This is a rather personal episode. There is no guest this time. It’s just you and me.

Overall trends are going pretty well for startups in Japan, but things could be a lot better.

One strange thing seems to be that almost everyone asking how to improve things for startup in Japan are either government officials, academics or venture capitalists. It’s fantastic that they are interested, and their interest in sincere, but there is only so much they can do.

The real change will have to come from Japan’s startup community itself.

In this episode I list three simple things that we founders in Japan all need to start doing right now. So let’s have a chat and I’ll explain how, as a group, we have the power to change the Japanese economy and social structure in a very positive way.

Perhaps unpredictable ways, but positive ways nonetheless.

I think you’ll enjoy it.

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Transcript from Japan

Disrupting Japan Episode 41.

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

Once again, I’ve got a special show for you today. There will be no guests. No wine. No playful banter with someone speaking English as a second language. Today, it’s just you and me. For the next twenty minutes or so, I’ll be whispering in your ear about something I consider very important, but that not enough people are talking about in Japan.

I get asked pretty frequently by both government officials and by individuals running innovation initiatives at large companies, what Japan can do to foster innovation and to help create a more start-up friendly environment. Now long time Disrupting Japan listeners know most of the best answers to these questions, so I won’t repeat them here. The people asking these questions, have the best of intentions, they really do want to see things change for the better in Japan. But, the inevitable flaw in their question tends to be an underlying assumption that start-ups can be supported and fostered top down.

Now, there’s a lot of things that the government can do and is doing to foster innovation here. But, too many people seem to envision a system where their program is at the center of a start-up community, or where start-ups will come to them for assistance, rather than what they can do to support the existing communities. The Japan start-up ecosystem is becoming robust enough that almost no new entity can insert itself as a leader, regardless of their level of funding. And, that’s a very good thing.

The Tokyo start-up community’s not really led by start-ups yet. VCs still have more sway here, but things are changing. More and more people are beginning to accept the idea that the social and economic changes that start-ups will introduce, will not be decided or controlled by the economic or political establishment.

Of course, politicians and industry leaders have certainly not embraced the idea yet. For the most part, they’re looking to start-ups as a kind of economic engine that can kick the economy into high gear and will benefit society as a whole. And, that most likely will happen, but not the way they think it will. I can rarely get bureaucrats and executives to really grasp this point. But, Disrupting Japan listeners will understand the far reaching impact of start-ups much better. So, I think you will appreciate some of the surprises Japan is in for in the coming years.

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You see, politicians and industrialists dream that Japan will develop an innovative subculture that will create opportunity and economic growth, but leave the existing power structure and social structure untouched. But, that simply can’t happen. Think of it this way, if you have a forest and then you take all the butterflies out, you don’t have that same forest minus butterflies. You’ve got something new.

It’s an ecosystem. The birds that fed on the butterflies will start to die out, the plants that the butterflies fed on will begin to thrive, things will be thrown out of balance for a while, and eventually a new stable system will emerge. And, the same thing happens when you introduce butterflies into a forest where there were none before. You don’t have the same forest plus butterflies. The balance is upset for awhile, until something different and quite unpredictable takes its place.

Perhaps the best example of this is when wolves were reintroduced into Yellowstone National Park in 1995. One of the main reasons behind this move was to control the elk population, which had grown out of control and had grazed away a lot of plant life to, well, almost nothing really. So, they introduced a few dozen wolves and these wolves did kill a few of the elk, as was expected. But, the side effects were massive. You see the elk changed their behavior. They started avoiding exposed valleys and river banks. Within a few years, vegetation in those areas began to recover and this attracted other animals into the area like birds and beavers. Also, with this vegetation cover and the new ecosystem, erosion decreased. The riverbanks began to stabilize and the rivers started to run straighter and deeper. Introducing a few dozen wolves into a 9000 square kilometer area, not only changed the ecosystem, but it actually changed the path of the rivers.

Any important change to an ecosystem changes everything. Economic rivers will change their course in Japan. And, much like what happened in Yellowstone, the resulting ecosystem will be far more robust and diverse than it was before. It will certainly be a net gain for the Japanese ecosystem as a whole, but the elk are going to have to work a whole lot harder than they’ve gotten used to.

So, innovation, it’s not plannable, it’s not controllable, and it most certainly cannot be done top down.

So, in this podcast, I’d like to give Japanese start-ups three pieces of bottom up advice on what we need to do to kick this start-up ecosystem into high gear. These are the three things we can do ourselves, with no support or input needed from government agencies or venture capitalists. Oh, they’ll benefit from the changes of course, but it’s our job to make this happen. So, here are the three things we start-ups need to start doing in Japan.

