Fifteen years ago, University-run venture funds were all but illegal here in Japan, but today a higher percentage of major Japanese universities have VC funds than in the US or Europe.

Today we sit down with Kei Furukawa, a partner at the University of Tokyo IPC, a $300M venture fund, and we talk about the unique role these funds play in Japan, how they drive innovation in rural areas, and why he has to talk professors out of becoming startup CEOs.

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

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Show Notes

  • UTokyo IPC’a mission and investment strategy
  • How the Japanese government is trying to accelerate university innovation
  • Why the government plans to stop funding university VC funds
  • The unique role of University funds in Japan
  • How IPC is helping startups work with large enterprises
  • Why Japanese CVCs are more founder-friendly than American VCs
  • Why Japanese CVC investment increased during covid
  • How to talk a professor out of being a startup CEO
  • Can startup interaction reform Japan’s universities?
  • The challenge in developing innovators outside of the major cities
  • Which startup sectors are most promising in Japan
  • How senpai culture is holding Japan back

Links from our Guest

Transcript

Welcome to Disrupting Japan, Straight Talk from Japan’s most innovative founders and VCs.

I’m Tim Romero and thanks for joining me.

University Venture Funds play a much larger role in the startup ecosystem and in startup finance in Japan than they do in the US or Europe. Japanese university funds also operate differently, and  fill a different niche than most of their Western counterparts.

Their oversized impact is all the more amazing when you consider that 15 years ago, it was basically illegal for Japanese universities to invest directly in startups, but now they’ve become a driving force.

Well, today we sit down with Kei Furukawa, a partner at the University of Tokyo IPC. A $300 million University fund, and we dive into how Japanese university VCs invest today and how that’s going to be changing in the near future. Oh, and for our overseas listeners in this conversation at different times, Kei and I talk about the University of Tokyo and Todai and UTokyo. It’s all the same place. It just goes by many names.

So Kei and I talk about how you can get investment from IPC, even if you’re not a University of Tokyo student or faculty. The single biggest challenge to getting university professors on board with what’s required to commercialize their research and how the different investment strategies in Japan are leading to a different kind of startup enterprise collaboration than we see in the rest of the world.

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

Interview

Tim: We’re sitting here with Kei Furukawa, a partner at the UTokyo Innovation Platform or IPC. So, thanks for sitting down with me.

Kei: Thank you for having me on.

Tim: In the introduction, I gave a brief description of what IPC is and what you’re doing, but could you explain a little bit more? So like, what’s your thesis? What are you investing in?

Kei: So, we are a university of Tokyo Innovation platform company. In short, we are called in Japanese Todai IPC. I think there’s three major points in our activities. Number one, we are a hundred percent subsidy of the University of Tokyo, which until a few years ago, it was a pretty rare case because national universities were not allowed to have, let’s say, investment companies or let’s say companies itself under the organization. But we were created for a more government policy point, we are a hundred percent subsidy, which is pretty, I think, unique model around the world that there’s a venture capital right under the organization of university. Point number two is our main activity is investment. So, we have three funds right now. Todai is about 400 million in USD. And we do direct investment into startups, and we actually also do fund funds. So, we actually invest into other venture capital funds.

Tim: Well, actually, your three funds, it’s really interesting, and I hope we have time to dive into each of them, because each of them kind of represents a different strategic importance for the university.

Kei: That’s very true. Okay, let’s dive into the three funds right now. So, we have three funds IPC one fund, AOI one fund, and ASA fund that we’re working on right now. So, the IPC one fund is a fund that we invest into other venture capital funds, and also we do direct investment into startup into a more middle to later stage. ASA fund we invest into more early, let’s say, seed round or very early stage funds. And we also do our car out spinouts from large corporations. And this is why we do it. I’ll talk later. ASA is a complete fund of funds. It only does fund of funds which we are working together with the Tokyo Metropolitan Government.

Tim: So, throughout the course in this interview, let’s talk about each one of those individually. Because they’re all really interesting to themselves, but focusing on IPC and the direct investments. So, what’s your thesis? What kind of startups are you investing in?

