Whenever you hear someone claim that the Japanese will never do something for unspecified “cultural reasons”, you know there is a fortune to be made.

Lu Dong is the co-founder and CEO of Japan Foodie, a cashless payment system currently masquerading as a restaurant discovery application.

Lu and I talk about the boom in inbound Chinese tourism that led to the creation of Japan Foodie, and how he and his team quickly managed to identify and dominate this massive and underserved market.

We talk about how tourism is changing Japan, the best way to build a two-sided marketplace, the only way forward for most e-commerce platforms, the future of e-payments in Japan and the history of women’s lingerie in China.

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

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Show Notes

  • The real problems with Japan being a cash-based society
  • What people really care about in a restaurant app
  • How to build a two-sided marketplace
  • Why e-commerce platforms are really advertising companies
  • What happens in Japan after the Olympics
  • Launching China’s first major sexy lingerie brand
  • How too much success can kill a startup
  • When you should turn down VC money
  • Why its harder to be an entrepreneur when you get older 
  • The importance of corproate accelerators in Japan

Links from the Founder

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Transcript

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

I’m Tim Romero, and thanks for joining me.

One thing I have learned starting startups in Japan for 20 years is that every time you hear people claiming that Japanese people won’t do something because of unspecified cultural reasons, there’s a lot of money to be made.

In the 90s, people claimed that e-commerce would never catch on because Japanese preferred the high touch, expensive department stores, but today, those department stores are struggling as every year, more and more commerce moves online. 10 years later, people were saying that online auctions would never work because Japanese people would simply not by used goods for cultural reasons. They were wrong, of course, and today, Yahoo! Auctions and Mercari, and dozens of others are thriving.

When a behavior is widely described as a result of cultural reasons, it usually means that the behavior doesn’t really make sense, and we cannot explain it, and man, that is the perfect area to start looking for business opportunities. If you can discover the real reason for this behavior, and it’s usually a rational economic reason, if you can discover the real reason for this behavior and fix it, you can make a fortune.

You might have heard that Japan is a cash-based society for cultural reasons, but we are already starting to see the cracks in that falsehood forming.

Today, I’d like to introduce you to Lu Dong, the founder and CEO of Japan Foodie, a restaurant discovery app and yeah, there are a lot of those, but this one is special. Well, not so much the app, but the business model, and the perfectly rational way in which Japan’s cash-based culture will migrate to electronic payments, and it’s already working.

In our conversation, Lu also provides some great advice for building multi-sited marketplaces, and he tells some pretty interesting stories about tourism, fundraising, and women’s lingerie.

But you know, Lu tells that story much better than I can, so let us get right into the interview.

Tim: So, I’m sitting here with Lu Dong, the founder of Japan Foodie and several other companies, so thanks for joining us.

Lu: Thank you.

Tim: You know, actually, recently, we’ve been focusing on sort of serial entrepreneurs in Japan, but before we talk about your other companies, let us talk about Japan Foodie.

Lu: So, I started Japan Foodie in 2015. What is Japan Foodie? It’s basically a lot of friends from China, from the US, from all around the world come to Japan, to Tokyo. Whenever they know I’m in Tokyo, they always ask me, “Lu, hey, I’m in Tokyo next week – next month, where should I go to eat?” Right? So, they never asked me where should I go shopping? Where should I go sightseeing? But, all of them ask, where shall I go eat? A lot of times, I book restaurants for them, I give them instructions, and a lot of times, I also go to those restaurants with them to help them order.

Tim: So, is the site really, is it more focused on restaurant discovery? Is it more focused on Japanese cuisine in general? In a nutshell, what are we –

Lu: Yeah. In a nutshell, okay. So, basically, help tourists discover and book, and pay. That solves the three main pain points in terms of foreign tourists in Japan. They can’t find restaurants, they can’t communicate in terms of booking, and in store, in restaurant ordering, and finally, they can’t pay because 82% of the retail in Japan is done by cash.

Tim: The payment pain point in particular is interesting because not only is so much cash, even the payment methods that aren’t cash tend to be Japan-only. They are like, Suica or the Rakuten Pay, or they are something that foreign visitors don’t have access to.

Lu: Yeah, well, before I started the company, I spent 10 years in China, started two companies in the e-commerce area, so in this 10 years, e-commerce became mobile commerce, so everybody knows that 80% of the traffic right now is on mobile where the mobile payment – smartphone payment, that’s what people call it which in China, there are only two: WeChat Pay and AliPay, right, became the major payment tool for people’s daily life. So, people live on those, whereas they come to Japan, back to stone age. They can’t use not only the smartphone to pay, but also, a lot of places, they can’t even use credit cards. The only one thing they accept is cash, especially during lunch, they’re like, “No, no, no, for dinner, we accept credit card, but for lunch, only cash.”

