treatments. We also talk about the rather unusual business strategy that allow them to scale up with relatively little financing and to land deals with global drug companies a lot sooner than most biotech startups can.

And I’ve got to say, my conversation with Dr. Suga really changed my mind about the role the Japanese universities and the government should play in fostering startups and innovation here.

It’s a fascinating and unique perspective from inside the system, and I guarantee you, it’s not what you think it is.

But you know, Hiroaki tells that story much better than I can, so let’s get right to the interview.

Interview

Tim: I’m sitting here with Hiroaki Suga, the cofounder of PeptiDream. So, thanks for sitting down with me today.

Hiroaki Suga: Sure. Very welcome.

Tim: PeptiDream is a peptide discovery platform but what is that exactly?

Hiroaki: So, the technology started from over 25 years ago. I had idea. Is that okay? I want to develop RNA catalyst. The so-called ribozymes. I did a post doc with Professor Jack Szostak in Harvard Medical School. I run the techniques for the in vitro selections but I didn’t really get major success, but I was fortunate enough that I get an academic position in State University in New York Buffalo.

So, I succeeded in developing we call “flexizimes” so that the first two patents are owned by SUNY Buffalo, but it wasn’t really quite useful yet.

Tim: So, you were working on this for 20 years plus?

Hiroaki: Pretty much, yeah.

Tim: Did you have an end target in mind saying, “This is how I’m going to commercialize it, this is why it’s useful”?

Hiroaki: Right, right. I already envisioned that we can apply this to the in vitro transition system. Once we have this in hand, we can do a lot of things, a lot of interesting things, right. So, I developed this flexizime prototype in the US. I came back to Japan by the invitation of the University of Tokyo. I got back to Japan and immediately we succeeded in real practical version of the flexizime.

Tim: That’s interesting because Japanese universities have a reputation of really prioritizing pure research over applications.

Hiroaki: Right. But this is actually pure research stage.

Tim: Okay.

Hiroaki: It’s really pure research but I was reminded to make it very practical. So, having this flexizime allows us to rewrite the genetic code. We call it “genetic code reprogramming.”

Tim: It sounds like from pretty early on, you were thinking about how to commercialize this at some point in the future.

Hiroaki: Yeah, at some point but not – I don’t know when. I didn’t know when.

Tim: So, was the drug discovery an early and obvious target or was that something that —

Hiroaki: No, no. I was not interested in an obvious target or anything. This is just platform technology. So, idea is I want to rewrite the genetic code but at the time peptide is containing the amino acids which you don’t see in a protein, then I can mimic the secondary, metabolize the various organisms like bacterias and fungus and yeast and whatever they make. And it is very often used for antibiotics or something, other things. But natural products are very important drug source for a long, long time. So, if you can mimic the natural product, then you can synthesize artificially natural product like molecule will be useful for drug discovery.

Tim: So, the PeptiDream platform and this technology, in general, allows the synthesis and analysis of a huge variety —

Hiroaki: Of natural product-like molecules.

Tim: Right, and it can do it very quickly and very cheaply?

Hiroaki: Right.

Tim: Let’s talk about that.

Hiroaki: Yeah.

Tim: Because, I mean, now PeptiDream is a $6 or 7 billion company but you found it very recently. It was 2006, right?

Hiroaki: Yes.

Tim: So, back in 2006, you had a long successful academic career, you had academic accomplishments and the proof of the value of the technology.

Hiroaki: Yeah.

Tim: But how did the company come together?

Hiroaki: So, I envisioned that okay, if I further develop, I try to prove this system works for the drug targets. If I succeeded it, I’m pretty sure pharmaceutical companies will come to me to develop the drugs together. I really want to because I know if I do with them, if I get something very nice product, and then I cannot publish. My mission in academic, we need to publish. If it’s bad ones, maybe we can publish it. But if it’s good ones, we cannot publish it. And I was really confident that we can get something really good ones.

Tim: So, how did you get that initial founding team together?