First, we need to understand the difference between a relationship based company and a product based company. All famous consumer brands are product companies, Facebook, Nike, Honda, Apple, Seiko, Google. Customers are attracted to them, because of the product they make. On average customers feel a greater loyalty to those companies than those companies do to their customers.

Sure, all of these companies developed a brand that acts as a kind of halo, that lets them charge a premium price and sell a greater range of products than their competitors. But, in the end, it’s all about the products they make. Product based companies can scale globally. But, just because you make a product, doesn’t mean you’re a product based company.

In fact, most Japanese companies with products are not actually product based companies at all. They’re relationship companies. This is slowly starting to change, but the cultural importance of relationships has a long history here. When I started my first Japanese company back in 1998, the goal of almost every start-up was to become part of a large company supply chain. Having that kind of relationship guaranteed a steady, if low margin, stream of business.

These relationships were more important back then, because although the keiretsu were starting to crumble under their own weight, most companies still preferred to business within their own corporate groups. And, small to medium enterprises had very little independent buying power. In fact, these captive, protected keiretsu micro-markets, is one of the big reasons Japan did not develop a globally competitive software market in the ‘80s and ‘90s.

At the time an independent Japanese company that would sell its products across multiple keiretsu groups, was a rare and powerful beast indeed. For the most part, the way to survive was to build what your client, very often your only client, to build what they told you to build.

Things have improved a lot in the last 20 years, but still a huge number of Japanese start-ups are really firms that have one major client and no hope of scaling. They have a relationship that guarantees a certain level of orders, but they have no product that can stand on its own in the marketplace.

Don’t get me wrong, although way too much importance is placed on relationships in Japan, it’s great to have those relationships. Knowing the right people can give you a huge head start in getting your first customers and in getting distribution. But, your product has to be more important than any single customer you have or things are going to break down eventually.

Now, it can be hard to tell if a company is truly a product company or if it’s a relationship company in the early stages. And, nearly all companies with a product will insist that they are product companies. But, a few giveaways are:

1) If you are still, or if you are planning on doing custom development work after you receive funding, then you’re almost certainly a relationship company.

2) If your product requires extensive customization and you’re the only company doing that customization, than you’re probably a relationship company.

3) If your product started out as a project you did for one customer and then you decided to turn it into a mass market product, then you are most likely a relationship company.

4) If losing your two biggest clients would put you out of business, then you are certainly a relationship company.

There’s nothing intrinsically wrong with relationship companies of course. In fact, in the early stages, relationship companies often see traction sooner and grow faster than product companies. But, relationships don’t scale and growth will eventually be limited by the strength of the CEO’s industry connections. Of course, relationship companies can still make a lot of money. And, powerful, well connected CEOs can even take a relationship company public, but they can never scale to be a global player.

Actually, relationship companies are fine, if you have strong relationships and want to leverage those into a company, do that. More power to you. The real problem is that this relationship thinking is holding back Japan’s start-up community.

The tendency to value relationships over products, is probably the single largest obstacle preventing Japan from really developing a pay it forward start-up culture. I see it constantly. Far too many people view their connections and their network as something to be jealously guarded, as some kind of competitive advantage. And, people who think along these lines are unlikely to make introductions without trying to extract value from them.

Of course, there are plenty of Japanese who have, or at least try to, embrace the idea of open networks and paying it forward. But, we’re in the minority. At least, for now. But, we’re going to change that. So, advice number one for Japanese start-up founders comes in two parts.

Part A, never pay for an introduction of any kind. Never agree to let an organization take a percentage of financing that might result from an introduction to a VC or from coaching you on how to present to them. Most of these people are trying to scam you anyway. Likewise, never give someone a percentage of a deal that might result from introducing you to a potential customer. Of course, affiliate programs and reseller programs are powerful tools. Use them when appropriate. But, as a start-up founder, if someone ever tells you that they know a prospect that you should approach, but will only make that introduction if they get a percentage of the deal, politely walk away. You’re dealing with a gatekeeper or a parasite and their opinion is probably not highly valued by the person that they are promising to introduce you to.

Part B, let’s all start making a conscious effort to pay it forward. Promise yourself that at least once a week, no matter what, you’ll introduce two people who would benefit from knowing each other. Or, recommend another start-ups product to a potential customer. Now, I’ll warn you in advance, if you do this right, it will feel unfair. You’ll feel like you’re making five times as many introductions and ten times as many recommendations as you receive. But, that’s fine. It means you’re doing it right and you’ll greatly benefit from this in the long run. I promise.