Tim: Really?

Lu: Yeah.

Tim: What’s the logic there?

Lu: Exactly. So, I had a lot of questions. How come Japanese people love cash or how come the credit card or non-cash payment adoption rate is so low in Japan? The most answer I got are two. One is like, people love cash, period. The second answer is like, when people use cash, it’s easier to manage your expenses, whereas if you use credit card, you get broke very easily.

Tim: Well, I don’t know, I mean, I think there’s a couple of simpler reasons, I think. I mean, if you look at the commissions that they charge the merchants, they’re much higher in Japan than they are overseas, there are laws that prevent the banks from aggressively doing consumer lending, so the banks don’t make as much money on credit cards, so they don’t push them as hard.

Lu: These two questions I got from most Japanese, I don’t agree because Suica is so widely used. If you had a Suica and the other option is to buy other tickets using cash, you always choose the Suica option, right? Japanese people love cash, I think that’s – I don’t buy that.

Tim: I agree. Any time you hear this kind of this general, oh, that’s Japanese culture, that’s the Japanese way, no, there is a business opportunity there.

Lu: Exactly, exactly, and you are right. So, basically, the charge for credit card to the merchant in Japan is probably the highest in the world, I know. So, the lowest right now is probably Rakuten Pay among the other couple payments, it is around 3.25, and the payment cycle is about 45 days, right? And also, the POS machine, typically costs somewhere between a couple hundred dollars to a couple thousand dollars for the POS machine, and they charge a monthly fee, and the reason they don’t take credit cards for lunch, but they take for dinner because on top of all that, they charge you three or five yen per transaction, on top of all that.

Tim: So, it is not so much that the Japanese consumers like cash. It’s that Japanese merchants hate credit cards.

Lu: Hate, exactly, exactly.

Tim: And, I don’t blame them. It’s great to see Japan Foodie taking off because I think you and I were talking about this like, just when you were starting out in like, the Starbucks in a basement of Roppongi Hills. It’s awesome to see you guys taking off this way.

So, you mentioned like, the importance of discovery and reservations, and payments. So, of the three, is payments really the key or are they all sort of equally important?

Lu: To the merchant and to the users, nobody cares about payment. You don’t go to a restaurant because you can pay with such and such payment, and to the merchant, they don’t care payment in a way because payments, whether it is 4% or 3%, it doesn’t affect that much of their business, if you think about that, right? So, what do they really care, I think what they really care for the users, is a wonderful experience. They really want to get the most out of it in their limited time in Japan. So, most value is actually discover and making sure you can get into that restaurant you really want to get in, and also, you want to know what is in there, right? A lot of times, you go to a kaiseki, you don’t even know what you are eating. So, a lot of value from the user, I think, is that, so we do a lot of content marketing, and for the merchant, what they really care is, they want to have a good client base and eventually, in the long-term, they want to make more money. I think they are the two things that they care.

Tim: Okay, actually, let’s us dive into your customer acquisition strategy. Multi-sided markets are really fascinating because you sort of have to be two different things to two different groups of people.

Lu: Yeah, better start with one.

Tim: Well, which one has been more challenging, is it to pick up the restaurant owners to bring them on board, or to attract attention of the inbound tourists?

Lu: Okay, so in terms of building a platform economy, you always start from B, like B2C, always from B. Alright, imagine Rakuten, right, where you can’t put a restaurant version of Amazon or Rakuten, right? A user will see, whenever they go to a website or an app, that it doesn’t have a decent selection of merchandise, right? So, you always start with merchandise, and to us, restaurants are merchandise. So, that is how we start out, so it was two, three years ago when I started this company, I knew I couldn’t start with business with someone from the restaurant industry in Japan, right? So, that’s why I found my Japanese co-founder of this company, who is the founder of this famous Japanese magazine called Tokyo Calendar, you might’ve heard of it, and before Tokyo Calendar, he also was a founding team member of this magazine called PIA Gourmet, PIA is very famous. So, these are magazines pre-Internet era, right? He has been in the restaurant magazine business for 28 years, so he knows in and out about all these restaurants; he interviewed so many restaurants. So, create contents for restaurant is his entire career. He has the know-how.

Tim: So, he brought you the credibility with the restaurant industry?

Lu: Yes, so before we even built the product, we already sold our service to at least 200 restaurants.

Tim: And, the promise, the service you were selling to the restaurants was, we will bring you foreign customers, we will teach them how to behave in your restaurant, and what type of food they should be ordering, and take care of payments for you?