Kei: The thesis of startup investment for IPC fund and the AOI fund, there’s a minor difference, but in general, we invest into startups that are utilizing research coming out from the university. So, that is the investment criteria that we have when we make investment into startups, that they’re utilizing the research coming out from university in some way. It can be an IP from the university, or it can be like core research done together with the startup events and the university, which then we can call university related. And then there’s other parts where it’s like the professor comes in as an advisor. So, there’s many ways we can form the way.

Tim: Yeah, that’s pretty broad. So, it’s not necessarily just professors spinning out their research or students forming it. It could be founders with no particular connection to Todai who want to use the IP.

Kei: That’s exactly right. So, the most beautiful story will be that all startups are using the IP or research coming out from, let’s say, just completely done in university. But one thing is that we want startups around the world to utilize the research coming from UTokyo not just the IP. So, we have actually about 10% of our portfolio is global companies. I don’t know one about one third of the companies that we invest into is non UTokyo at day one, but we make that UTokyo connection in, let’s say, academic or research way. And then they utilizing the UTokyo asset. And then we make investment, which is also a great way, I think, to enlarge the ecosystem around UTokyo. So we welcome other companies coming into UTokyo and utilizing the asset. Number two, if we restrict ourselves to just spin us from, we’ll be restricting our investments. And the important thing is that we bring back return to the investors. So we broaden our, let’s say, investment thesis so that we have a balanced portfolio in that way.

Tim: Yeah. Are you focused on just the initial seed investment, or do you follow on the later stages?

Kei: We are a follow on fund. So our fund size for IPC and ASA is both 200 million USD. So, we have a fairly big fund, and of course, it depends on the project itself, but we tend to do all our investments.

Tim: So research at the University of Tokyo is really wide ranging. But for the IPC funds, is there a particular sector or a number of sectors that are particularly active, whether it’s like healthcare or energy, or…

Kei: About one third of our portfolio is healthcare, which is drug discovery, medical devices, and a bit of agritech. We do put a lot of power on biotech because it is important for humanity. We think it’s important for investments. So, we do a lot of biotech. About 20 percentish goes into hardware including space, aerospace, materials, semiconductor and robotics. And about, let’s say, one rest of the one third 40 percentish goes into AI and IT. We hardly do two consumer because we know in the market there’s a lot of venture capitals that do two consumer kind of investment. And we do the more difficult AI and IT related between enterprise related startups in that sense.

Tim: There are a huge number of foreign students here at the University of Tokyo. Are there a fair number of foreign founders in the fund?

Kei: We have about 80 companies now, and I think we have about three or four companies that are non-Japanese founders of founding companies in Japan.

Tim: Excellent. So you mentioned IPC started in 2016, and part of the motivation was the national government trying to get the national universities to be more active in supporting startups. At the time they did provide a lot of funds for that investment. So, who are your LPs? Is it all Todai money? Is it a little external money? Is it…?

Kei: Good question. So most of the fund comes from Todai, but it comes from the government. For the first fund most of it comes from the government, but we have a little bit coming from major banks. For the second fund, about 60% comes from the government, but the rest comes from private sector. So that’s financial institutions and enterprises. So half and half.

Tim: So every fund is more and more private money.

Kei: Yes. So, we have to go complete private most probably we are no longer yet, but for the next one, maybe we have to go more complete private on that.

Tim: Well, I mean, that’s a good trend. I think that was what the government was hoping for, right? Prime the pump and then let private money take it over. So, let’s talk about university funds in Japan in general. Because I think that the role that university funds have in Japan is kind of unique, they’re much more influential than what we see in the US or Europe. For example, in the US only 30% of research intensive universities have a fund. In Europe, that number is 40%, but in Japan, 85% of the top universities have at least one venture fund. And like Todai has several. So, twice the rate of Europe, three times the rate of America. Why?

Kei: Why? Tim, I’m going to ask you, where do you get to 85%? Because that’s…

Tim: The source of that is the global venture capital institute.