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And, best of all, if all of us commit to this, open networks will win and we can put the gatekeepers and the parasites out of business.

Now, my second piece of advice for Japanese founders may seem a little bit harsh at first, but it’s coming from a place of love. I promise. Number two, no one who matters cares about your passion. They just don’t.

Now, let me explain. “Follow your passion” is one of the most vapid, careless, dangerous pieces of advice that gets tossed around in the start-up space. Naturally, you shouldn’t stay in a job that you hate and you certainly should not start a company which requires you to interact with people you dislike or to behave against your own values. But, “follow your passion” is a stupid way to pick a career or a start up venture.

Now, I’ve had an interesting set of careers so far. And, in my 20s I was a professional musician, I was passionate, I was talented, and there were plenty of people around me who were even more passionate and who were far more talented than I was. After a number of years, I got out. As did most of my friends, eventually.

“Aha!” I hear you say, “Quitting proves that you didn’t have the passion to see it through. You only lose when you quit.”

Well, ok. That’s almost circular logic and perhaps there is a grain of truth to it. But, you see I didn’t quit because of lack of passion, quitting music was one of the most heartbreaking things I’ve ever had to do. And, there are plenty of passionate, talented people who never quit and continue to flip burgers and to work part time jobs into their 40s and 50s. Some percentage of them are happy, I’m sure. But, a lot of them probably are not.

It’s a huge logical mistake to simply note that all successful CEOs are passionate and conclude that passion is the key to success. It ignores the thousands upon thousands of passionate failures. In fact, I think we have exactly backwards. I don’t think it’s passion that leads to success, it’s success that leads to passion. Doing something well, winning the game, seeing momentum build up behind you, being rewarded and recognized for something you’re accomplished is motivating. It leads to and reinforces passion.

Ok. So, if passion is not a good guide for picking a start up venture, what is? Rather than use the mantra of “follow your passion”, you should use “create value”. Build something that adds value to people’s lives. As Zig Ziegler once said “The secret to getting anything you want in life, is helping enough other people get what they want.” How do you know if you’re adding real value? Well, if you’re adding value, people are willing to pay for it. In fact, how much people are willing to pay, is directly related to how much value you are creating for them.

Passion for its own sake is selfish, shallow, and somewhat childish. It’s not about you. It’s about what value you can create for others.

The other real problem with following your passion, is that passion deserts you when you need it the most. There will be times, sometimes long stretches of time, when running a company is just plain hard work. Some days or weeks are trying, frustrating and they just simply suck. There will be plenty of times when you just don’t feel like turning on the computer or picking up the phone. If passion is the only thing that keeps you going here, you’re going to be in big trouble.

There needs to be something bigger. Some people are in it for the financial payout. Some are motivated by loyalty to a great team. Many in the pride they feel by building something the customers find amazing. And some, by knowing they are creating value and making life a little bit better for their customers. And you know, the amount of money you can make as a start-up, or as a human being, is pretty close tied to how much value you can create. It has nothing to do with how much passion you have.

I’m still far too young to be a bitter old man, but if I hear one more bubbly speaker at a start-up event proclaim to the world how passionate he is about start-ups and how Japanese people need to feel more passionate about entrepreneurship, I think I’m just going to lose my mind. And, to be honest, it’s mostly the foreigners going overboard with this rah rah passion crap.

So, let me be the first to say “Screw passion.” Make something useful. Make something that adds enough value that people will love it and pay for it and the passion will follow.

When someone tells me that they have a passion for something, I think that’s great, but tell me what you’ve actually done. What value have you created? If you’re just starting out, tell me what concrete steps you’ve already taken and what you plan to do next and you’ll have my attention.

Don’t get me wrong. Passion is a fine thing, but when you create value, and when you solve real problems, the momentum will build up, your revenues will increase, and so will your passion. You see, you don’t follow your passion, you’re passion follows you.

And, this brings me to my third, perhaps most important, and certainly the simplest piece of advice.

There’s a lot of well placed concern that the current crop of Japanese start-ups is not ready to compete globally. In fact, a large percentage of the pitch events made going global their central theme. I get asked a lot about what Japanese start-up companies need to do in order to compete globally. There are panels about this at most start-up events. And, it was one of the main issues discussed during our Disrupting Japan one-year anniversary live show.

Actually, there’s been tremendous progress in this area over the past five years or so. It wasn’t that long ago when the majority of start-up pitches I heard were either copycat companies modeled on successful foreign firms, or based on ideas that would never scale past a few dozen likeminded individuals.