Lu: Yeah. Well, exactly, like the three pain points.

Tim: That’s attractive.

Lu: Very similar, yeah, very similar to the three pain points of the tourist. Very similar three pain points for restaurants too, right? When they want to have more foreign inbound tourists, they don’t know how, right? And, the second, of course, how many restaurant people can speak four or three languages? No, right? So, they definitely have problems in terms of the booking or in-restaurant ordering.

Tim: Well, also, for restaurants, unless you’re a big chain, it doesn’t make sense to invest much in serving what’s going to be a tiny percentage of your business, right?

Lu: Exactly, exactly. So, a lot of people are comparing us with Guronavi or Tabelog, or Hot Pepper which are the three most popular Japanese restaurant media. So, our key difference to them is basically not only we can just convert those languages, also, building the UX of the app is completely different from Guronavi, Tabelog. If you go to Guronavi and Tabelog, you don’t even see restaurants after three or four actions or pushing buttons on the app, right? They start with the eki, but for foreigners, you don’t even know where you are, right? So, the whole design logic is different.

Tim: That’s a fascinating observation that I had never really noticed until you just mentioned it now, but you’re absolutely right. Every foreign food focused application I’ve seen has the food in front of you from the moment you arrive, and the Japanese don’t. They’ll start with your location or some sort of higher classification. That’s interesting.

Lu: My guess is, they just have too many restaurants on there, right? So, just throwing all these restaurants on the top screen, it actually creates a lot of confusion, right? So, they have to come up with some way to guide you, but anyway, to me, they’re a web or a mobile version of a Yellow Page.

Tim: Yeah, very much so, that’s a good metaphor.

Lu: On the other side, we are what I call a ‘service e-commerce platform.’ Amazon or  Rakuten. So, the key difference is, when I put it, it’s like you see a product that you really want to buy on Amazon, it’s like a button called ‘buy.’ That’s the key difference between media and e-commerce. You can see all the information available, okay, fine, that’s media, but you can do nothing about it furthermore, versus on e-commerce platform, you can actually buy it. It’s just that simple.

Tim: So, is your business model reservation fee, is it a percentage of what they charge using your payment platform, a combination of the two?

Lu: Yes, yes.

Tim: So, listing is free and it’s performance-based.

Lu: Yes, right now, but as we have more and more restaurants on our app, of course, there will be restaurant, they want to pay a fixed advertising fee to be on top, like Rakuten or Taobao, typically, if you look at their financials, most of the income is actually advertising. It’s actually larger than their e-commerce platform fee. In reality, Taobao or Rakuten, they’re an advertising company rather than e-commerce company.

Tim: Even Amazon is moving that way these days.

Lu: Really?

Tim: Advertising is one of their fastest-growing revenue streams.

Lu: Exactly, because it’s always easier to charge marketing dollars than go through platform fee by each transaction, yeah.

Tim: Okay, let’s shift over to the customer side. How do you target foreigners who want to come to Japan before they’re here? How do you reach them?

Lu: First of all, if you’re Chinese, you want to go to Japan, how many websites or apps out there are actually doing what we do? Basically, help you discover the restaurants and book a restaurant beforehand, and actually pay for the reservation beforehand and maybe also pay and order in the restaurant. Basically, that’s what I’m talking about – there’s no one even doing it.

Tim: But, I guess, like, mindshare-wise, there’s companies like TripAdvisor and –

Lu: Nobody does restaurant booking in Japan, so Yelp and TripAdvisor does some of the restaurant booking in North America, in United States, so what’s so important about payment? Basically, by pre-paying to the restaurants, especially in Japan, they only have eight tables – there are eight seats, right? One big table, eight seats, on the counter. If there are two of you, you got two guys making reservation and don’t show up, a quarter of the revenue is gone, right? And, there’s no guarantee, there’s nothing to protect you, right, which happen a lot. So, one of the biggest pain points from restaurants which are popular among tourists, especially Chinese tourists, is no-show. So, one of the restaurants actually we contracted right now, so their no-show rate at the peak, about 73%. So, 73% of people booked don’t show up.

Tim: Oh, my God. You can’t stay in business doing that.

Lu: Yeah. You can’t even run a business like that, right? And, on average, Japanese people, I think they’re the most, I don’t know, credible people in the world right now, the no-show rate is about 1%. So, 1% versus 75%, you can’t even. Well, there are a lot of reasons why they don’t show up. It’s all completely their fault. A lot of times, they just can’t find the restaurant, right? A lot of times, the Chinese behavior is they just booked a whole bunch of restaurants and they end up just going in one.