Kei: I guess it depends on how you define the top universities, but yes. More and more universities are starting to build venture capitals. UTEC was the first one. They’ve been close to solo university related investor for a long time. Then 2013 a law was passed saying we’re going to make new venture capitals in university of Tokyo, university of Osaka, Kyoto University, and Tohoku universities. These were more or less a government led, and they got a chunk of budget and allocated to four national universities. And then we were pretty active for a couple of years. And then two years ago, they changed the law that now all the national universities can have venture capital. So, they are starting to make venture capitals in a lot of national universities throughout Japan.

Tim: I think so. But so why is there a need in the ecosystem in Japan that universities are filling that is either being filled right by someone else in Europe and America, or maybe doesn’t exist in Europe and America? Why are the funds so important here?

Kei: If you live in Japan, and if you’re in this industry, you kind of feel that tendency, where is the governments putting a lot of emphasis on startups and new innovation in the last, let’s say three, four years. And that the whole society is shifting from a more, or let’s say a conservative large corporate kind of culture to a startup culture. Not completely, but really gradually. I think that each university is starting to realize that they had good technology, but to monetize that or make that into business, they need professionals in doing that. And Japan is a small country of course, but venture support is a very local, you need to put hands on kind of activities. So each university is starting to realize that they need kind of organization or team on the ground supporting these ideas.

Tim: Yeah. But do you think like it is kind of almost a signaling a validation of having the government and then the national universities by proxy provide that instruction rather than, like in the US it seems like a lot of that information is coming from other founders or from business. Are the universities playing that role of kind of legitimizing it to other businesses rather than kind of the other way around where businesses are just looking for the IP?

Kei: No, I think the university itself is trying to make the money out of that. It’s not the business side. Of course it depends on us in the place, maybe. So the business side is coming into the university saying, okay, let’s make a venture capital together make money from that. But I think it’s more that each university is making their own initiative. Of course, they’ve been looking at us, they’ve been looking at the other university related venture capital saying, okay, we’ve kind of seen a good trend on that. Why not we started that also.

Tim: As you mentioned, this trend is really important and really sudden because until very recently, universities were not allowed to invest in VCs. In fact, in like the dotcom era, university professors were not allowed to sit on the boards of private companies. Venture was kind of walled off from universities. And Japanese universities and Japanese industry have a long history of collaboration and research. But it really seems in the last 10 years, there’s been an effort by Japan’s universities to, if not flip that, to greatly expand the amount of startup collaboration and to bring startups into their direct business collaboration. And are you also seeing that trend nationwide to change their traditional way of working with large enterprises and try to bring more startup innovation to them?

Kei: Yeah, for sure. We’re seeing that trend. As you mentioned in the past, large corporates, of course, have a lot of assets. They have money, the people, they have. So for universities, it was, I wouldn’t say easier, but a kind of legitimate way to sell their IP to large corporate. And that’s kind of the effort that they were made. At the same time research or let’s say new ideas is not billion or a zillion dollar making business all the time. And if it’s a small but still has market potential, let’s say, or can change the world. There’s other ways to let’s monetize and make that into business. And a lot of universities are starting to realize, okay, let’s make a startup and then we can bring that startup to the next level. Maybe IPO, maybe M&D. But that kind of trend is what the society is seeing, and also the universities are also kind of realizing. So, that is a big trend, I think is moving on right now.

Tim: Well, I think so. I mean, having startups spin out and monetize the IP is incredibly attractive as you know it’s much harder than it sounds.

Kei: And I think the large corporate mindset’s also changing the last even five years.

Tim: How so?

Kei: Well, there’s one thing that I always talk about is that when Covid hit, we saw all the, let’s say LP investments will stop from large corporates enterprises, but China and US there was a big decline on the investment after Covid. But in Japan, the large corporates, they understood that they need to put money into the startup ecosystem to sustain or make new business. Despite the difficult situation of Covid, when it hit here in Japan LP investment didn’t come to funds. So, we had to close a lot of them. But Covid was a different timing, where a large corporates actually invested more into funds or startups which was a kind of, I think, very different thing that we actually estimated.

Tim: Now that’s really interesting. And in fact, one of the unique aspects of Japan’s venture capital markets is that the growth is very steady. Even in 2023, when the US saw like a 49% decrease and Europe saw similar decrease, Japan saw like a 3% increase. The boom times it’s smaller booms and the bus times, it’s actually still growing. But it seems like this steady 20% annual predictable growth. And do you think that’s largely because of the corporate planning and the corporates viewing this as kind of long-term R&D?