Hiroaki: I wasn’t really intending to make a company but I was disclosing the patent through the – it’s called Todai TRO which is Technology Transfer Office in the University of Tokyo. They said, “You know, this sounds like really good technology. Are you interested in forming a company?” I said, “I may if I can find a good CEO. I don’t want to be CEO. I don’t think I can do CEO. Business is not easy.” And so they started screening the people I interviewed, maybe four or five people, then I found one, Kiichi Kubota.

So, before forming a company meeting with him many times, mostly drinking together, to know him very well, otherwise, I cannot trust. I developed a good friendship. I can see his vision. It wasn’t easy that he said yes but eventually, he said yes, we do.

Tim: I mean, that’s a technology transfer office working exactly the way they’re supposed to.

Hiroaki: Yeah, exactly.

Tim: But rarely the way they do. So, were you worried that you would have to give up a lot of the academic research or that the time demands would —

Hiroaki: No. That’s why I need the CEO, right? If I start a company and by myself, it’s going to take up a huge amount of time. At the time, I was still a researching professor, so less duty from the Institute or University duty, so it was much more time. And I was not quite famous at the time yet.

Tim: So you were really trusting the entire business side of the company to him?

Hiroaki: Yes.

Tim: And you were just focusing on the technology.

Hiroaki: Uh-huh. 100%.

Tim: That takes a lot of trust.

Hiroaki: Yeah, yeah, yeah. That’s why I did. I need to know him. Then also, it’s one other important person which is Patrick Reid, who is also CEO of the company now. He used to be a Science Director. He was also Associate Professor in a different lab. He’s staying one floor down of my floor but we met each other in faculty meetings. So, we started talking and then I found he is interested in starting company. I didn’t know about the time, first time. Before I decided to start a company, I said, “Ah, it’s going to be very tough in Japan. Japan is not a very good place to start a company.”

Tim: So, is Patrick an American?

Hiroaki: He’s American.

Tim: I think that’s got to be one of the biggest difference between American university professors and Japanese university professors.

Hiroaki: Yes.

Tim: So many American science professors are dreaming about wanting to start a company and so few Japanese do.

Hiroaki: I think all Japanese professors also somewhat thinking about or hoping to do it but they don’t know how and they don’t understand how the business is and they think they can do the business. That’s a big – I know I grew up in the family having a business, own business. I know how hard it is.

Tim: So you’ve got this really good team together that trust each other and you got a foundation but selling this technology, selling this project is not like selling SaaS software.

Hiroaki: No.

Tim: You’re asking for really big commitments from pharmaceutical companies, from medical companies. How did you get that initial —

Hiroaki: Okay. So, I’m academic person. I have a lot of chance to deliver talks. I was invited in many conferences. At the time, I already started becoming a little bit more famous than before. I give talks in many conferences and they’re always, there are some people from pharmaceutical companies. And they heard my talk and then, “Wow. This is something new.” So, they started talking to me.

Tim: So, in startup terms, your lead generation was through academic conferences.

Hiroaki: Yeah.

Tim: Wow.

Hiroaki: It’s always bringing in the people. So, all of the first started companies who has contract to some Japanese companies all come through me. They might forget about this already. They might forget about this. All comes from me. I directed all people to go to see Patrick Reid and then they started discussing about how they make a contract to make drug discovery process. This becomes building up the platform of the business model.

Tim: I mean, now PeptiDream has an amazing list of clients from Bayer to Lilly to.. But early on, were the Japanese companies or foreign companies more willing to work with you at first?

Hiroaki: Actually, it’s foreign companies.

Tim: Yeah?

Hiroaki: So, Japanese companies are very skeptical to develop drugs of the peptides. I said I want to develop the peptides drug and most people said, in Japanese companies particularly, “No, no. We have done it years ago. It never worked. It’s very tough to get on the market.”