Tim: It’s a different culture.

Lu: So, there’s a lot of culture issues with that, so basically, what we try to do is, we try to eliminate the no-show problem for the restaurants so that we protect the restaurant on one side and also to be able to help communicate for the tourists at the same time.

Tim: On the inbound side, are you focused on Chinese tourists only or…?

Lu: You always start with the lowest hanging fruit, right? So, Chinese is lowest hanging fruit for us because they have the biggest number, right? So, 25% of the inbound tourist in terms of numbers is Chinese and 40% in terms of spending is from Chinese. What I mean by Chinese, mainland China, right? And followed by Hong Kong, Taiwanese and Hong Kongnese, and Korean, and American. So, these are the top five, right? So, 25% of the people spending 40% of the money in Japan, so a big number, and secondly, they don’t need education in terms of mobile phone payment because in China, nobody uses cash anymore and especially two years ago, our restaurant, people are just amazed. It’s like, they don’t even know that this thing can pay. You can pay using this QR code, how? But, Chinese people, they just come here and scan the QR code using their phone and just pay. It’s like, wow.

Tim: It is quite a culture shift. Even people coming from the US find it very strange to be walking around with $500 or $600 in your pocket at all times. It just feels weird.

Lu: Exactly, exactly. People carry cash a lot. So, basically, Chinese is lowest hanging fruit. They’re used to mobile payment, they want to spend a lot of money in Japan, especially on food. Chinese people love food – I mean, all people love food, but Chinese, actually, there’s a very interesting questionnaire done by JNTO, the Japan Tourism Bureau at the airport. They asked tourists from different countries, what’s your budget per meal? And, the people who have the highest budget is from China, $150 per person.

Tim: Really?

Lu: Yeah, we want to eat really good, and guess who’s the cheapest? American.

Tim: Really?

Lu: Yeah, their budget is about $50.

Tim: Aw, man, that’s a waste! If you’re – yeah, I mean, it’s – but I mean, if you’ve gotta conserve money somewhere and you’re coming to Japan, now, splurge on the food, it’s just so good.

Lu: You can never go wrong, right? So, the first two years, it’s almost entirely focused on the Chinese market, right?

Tim: So, what’s the next step? You guys recently raised about $9 million, what is that going to be used for? Is that going to be going into other inbound markets? Is it going to be going in new directions with the technology? What’s next?

Lu: Yeah, definitely technology first. We think, first of all, we’re a technology company, and secondly, we think we’re a marketing company. So, basically, what we do is we’re going to continue build our multi-payment tool. For example, right now, most of the smartphone payment are not integrated with the POS machine, right? So, the next step is we’re going to be integrated with the POS machine, most major POS machine in Japan. Also, we want to make our payment tool available for other apps, so basically, by releasing our SDK payment, any app that want to have a payment function just like Stripe, so it’s like a lot of the technology development is like in the next six to 12 months. All around B2B side of that. Right now, we are the only one, but we think other people are going to catch up, but we’re going to, just by putting our self into the POS machine, by putting ourselves in other people’s app, we want to have a really big installed base.

Tim: Kind of build an ecosystem around your product.

Lu: Yes, yes, and of course, our B2C payment side as well, so we want to have at least 30 to 100,000 merchant base in Japan.

Tim: Now, a lot of people are really concerned that after the Olympics in 2020, we’re going to see this huge fall off in tourism. What’s your take?

Lu: No, I don’t believe it.

Tim: No?

Lu: No, first of all, there are countries – actually, there are a lot of studies done by bankers, personally, I was in Beijing during the Beijing Olympics. After the Beijing Olympic Games, we saw a huge increase in terms of tourists into China or Beijing, and I’m a big believer in post-Tokyo Olympics, there’s going to be a huge increase in growth instead of a decrease because the reason is, there are only so many people who can actually be here to see these games, it’s a two-week PR event, so you’re broadcasting these Olympics to the whole world for the continuous two weeks, right? With Tokyo.

Tim: So, that will just stay in people’s minds for many years after the events?

Lu: Exactly. Well, at least one or two years, right? So, people are like, wow, Tokyo, interesting. I almost forgot about Tokyo. Let us go to Japan, let’s go to Tokyo after the Olympics.

Tim: Well, I think most sane people would not want to visit the city during the Olympics.

Lu: Exactly, because you know the hotel prices are going to be 3x and it’s almost impossible to get a ticket. Why bother? Go to Japan in other seasons, in the Sakura season, right? Or, the red leaves season, the koyo, and so that is from the market side and from the Japanese government side. Basically, Japan’s economy has been stagnant for the past 25 years, they lost 25 years, right? So, there are not many leverage they can pull to actually stimulate the economy, and one of the few is actually inbound tourism.