Kei: I would say yes to that. Not all the corporates, no. Each of them have their own strategy on open innovation and investment into fund these startups. But in general, I think, yes, Japan, large corporate used to have that mentality that they could make anything in themselves. So, we do everything now. Now they understand that they cannot do everything. So, they are looking more into like the early stage startups. As you know, there’s more venture capitals invested by enterprises. Even the ones that they didn’t do before are newly investing into funds so that they can gather information and whatnot. So, their mindset is changing, and I think it’s a good trend for the society and the ecosystem itself.

Tim: Well, I think it’s one aspect that’s very unique about the Japanese startup ecosystem. I don’t think it’s necessarily better or worse, but it’s going to develop differently in that there is that predictability. Yeah, well, relatively.

Kei: Relatively, yeah.

Tim: So yeah, partnerships can last longer. It’s less transactional. People get less excited in the high times and less depressed in the bad times. Yeah, it’s different.

Kei: Yeah. I think it’s different enough.

Tim: Looking at your portfolio of direct spinouts, are most of them student founders or professor founders?

Kei: Well, that’s a good question. It’s a mix of both. It’s a mix of both. We’ve done couple of student founded companies. I will say this about eight companies that we invested, which came out from students. When you talk about Spinouts, I think they will be, professor came in as an idea, but usually professors cannot be a CEO. So we bring in a CEO or the professor finds a CEO candidate.

Tim: That’s actually something I want to talk about a bit because there are, and again, I’m not talking about your portfolio in particular. But in Japan, there’s an awful lot of university startups where we have the CEO, the CTO are both full-time professors. And I’ll meet them and I’ll say, well, okay, are you going to quit your jobs? And they’re like, well, no. Or, well, maybe we’ll see. If the startup gets successful, then maybe we’ll like, yeah. And you can’t build a startup that way. Do you have to have this kind of conversation a lot researchers here?

Kei: To be very honest, no, we don’t do that question so much. Of course, there’s a lot of cases where the professor comes in before come making a company saying, and sometimes he says, okay, maybe I’ll do the CEO. But we say, okay, if you want to keep it staying in academia, you should not be doing a CEO. And also it’s always better to have a business professional together with a technical as a professional. And that kind of teaming up is very important when we make a startup. So, let’s bring in someone, maybe we support them, bring him in, or maybe one of his students from the lab becomes a CEO who has like a business background. So, we tend to make that team up. We hardly have never done the professor becoming a CEO kind of a company.

Tim: Are the researchers receptive to that? Do they…?

Kei: Yeah. So I mean, it just all depends on the way you explain.

Tim: You know, I find that really encouraging. No, I really do. Because I’ve met and I still meet so many of these part-time CEOs, and they’re obviously brilliant people, but they have no business experience whatsoever. And you just know the startup is doomed to fail. No, I find that extremely encouraging.

Kei: Of course, there are cases where the professor’s doing A CEO. But if we were to, let’s say, invest, first of all, we have to, let’s make an organization change it. We try to nicely communicate with the professor and for him to understand. If he doesn’t understand, then I think that’s end of the story. And if that’s end of the story after the first investments made, it’s going to be difficult to change the shares and whatnot inside the company. So, we do that everything before the first investment.

Tim: Oh yeah. That is so true. I’ve seen so many startups that you’ve got a CEO who still has 30% of the equity who’s now part-time and it’s poison. No one will invest in that.

Kei: So, we are very careful with making sure that doesn’t happen as much as possible.

Tim: So, is the usual model that the professor becomes an advisor and gets a little bit of equity or?

Kei: It really depends, but yes, that’s right. So, usually the professor doesn’t want to leave the academia. That’s number one, because it’s not like US where a professor could go out and come back in another major. In Japan, if you are out of the academy, you’re actually out of the academy if the chances to go back by very low. So the professors, he likes engineering. He likes to do research. That’s what he likes to do. So he will have some equity, of course, but he will stay as an advisor. Time to time he can’t do CTO, but later on we’ll bring a different CTO. It’s more that we give more to the full-time CEO guy, the equity, so that he has the motivation.