Tim: Do you think the reluctance was because of the peptide technology specifically or more of a general culture —

Hiroaki: More like at that time the peptides from the hormones, some other natural products that people have history of the peptides, the fragment of the protein can disrupt the protein. Protein interactions were some kind of drug-like property. Never get a hit to the market because instability, peptides are very easy to be digested in the body, in the bloodstream. Efficacy is not that strong and then it’s hard to develop the drugs from peptides because insolubilities and very often they have to synthesize wrong peptides and it cost a lot for that.

Tim: So, for the foreign companies that were willing to try it, was it because they hadn’t tried it before or that they were willing to try again?

Hiroaki: Yeah. They have done also same things, so they have the same knowledge. But these relatively young people haven’t really exposed that much of the bad experience. Japan is probably – even the younger people wants to do it, that’s true. They wanted to do it but if you go up to getting money and these people who have done said, “No, no, no, no. It’s not going to work.”

Foreign companies, a little different structure and if technology is there, they might become interested. That’s probably the importance for the foreign companies, a little bit more aggressive, try to do something new. Testing new thing is like their culture and Japanese companies are less aggressive in the sense. They were interested in too that’s why we have some Japanese companies but attitudes are very different from the research level to the up level. I think foreign companies, a little bit of research level, even there are still younger people compared to the Japanese system. There tends to – okay. So, something new, you know. Maybe we can give a try, you know, if it’s not huge amount of money.

Peptidream in the beginning of the contract was not so expensive compared to any of the American-patented company. They probably request probably 10 to 100 times more money than Peptidream requested.

Tim: I notice that the deals that you’ve done have been structured really interesting, where you have a small amount of money that’s actually paid upfront and then you get additional money for —

Hiroaki: Step up.

Tim: Yeah, clinical trials or discovery.

Hiroaki: Right. So, we set the criteria to each stage and once you achieve it, you’re going to get the money, right?

Tim: Yeah.

Hiroaki: So, in other words, you have to be very confident you can achieve it. If you’re not confident, you won’t do that way because you spend the time, employees will the spend the time, you get nothing. So that means you waste your money.

Tim: And that is why, I think, biotech investment is so hard because a lot of these companies are like, “Well, 10 years from now, we’re going to have these amazing drugs,” but there’s not many people who are willing to invest 10s of millions of dollars for 10 years.

So early on, I mean, when you were starting out in 2006, this was before or maybe just at the very beginning of the recent like startup investment boom, so how did you raise funds? Was it just personal funds?

Hiroaki: Just by ourselves, yes, mostly ourselves. Everybody put the money in. We are lucky enough that third year, I brought one deal, right. And then they actually closed the deal. It wasn’t big deal but it was enough that we can actually start planning with healthy situation.

Tim: So, the third year was the first time you had a real deal?

Hiroaki: I think so. Second year, maybe the end of the second year. But the deal was actually not too small that we can sustain the company for another couple of years no problem but then having that deal, there are more people started coming in because when I gave a talk and then more people interacted.

Tim: The first one is always the hardest.

Hiroaki: Yeah, yeah. First one is much more, you know, like a try, so it was not a big deal. It was actually a reasonable amount, you know.

Tim: Well, yeah. If you are running the company on very little money, even by farmer standards, a small deal is a huge amount of money.

Hiroaki: Yeah.

Tim: So, did the venture investment come after those deals or before those deals?

Hiroaki: Venture was just one, like very small amount. $1 million, that’s it. And the $1 million comes from University of Tokyo Edge Capital. We didn’t need the money because we had already three companies collaborations going on. We thought that we probably can do without it. And there’s another small $500,000 investment that comes from the trading company, actually.

Tim: As an early stage cash flow positive biotech company, that’s pretty unusual.

Hiroaki: Yeah, but it’s not huge money, okay. So, this was very important, I think, we succeeded there in a sense that we didn’t have a few million dollars or $10 million, okay. If you see $10 million in cash, you just will burn the money. When you have the $10 million, “Okay. So we’re going to develop the drugs by ourselves.” They misunderstand what the biotech startup can do in Japan, not in the US. In Japan.