Tim: I agree. It’s an easy win for them.

Lu: Exactly, so it’s called short-term immigration, right? So, they come here, drop the money and go, without leaving all their problem.

Tim: I think that’s a really optimistic way of looking at it, but I think it makes a lot of sense. I can see that being actually a more likely outcome than simply the Olympics ending and everyone forgetting about Japan again.

Lu: It’s a beautiful country.

Tim: It is.

Lu: A lot of the tourism resources worthy of visiting, right?

Tim: Listen, before we talk about Japan in general, and entrepreneurship here, I want to back up a bit and talk about your experience running a lingerie startup in China.

Lu: Okay.

Tim: It is quite a story, so can you tell us a bit about LeMiu?

Lu: Sure, sure, sure. So, basically, 2004, if you remember, right, for e-commerce too, pretty primitive and my angle back in China was, what kind of business model I can take from outside China? For example, from Silicon Valley or from Japan, and implement it in China? China has the most population in the world, and people become richer, and my conclusion is, e-commerce. With that theme, I started two companies. One is selling men’s shirts online, and the other is called LeMiu, it’s basically a women’s lingerie brand online, so basically, I was the first to actually sell women’s lingerie online in China.

Tim: What led you to that niche? Was there a particular company that inspired you in the US or did it just say like –

Lu: Yes, definitely. Yes, all right, so the first question is, even if I failed after a couple of years, two, three years, I still wouldn’t regret it. So, basically, I always should do my passion. I was actually pretty passionate about fashion. As a matter of fact, actually, I did fashion design for two years before I came to Japan.

Tim: Oh, alright. Okay, so this was not a new industry for you? You understood the basics of the industry going into it?

Lu: It is mostly from my heart, but I love shopping, I love fashion. Actually, I can make a jacket by myself.

Tim: Really?

Lu: Yeah, so I learned tailoring. So, it is my hobby, it is my passion. I really love fashion, right? You always start with a passion, and the second problem is, how can I create a successful business model out of the fashion industry, right? Research in the US, in the world about these successful parallel business models, and a couple of companies pop up, the company that caught most of my attention was Victoria’s Secret. We didn’t know about them, right? So, basically, wow. You know, women have to wear lingerie, right? And what Victoria’s Secret did, difference from traditional lingerie manufactures is, it is a marketing company. It is a brand. All about marketing effort, right? It was like, okay, basically take the Victoria’s Secret business model, it is a lingerie company plus marketing spin, and online-offline play. Even before the Internet era, Victoria’s Secret was doing mail order business, so what I call it is multi-channel retail, plus a marketing branding play.

Tim: It took off, you did quite well with that early on.

Lu: Yes, yes, I think all the theories, all the strategies worked. I think China was ready back then, right?

Tim: Well, it sounds like LeMiu kind of became a victim of its own success because you definitely struck a nerve. It was successful, you had 300+ people working for you at one point. You had shops. What happened?

Lu: What happened was, so the first three years was a rally, right? So, from 0 to 300 employees in three years, and to 3 million customers, everything, and actually, the second year and into the business in 2009, our advertising fee over the Internet, we ranked number two in advertising spending in China, so we just carpet-bombed the Internet.

Tim: You were the second largest ad buyer in China?

Lu: Yes.

Tim: Wow.

Lu: Yeah.

Tim: So, that’s a lot of ads.

Lu: Yeah, with the – well, the reason for that is Lehman Shock, so after Lehman Shock, everybody’s stopped spending on the Internet and we had cash. So, it’s like, okay, this is time to bomb, right? So, boom! So, when everybody stopped spending in marketing, we were the only few guys on the market spending money on the Internet, and the Internet marketing advertising feet was dirt cheap, and so our customer acquisition costs was a really, really cheap. So, in 2008, 2009, I actually accumulated a lot of users with all this cheap advertising. The lesson I learned in those three years is last man standing, right? When nobody has of money and you are the only one that has money, the last man standing on the market, you are going to win, and so the last – and basically, we peaked in 2011, and then from there, it went downhill. The reason was very simple: our business model was entirely built around the Silicon Valley model which is the j-curve, right? So, we didn’t focus on building profit but we were building GMV or market share to basically try to grab as much as market as possible just like, the Amazon model, right? Amazon didn’t make profit for the first eight years, so we were like, we don’t need to make profits. We just need to expand, expand, expand, right? So, we raised money, poured all that money to marketing, expand market, grow our revenue, grow our GMV, and use that to boost our valuation, and raise another round, and use that money to pump into the market again. So, that’s basically the game we were playing. Not only us, but everybody, but that game stops when there is no money from the VCs, right? So, all of a sudden, in 2012, 2011, 2012, there were no money. You hear people familiar with the e-commerce market back in China, when the bubble burst for Groupon model, because Groupon model was really just – not e-commerce to me, right? They sell nothing out of nothing, right? Anyway, the entire e-commerce market just got no money.