While most people seem to want a top down solution to the global competitiveness problem, the answer is really quite simple. If you want to build a global company, solve big problems. Solve problems that people all over the world are having.

Don’t get me wrong, there’s nothing wrong with companies that focus on mobile gaming or Japan’s Otaku or anime culture. A small handful of them will do very well overseas. But, most of them are too caught up in their own coolness or perhaps, cuteness to really try to define what value they could potentially provide to a global audience.

Current wisdom is that English language ability is the key. A lot Japanese pitch contests are held in English. Rakuten and Uniqlo, both now use English for all official internal meetings, even those held in Japan. And, there is a real emphasis being placed on start-ups with mixed Japanese and foreign teams. These are all important and useful developments. English language ability is an important step in getting ready for global competition, but it’s not the core value.

Think of it this way, the global expansion, you could almost say domination, by companies like Honda, Sony, and Seiko in the ‘60s and ‘70s was not due to their English language abilities or their understanding of foreign cultures. In fact, during that era, Japanese firms had a well deserved reputation of horribly misunderstanding foreign cultures and they suffered a lot of bad publicity because of it. But the problems they were solving were so big, the value they were offering was so strong, that they were able to succeed despite headquarters’ lack of understanding of local languages and cultures.

What the did understand was the global market. They were very much aware of the competition and the potential competition world wide and reacted accordingly. So, English language skills for start-ups, they’re great but you need to use them.

You need to be aware of what other companies in your space are doing. How are they positioning themselves? When are they likely to come into Japan? And for the truly globally ambitious start-up, when can you take on the competition directly in their home markets? Now, our non American listeners are undoubtedly thinking that an American like me, is probably the last person to lecture anyone on the importance of understanding what’s going on outside their own borders. And, yeah I admit it’s true. We are Americans are terrible in this regard. But, the fact is, most US start-ups don’t need to think about it initially. It’s not a statement of arrogance, it’s a function of the way the market works. The US market is so competitive and so saturated with start-ups, that any company that gains serious traction is probably solving a big problem and solving it well.

Japan’s start-up scene’s not like that. A small start-up can grow up unmolested and unchallenged in a niche market, at least for a while. But, the world is small these days. If you don’t take the fight to the competition, they’ll bring it to you eventually.

So, English ability is a great first step, but the real key is using that ability to keep an utterly paranoid watch on what your global competition is doing. Learn their strengths and weaknesses. Steal their cool ideas. Consider yourself a global player from day one. And, when it comes time to make your big move into overseas expansion, for God’s sake, don’t just send a team of engineers to set shop in a San Francisco office. Either move the management team there or hire an experienced local team and trust them to grow your business.

Now, I sometimes get accused of being a cheerleader for Japan and it’s true. I’m quite optimistic about the future of Japan in general, and Japanese start-ups in particular. I suppose part of the reason it looks that way is because so many people, including the Japanese themselves, are often hesitant to point out all the things that are going right in Japan. People also tend to ask me about top down ways of improving things for start-ups in Japan, but top down things are going pretty well. The trends are all moving the right direction and there’s only so much you can do top down anyway. The real power for change in start-ups is and will always be bottom up.

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So, to summarize my three pieces of bottom up advice for Japanese start-ups:

1) Products are more important than relationships. Make introductions. Give advice. Ask for nothing in return. Don’t play ball with the gatekeepers and the parasites, you’ll come out way ahead in the long run. I promise.

2) Screw passion. Build something that adds value. The secret to getting anything you want in life is helping enough other people get what they want. And finally,

3) Solve big problems. The bigger the problem, the more money you’re going to make. Be a global company and a global problem solver from day one. Know the strengths and the weaknesses of your global competition and steal all their cool ideas.

 

The trends for start-ups and innovation in Japan are positive and accelerating. Start-ups are already beginning to change Japanese society and the Japanese economy. Now, I’m not one of those people who think that all innovation is good or that innovation is synonymous with progress. Technology and innovation is amoral. Technology amplifies our own nature. The fact that so far technology has produced net positive effects, says more about the good in human nature, than it does about any inherent good in technology. Like introducing butterflies into a forest, the introduction of start-ups into the Japanese economy will have both good effects and bad effects. The exact nature of which are impossible to predict before they happen and obvious to everyone after they have occurred. But, Japan’s economic ecosystem will be much stronger because of it.

If you’ve got ideas about how Japan will be changing in the coming years, or if you’d like to continue this conversation online, come by DisruptingJapan.com/show041 and let’s talk about it. 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.