Tim: So, it kind of gave you that focus.

Hiroaki: Right. So, we really needed to develop the technology and then collaborate with big farmers with several pipelines, not only one. So, if you contract with three companies, usually three companies give us 3 lines and then you can get almost 10 lines rather than just one and spending a million dollars on it, burning it. Instead, we don’t burn anything but you succeeded it, money comes in, and they will put the criteria so you don’t get the money immediately. But once you reach the criteria, you can get more money, and you get to another stage and you get more money.

Tim: And it’s much lower risk for the farmer companies and potentially – and if a marketable drug comes out of this, a patentable drug, does PeptiDream have royalties on that patent as well?

Hiroaki: Yes.

Tim: So, the long-term upside is much, much higher as well.

Hiroaki: Exactly. So, for us, we don’t have risk. We are very confident we can get the criteria. The higher range of the criteria will become difficult because that’s not what we promised anyway.

Tim: Is there something unique about the PeptiDream technology or is this a model that —

Hiroaki: Yes. Technology, technology.

Tim: So, other biotech companies couldn’t follow this path?

Hiroaki: Probably not unless you have a very good platform technology.

Tim: Okay.

Hiroaki: Platform technology is very hard to defend because people can invade very easily to make a copycat of it but the technology is very complex, very robust and big farmers think, “Okay. It’s worse to buy it rather than developing by ourselves, right?” That’s really the point.

Tim: Yeah, yeah.

Hiroaki: So, it’s complex enough that people cannot. If you want to spend five years, maybe you can make another copy and then you have a risk of if we sue, and then you spend already five years of the investment. It’s a huge loss. So, in that sense, it’s much easier for them to purchase the technology or collaborate with PeptiDream and then see, you know —

Tim: Sure it’s cheaper, it’s safer and they still get the drugs that result from it.

Hiroaki: Yeah.

Tim: I’ve got to ask you, though. I mean, the company was – PeptiDream has been hugely successful but you’ve kind of stepped away from the spotlight roles and even the core technology roles. So, why?

Hiroaki: Why?

Tim: Why?

Hiroaki: It’s because it’s a business. I’m more interested in developing new technologies, probably related to the PeptiDream technology because it’s my continuous of the academic research, right? But I want to do something new. I want to do – I focused on more challenges, right?

Tim: So, you do things that are more like academically interesting?

Hiroaki: Oh, yeah, yeah, yeah. And I can develop another technologies. I’m better to focus on academic research.

Tim: So, can we expect another startup coming out of the current research?

Hiroaki: No, I already have.

Tim: Really?

Hiroaki: Yeah, yeah.

Tim: I didn’t know that.

Hiroaki: I left 2018 June because I started another company with a different technology, more biologics, not peptides but there’s some relation there. I started Mira Biologics.

Tim: Alright. So, will you be pursuing the same platform model?

Hiroaki: It’s a different technology but we use a little bit technology that I developed. It’s just a part of the technology that I developed earlier which doesn’t compete with peptides.

Tim: But sort of the business plan of saying we’re going to use a little bit of money —

Hiroaki: Very similar style.

Tim: Similar?

Hiroaki: Yeah. Its little difference is now I have enough money that I invest by myself, a larger amount of money than before.

Tim: Yeah. Well, that’s true. Yeah. The IPO helped.

Hiroaki: Yeah, yeah.

Tim: But okay, as someone who has founded two biotech startups in Japan, why do we see so few biotech startups coming out of Japan? We’ve got world class universities here. There’s big venture capital. There’s a big pharma industry here. Why don’t we have a more robust?

Hiroaki: There are several reasons. The first one is a far less strength of the venture capitals. Venture capitals are not investing money to the risky companies. Biofarmers is at the highest risk, right?

Tim: Yeah.

Hiroaki: The small – the pharmaceutical companies are much higher risk compared to developing a software.