Tim: Right, so all the VCs backed away from it at once.

Lu: Yeah, exactly. So, the VC does that, right? So, they all pour money into one thing, build and over invest, and the boom, all of a sudden, they don’t invest at all and see all these guys die, and last man standing, they may pour a little money and merge a couple of guys, and IPO, and that they moved to another area, and then there are, oh, no more e-commerce. Now, AI or mobile..  –

Tim: And, we will get back to e-commerce in three or four years.

Lu: Exactly, so –

Tim: So, you were stuck. You had to either pivot to profitability very suddenly or to sell the company to someone bigger?

Lu: Yes, exactly, and most company died. So, the e-commerce or the entire e-commerce industry was just basically wiped out. At the peak, about 300 companies copying Groupon’s model in China got funded.

Tim: That’s so crazy.

Lu: It’s either throwing VCs’ money around and compete with each other, and all of a sudden, when there is no money, we have only three companies left on the market and they got bought by Baidu, by big guys.

Tim: Looking back at it, is there something you would have done differently or do you think you kind of played the game the right way and just, the timing was off?

Lu: I would say, I would play differently by selecting different investors or grow less aggressively. So, basically, what I learned was, VCs, all they need is a curve. They do not care what you sell. They want you to be the next Facebook or the next Instagram, the next YouTube, whatever, but these companies are very light in a way. They don’t have to produce bras, they don’t have inventory, they don’t have warehouses, they don’t have the ship products all over the place, right? So, these type of Internet companies or mobile companies, they can create a J curve rather in a short period of time versus we sell bras, no difference in other bra makers, but we sell most of our bras online versus off-line.

Tim: So, do you think, because I think a lot of founders are wondering about this, like constantly, but looking back, do you think it would have been better if you would have had more strategic investors? Maybe money from companies that were in textiles, or something?

Lu: Yeah, so basically, investors who have a longer investment horizon, they don’t ask you to go IPO in three years, and also, we don’t accelerate that fast.

Tim: Three years is pretty aggressive.

Lu: Well, back then, they were like, every company is growing, they’re growing 10x per year, 10x. Like, we’re only growing 3x per year. So, the VC’s actually telling me, “Lu, you are spending your money too conservatively. You should spend more money. Just pump your money, what are you going to do with your money? Pump your money in marketing!” But, the thing is, we have to produce those bras. We can pump in marketing dollars in 10x. We cannot expand our manufacturing base by 10x that fast, right? Because the factory, the production line, they cannot go 10x that easy, and they cannot train people because every single garment is done by human hands.

Tim: Yeah, and you’ve got a – I mean, it’s inventory. It has to be stored somewhere, it has to be moved somewhere, it is not like Internet advertising that you switch on and off.

Lu: It’s very heavy. So, the marketing side is very fast, the supply chain is crucial for goods-related business models, right? We can’t ramp up that easily. and when you try to ramp up that easily or that fast, your quality goes down, and once your quality goes down, your products don’t sell and also, your brand starts deteriorating, so all these things happen when you try to go too fast.

Tim: That makes sense.

Lu: That’s basically a valuable lesson I learned. So, basically, the last three years, what we’re trying to do is focus on the quality, focus on our brand, try to be conservative. Of course, we let go of two thirds of our people, we cut our marketing dollars to zero, but we still had to survive, so basically, we switched to survival mode and broke even. So, I played highroad strategy before I played survival, and profit strategy before all that was part of my experience, very painful though.

Tim: No, but an important one.

Lu: Yes.

Tim: Coming back to Japan, why Japan? You had connections in China, you had sources of funding and customers both in the US and China. Why Japan?

Lu: Because of reasons, family reason. My wife is Japanese – well, I ought to be more proper – she is a quarter Japanese, but born and raised in Japan, and she got pregnant in Beijing because Beijing was very hard to live in terms of air pollution, in terms of food pollution and, and the water contains too much calcium and magnesium, about 200 to 300 times more than Tokyo, stones.

Tim: Yeah, I can imagine it would be kind of a scary place to be in raising little kids.

Lu: Exactly, and so we were like, it’s a fantastic place, it is like wild, wild West, right? You have a lot of opportunities, but for raising kids is too wild. So, I always tell myself to go out of my comfort zone, but the moment I had a baby, I’m like, okay, let’s go into the comfort zone. So I want my family to be in the comfort zone while I can still challenge myself to be out of the comfort zone. So, that is not easy, whereas in Japan, it is a perfect place for me to do both.

Tim: That’s interesting, and I think a lot of older entrepreneurs, myself included, feel exactly the same way. When I was single, I really didn’t need much money at all. I didn’t spend money, but when you have a family, suddenly all that changes.

Lu: Yes, family, especially when you have kids, right? Your life just all of a sudden changes. A lot of responsibility. So, basically, moving back to Japan is the safest choice for us. Lower cost in raising a baby, very safe.

Tim: A wonderful place to live.

Lu: Very healthy, and my wife is easier, right? And, healthcare is very professional and clean. All the basic stuff, right?

Tim: I think Japan really is that interesting blend of stability and innovation. You really can have both.

Lu: Yes, a lot of people don’t know about that, so I think that’s the best kept secret, right?

Tim: I think so. Well, the Japanese government is doing its best to tell the world, but yeah, I think it’s amazing.

Lu: Yes.

Tim: Now, Japan Foodie, you guys have participated in a number of the accelerator programs here in Tokyo. Has that been beneficial? Is that something you would like to recommend to other startups?

Lu: Definitely, definitely. Like I said, not only the government, but also the big companies, they try to innovate, they try to change. Accelerator programs are designed for that, for big companies to collaborate with startups.

Tim: Well, I guess we should explain to those that are in the US. Japanese-style accelerators tend to be very different from the US.

Lu: Really? I don’t know the ones in the US. Yeah, I only know the ones here.

Tim: In the US, it tends to be financial support, a lot of mentoring, and they try to grow these startups, and then kick them out of the nest, but in Japan, most accelerators are industry-specific. It’s closer to like, open innovation programs.

Lu: Yes, yes. I’ll give you an example for JR – so, we partner with JR East, the largest railway company in Japan, right? So, they are like, we have a real big business; we have a hotel business, we have a food and beverage business. We’re actually the biggest bento company in Japan. They sell more ekiben than everybody else, they have a lot of hotels, they have all these kinds of stuff. So here’s our resources and it is your role to come up with the innovative business models or projects to leverage our resources and make it more usable or make a different tweak. That is basically where we are. So, it’s like, okay. So, now, you have all these restaurants and hotels in your business, but I don’t think anybody know about that, right? So, it’s like, discover. I don’t know you can pay, you can now – definitely not reserve, right? So, why not using our service to leverage your hotels and restaurants?

Tim: The main advantage of the accelerators was just you have access to a really large customer base?

Lu: They use us to access, to promote themselves to the Chinese, and we leverage their restaurants to actually spend into our merchant base, so win-win. We had participated in a series of accelerator programs. They are all like that, so it’s all about synergy. You have this, we have this, together, we are better, right? And, typically, they don’t provide financial aids, right? But, they buy your products, right? So, like, we did something for them, they will pay for it.

Tim: Well, Japanese business customers are incredibly loyal. So, those kind of partnerships and those type of customers are incredibly valuable.

Lu: Yes, and the name values are really enormous as well, right? So, JR, your business relationship with them is a big help for us to get actually other customers.

Tim: Sure, having that big name gives you a lot of credibility with other Japanese customers.

Lu: Yeah.

Tim: Okay, Lu, 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 people think about risk, the attitude towards foreign immigration – anything at all to make it better for startups in Japan, what would you change?

Lu: I would say the financial system.

Tim: Oh, all right, what would you change?

Lu: I think Japanese are very innovative. I don’t think there is a lack of innovation in Japan, actually. I think Japan is among the most innovative people in the world. Think about all the innovation we did in the past, right? The TVs, the cars, and everything – they’re pretty innovative – the phones, right, before the iPhone is dominant in Japan. What I think their lack of entrepreneurship is a different story. It is not that diversity or anything like that; if you start a company, you don’t gain too much compared to your peer. But, if you fail, you are done for life. That is why nobody is doing startups.

Tim: It’s simple risk and reward.

Lu: Exactly, so you cannot borrow money. Once you borrow money, you have to be the guarantor for your wife, or your family, but once you go bankrupt, so basically, there is no limit liability in Japan, right? It is so unlimited liability, so once your startup fails, you have to divorce with your wife, otherwise, your wife’s assets is all basically taken by –

Tim: Yeah, you have to carry that around with you for your whole life. Your kid has to pay for your loan, for the father’s loan.