Tim: That’s true. A business software, after six months, you know if it’s working or not.

Hiroaki: Exactly. But drug companies, it’s a much more longer term that they have to commit and they have to wait and they can’t wait, and they don’t have enough money to wait, okay, and the culture that they can wait. So that’s the biggest problem because younger culture of the investment means that they are not mature so they don’t see what the potential in 10 years. They are looking at five years, right?

Tim: Yeah.

Hiroaki: And US has larger examples and they see maybe this will be 10 years, 15 years you get a huge success. Look at Gilead or other companies, you know, they waited for a long time.

Tim: Well, I think also, in Japanese VCs, they don’t have the technical knowledge to evaluate the —

Hiroaki: That’s what I exactly what I want to say also. The VC lacks the technical knowledge but at the same time, there are not many PhD who understand complex technologies. Software, it’s easier.

Tim: Yeah.

Hiroaki: I’m being honest. Much easier than the biofarms, so that’s one of the reason, okay? And the second reason is Japanese society itself prefer to go to the largest companies. Larger companies are stronger. Like let’s say, for example, all my students go to the larger companies. They all go to the big farmers. They don’t go to PeptiDream.

Tim: Is that risk-averse problem again?

Hiroaki: It’s not risk. I think they don’t think about risk but they think because PeptiDream is no risk now, almost no risk. So, big farmers is a much more known name to parents, for instance, right?

Tim: Right.

Hiroaki: So, easy to say. Society has little issues of going to the small company. And then also, large companies are not very much interested in helping smaller companies. That’s the culture problem in Japan. Let’s say, for example, PeptiDream is just starting up, they get little success with a contract with other companies. Japanese company should come in immediately saying, “Okay. In Japan, why don’t just do more bigger ones?”

Tim: Right, right.

Hiroaki: But they don’t. They just watch. And growing, growing, growing, PeptiDream used to be the risk, okay? If you commit a contract with PeptiDream is a risk. But now, you don’t contract with PeptiDream is the risk.

Tim: Does it get back to that decision-making process you were talking about before where it always has to go up to —

Hiroaki: Exactly. So, up there now they know, “Okay. So, PeptiDream has now so many companies, foreign companies that contract and they are doing well. Clearly, otherwise, they can’t continue this much.” So now, it’s not a risk.

Tim: But that’s bad for Japanese farmer companies. That’s bad for Japanese startups.

Hiroaki: Exactly.

Tim: How do we fix it? I mean, do universities —

Hiroaki: I’m thinking no. No, I don’t think – but then, the last point that I have to come back, the last point. There is not so many excellent technology there. The companies who started based on something, usually you see, okay, so here’s a company and here’s another company similar. And another company actually comes from older companies. Like, there are some companies who are in IPO originating from the research units of the big companies. So, the foreign company actually decided to leave Japan and then they have a very good team there, so they decide to spin off the company. So, they’re a company that something – having already background of the big farmers continue doing things, right? So, that means that that company isn’t really huge different from the big companies.

Tim: Right. It’s the same people. It’s the same —

Hiroaki: Yeah. So it’s not really the technology-base. There is a drug-based. It’s not technology.

Tim: It’s not really a startup. It’s really more just a streamlined operation, spin out.

Hiroaki: Exactly. Yeah. Real reason is there is no disrupting Japan type of disrupting economy technology is not there. So this PeptiDream technology that I developed is the one there which you compare with other similar technology is a far better than the others with the success rate, the hit rate, all these things is far better than anything else. That’s why we can win.

Tim: So, you have to be 10 times, 100 times better before anyone will even notice you in Japan.

Hiroaki: Right.

Tim: But how do we fix that? How do we —

Hiroaki: I don’t know how to fix it, to be honest with you. I mean, the reason I started another company is I want to prove myself that, okay, that was not just lucky. I want to have nice plan, good technology. I think I have another very good technology together with another professor in different school, Osaka University. I want to prove if the technology is good and then team is good, we can do the same thing like PeptiDream did.

Tim: Yeah. Maybe I’m just hopelessly optimistic but it sounds like the kind of environment you’re operating in or maybe the environment you’re sort of creating this sort of academic ecosystem, the foundation is already here in Japan. But you don’t think there is a clear path yet from academic technology to startup, not yet?

Hiroaki: Not yet. One thing I really need to say, that the professors in the universities, they really need to work hard to get technology to be very practical, technology to be very robust, technology that you don’t need to cheat the things to say, “Okay. This is a great technology.” You really have to put efforts to get to the end. And then the Japanese government, they need to support for this type of research. So, that’s very critical.

Tim: Here’s the interesting thing because looking at it from outside like I’m looking at it, it seems like it’s very different from your point of view inside. So, looking at it from outside, the government has provided a huge amount of funding to support startup innovation from universities. They’ve developed these programs to help commercialize these technologies. But is the culture inside —

Hiroaki: That’s a stupid decision, what the government is doing.

Tim: Waste of money?

Hiroaki: Waste of money.

Tim: Is the culture inside universities changing here because it’s historically been Japanese academia, the professors prided themselves on the abstractness, on the theoretical, and having a working technology, putting in that 80% of the effort to make it commercial was somebody else’s job.

Hiroaki: Exactly. That’s what I did, right? I wasn’t really trying to commercialize the technology. I developed the technology which is robust enough to transfer. When you transfer the technology, the company has to practice exactly what I developed, right?

Tim: So, Patrick was the one that was really working hard to get it to that?

Hiroaki: Yes. His job isn’t – he doesn’t need to develop the technology. He can trust my technology but he can develop after that. Like you said, it’s government putting money to helping startups, encourage the professors to startup. That’s good. And also, they’re actually funding more very applied technology that is a – the professor are all, “This will be a big sort of things.” If you get the money like that, you are not really hungry anymore to develop the technology to the end.

Tim: And you lose that focus we were talking about.

Hiroaki: Exactly.

Tim: Yeah.

Hiroaki: And most professors would get it from the government money is mixed up with the government money what you get for their own academic research. And now, it’s like this diluted basic effort. It’s stupid. The government should put the money for more basic science, okay. Do academic the best practice. And then when you reach the point that okay, maybe this can be a business, form the company by yourself and then the capital money goes into that, developing something. So, the government money is not supposed to do that capital money kind of things. It’s better to go focus on the research.

Tim: So, the reason you have clearer division between the pure research and the money for commercialization.

Hiroaki: That’s what it is. So, government is making a huge mistake. That’s my opinion.

Tim: No. But I mean, that might explain why despite the huge amount of investment, there’s been very few successful biotech startups.

Hiroaki: Yeah. You know, most people misunderstand because of PeptiDream’s success, I automatically get research money from the PeptiDream. I have never have research money, zero money from PeptiDream to my lab because we are very much separated.

Tim: Yeah. So, a clearer distinction of what’s research, what’s business.

Hiroaki: Yeah, yeah.

Tim: Well, listen, Hiroaki, before we wrap up, I want to ask you what I call my “Magic Wand” question and that is, if I gave you a magic wand and I told you that you could change one thing about Japan, anything at all – the education system, the way venture capital is financed, the way people think about risk, anything at all to make it better for innovation and startups in Japan, what would you change?

Hiroaki: God, this is very difficult.

Tim: It’s kind of a fun one.

Hiroaki: Truth is, it’s so complex. Universities in Japan is very complex, so I don’t think one magic thing would work. But the government should make research funds to the more basic science. This is all the other professors doing research are saying this, but I’m not saying this the same way. I think it’s a breakthrough of technology, right? Your theme of Disrupting Japan could occur only something really tremendous idea breakthrough technology development plus with a team who are interested in developing business based on that. So, the money is supposed to come very separately. Don’t mix it together.