Lu: Think about it, but nine out of 10 startups fail.

Tim: So that is a risky gamble to take.

Lu: So, like we said, like the serial entrepreneur, right? In China or in the US, it’s very similar. Your company can fail, but your personal wealth gets preserved, and then you can use the that and start with your second company, but in Japan, if you fail once, your asset, your kids’ assets, your parents’ asset, everything is gone.

Tim: Well, I think we are seeing that changing now. I mean, there is a lot of risk capital available, there is a lot of VCs in the market now that I think very few startup founders need to borrow money or put of their own assets to start a company anymore.

Lu: That’s what I mean, the finical system, so it’s not only just the bank, but also VCs, right? And, the VCs, the problem about VCs, they think like a banker, so bankers, they should think like VCs, and VCs should think like real VCs, you know what I mean?

Tim: Okay, so it’s not just the structural change; it is an attitude shift.

Lu: So, once you start a company, there are only two ways you can get money, right, from the financial system. Either from the back, you borrow a loan, or you get from the VCs, equity financing, right? And, what I really hate about the Japanese VCs, the first question they ask is about profit, right? So, a lot of Silicon Valley startup, they don’t look at profit, again, right? Maybe in two, three, maybe five years, we start thinking about profit, so you have a roadmap leading into profit, but – so, basically, the US VCs, they’re trying to find the next Facebook, the next Google, versus in Japan, they try to find the next profitable SME.

Tim: Yeah, they’re all calculating your discounted cash flow for the next five years.

Lu: So, basically, that forms a whole dynamic in Japan. Nobody really dreams big.

Tim: Do you think that is changing now?

Lu: Yes, I think it’s also changing because I think with Mercari, they went IPO pretty big in Japan, but in the world, it is not that big, right?

Tim: In Japan, that’s dreaming big.

Lu: I’m part of this – I’m from a community called Chiba-dojo, you know Chiba-san? He’s a famous angel investor; he invested about 50 companies, so last month, we had an off-site, and the theme was, within the next 5 to 10 years, out of that 50 companies, we want to have at least 20 unicorns out of Japan. The key is for the entrepreneurs who dream big, for the VCs to really back up the companies that dream big, and to pay less attention to the practical one to two-year profitable goals, right? If you have the same effort, try to go big, try to change the world instead of trying to build another profitable small company, right? You can go IPO for $50 million.

Tim: Excellent. Well, hopefully, we will be seeing a lot more of that moving forward.

Lu: Yes.

Tim: Well, listen, thanks so much for sitting down with me.

Lu: Thank you very much.

And, we’re back.

One of the topics we covered and one I wish we had more time to dive into was the future of e-commerce platforms. Are they all destined to become advertising platforms?

Well, it’s true. Rakuten, Amazon, Taobao are all generating more and more of their revenue from ads, but is that sustainable? I mean, would it be worth it for a brand to have a presence on, say the Amazon if they also had to pay Amazon advertising fees to enable customers to find their products on Amazon? In the short run, Amazon can do the math and make sure that the companies would not actually be losing money on Amazon, and it would probably be a short-term money loser for any one company to pull their products off, but what if long-term, major brands started pulling out of Amazon to build traffic to their own sites?

Now, granted, that’s might amount to simply robbing Amazon to pay Google, so they might have to spend it the same amount of money either way, but it’s going to be interesting to see how far Amazon can squeeze their merchants for revenues.

Getting back to Japan Foodie, the importance of Chinese tourism in Japan doesn’t get talked about much in the Western media, and why should it, I guess, it does not involve the West? But, as Lu explained, inbound Chinese tourism is huge in Japan, and with China’s growing economy and growing middle and upper class, the number of tourists is only going to increase.

Another example of how the balance of payments, if not the balance of power is shifting, is that as Lu mentioned, Chinese tourists are spending more per visitor than American tourists, and although I had to edit this part of our interview out, Lu also explained that the software developers he was bringing to Japan from China were actually taking a pay cut to move to Japan.

Trying to make predictions about China is, well, difficult, and as Yogi Berra once said, “It’s difficult to make predictions, especially about the future,” but what else can we do? The future economic relationships between Japan and China, the potential for innovative and profitable startups is going to be amazing.

If you want to talk more about startups or payment systems, or lingerie, for that matter, Lu and I would love to hear from you, so come by disruptingjapan.com/show133 and leave a comment.

Hey, also feel free to follow Disrupting Japan on Twitter, Facebook, or even join our LinkedIn group. If you want to ask a question there, I guarantee you, I will respond.

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

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