So, one thing really I want government giving more money to basic science, okay. Professors know, if they want to develop something out of this technology, now you need to have teams of people who can really do investment and then also forming a team to bring the business. If that happens, great. But again, I said it’s not one magic thing. It has to be multiple.

Tim: So, the idea of situation would be a really well-funded basic research and then when truly revolutionary, truly important technology comes out of that, you need much less money to commercialize and to promote?

Hiroaki: That’s what I think. I think it’s a stupid idea. There are not many such technologies, okay. There are not many.

Tim: Very few technologies are really disruptive.

Hiroaki: Yeah. So that’s why, you know, you just need to put all money to basic science, to develop such potentials. And then maybe only 10 or maybe 5 or maybe 3 comes out of it.

Tim: Yeah. But you only need a couple every decade, right?

Hiroaki: Yeah.

Tim: Of something that is truly, truly disruptive.

Hiroaki: Exactly. That means one in a year, right? That’s very good enough. They can pitch to not the government, to the investors. The investors will look and they can decide. They’re not stupid.

Tim: Yeah. I think maybe the problem is almost startups have become too popular and too trendy and so governments and large companies are more willing to put money into startups than they are into basic research.

Hiroaki: Again, I said, PeptiDream has no money from the government. I’m very proud of it. You can succeed without government money. I need the government money for doing a research basic science and developing technology. But this has nothing to do with the company. Once you get it, you spin off, never touch the government money.

Tim: And you’re on the path of doing that again with your new company.

Hiroaki: Yes.

Tim: And maybe that would provide a kind of a blueprint or a roadmap that other biotech companies —

Hiroaki: That’s what I’m interested in but —

Tim: Well, I hope to see that.

Hiroaki: So, the problem is, okay, PeptiDream okay. Yeah. It’s a good success but it’s really unique what you’ve done but that’s just a matter of luck, you know.

Tim: So, do it again. Well, listen, thank you so much for sitting down.

Hiroaki: Thank you. Thank you very much.

Outtro

And, we’re back.

Hiroaki’s explanation of the decision-making process at large Japan companies was pretty much perfect. I mean, I’ve been selling new technology into Japan enterprises for the past 20 years and across quite a few industries. And he’s right. Great innovative ideas get adopted or even invented by younger employees but middle management in most Japanese companies has very, very limited decision-making power.

The real decisions are made higher up by people who don’t really understand the new technology or often even the problem it’s trying to solve. From a sales perspective, this just means a longer, more consultative sales cycle but this is hurting Japan. It’s causing some of Japan’s most powerful companies to fall further and further behind.

But I think Hiroaki’s insights into the role the university and government funding should play in the startup ecosystem were the most interesting and it’s something we discussed in even more detail after the interview.

And yeah, I’m sorry about that. But sometimes the absolute best conversations I have with my guests happen after I put the microphones away.

But anyway, I think Hiroaki is right. There needs to be much more separation between research funding and startup funding both from the government and from startup investors. Startup investment should be de-commercialized in existing technology. Those funds should not be used to do additional basic research. But with so much funding earmarked for startups, many researchers are packaging up their research in startup stories and raising money for it that way.

And this seems to be one of the big reasons, perhaps the main reason that Japan has so many extremely well-funded university startups with really promising technology that never quite manage to commercialize their offering.

The solution is simple but not easy. The solution is clarity. Take a lot of the government money out of the startup funds and put them into research grants. But the money in the startup funds, well, that’s for startups. That’s for growing a business. And if the researcher wants to continue doing fundamental research, that’s great but he, just like Dr. Suga, needs to hand control of the startup over to someone else.

If you want to talk more about startups or university spinouts in Japan, come by DisruptingJapan.com/show146 and let’s talk about it. If you leave a comment, I guarantee that either Hiroaki or I, or maybe even both will reply. And hey, if you get the chance, check us out on LinkedIn or Facebook but even better, if you like the show, tell people about it. Disrupting Japan is grown not by social media marketing or advertising, but because listeners like you enjoy it and they tell their friends about it.

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

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