Tim: Oh, that’s great. That’s exactly how it should be. I’m so happy to hear.

Kei: Good, good. Yeah.

Tim: It gives me hope. But you mentioned one thing I do want to talk about in that professors who leave academia to join a startup, it’s a one way trip. And I think one of the most positive developments in the Japanese startup ecosystem over the last 20 years has been the number of business professionals who’ve left business and gone into startups. And only really in the last five years, we’re starting to see them go back to business. It’s a small percentage, but it’s starting to happen. And that’s like one of the most valuable things that can happen because it educates both sides. Do you see this ever happening in academia where people might actually leave and come back and share that knowledge?

Kei: As you said, it’s a very small percentage still, but yes, I think we’re starting to see that trend also where, say we have a master’s student who went into business, he went into consulting. Maybe he’s an engineering company, but after two or three years, he comes back into academia for his PhD. So, that’s kind of the trend that we’re seeing. We have couple of companies that we invested into that has CTOs, which is similar case where they did some business, they went back to the university did his PhD. And from that PhD he started a company. So yeah, that’s kind of trend that everything goes.

Tim: That’s good. That’s a great start. But do you see a time where you might have a 35-year-old university professor researcher who leaves, runs a startup for 10 years and then comes back as a 45-year-old professor? Are we a long way from that?

Kei: There must be cases somewhere, but from my perspective, we have not seen many of them. Hardly seen any of that. The thing in the academy is a very tough competition. You need to be there for a long time. You need to write papers, you need to be in conferences. So, it’s that kind of step up that there is for academia. So it’s not simply you go to business and then you come back as a professor. It’s not easy as that, but there’s chances of course. So, it’s case by case, but not a lot. Not a lot for sure.

Tim: Well, no, but I think like, so what IPC is doing, the bringing the startup innovation into academia, bringing the academic research into the startup world. I think it’s the start of something that’s really important. So, it’ll be interesting to see how this develops over the next coming years and decades. Let’s take a step back into incubation, because you also run the first round program.

Kei: Yes, we do. So, first round program is an incubation program where you bridge between the academia and the business. You can apply as a project, meaning before you find a company or you form a company, but it has to be within three years, which means you have to be fresh. And you also cannot be backed by venture capital because if you’re backed by venture capital, let them support you. And if you get chosen, you get about 70K USD non-equity. We don’t take equity. So, you get pure cash from us, and you also get a lot of support, lawyer support or mentoring support, cloud resources. So we provide as much as possible so that company can take their first step. We have accepted about a hundred companies. Most of them, I think 95% of them finish the seed run in a successful way. The rest 5%, they get grants so they don’t need a seed run funding. And it’s like that. We have maybe one or two companies that stop their business, but most of them are still ongoing concern.

Tim: One of the most interesting things about this particular program is that it’s not just the University of Tokyo. You’ve got around 20 or so…

Kei: 20-ish universities and research institutes around Japan, top universities and research institutes.

Tim: So, why that change? What’s the goal of involving so many different universities under one roof? What was the thinking there?

Kei: We started from the University of Tokyo, and we understood that this kind of is a good role model. And then we came to the point that, okay, we can expand this program to other universities, which some of them do have better capitals, but most of them don’t. So this first round, we actually do it outside of the investment. It’s a pure incubation program we do for the good of the ecosystem and the startup. We found out that these universities actually needed this kind of support. So, they came on track. So, they are like a co-host with us right now. So, that’s kind of the pure motivation that we have there.

Tim: So, a lot of these other universities, in their case, is it a lack of the mentoring resources? Is it a lack of the number of students who can create startups? What’s the big lack that?

Kei: Yeah, so I think they’re both of that. There’s a lack of mentors or let’s say resources for them. And also they could take this program as one way to say, okay, there’s this program if you try hard, you can get accepted and then you can get a mentoring. So, they might have not have their own mentors or they don’t have other resource, but you can utilize our resource. And for each university, it’s like the first step. So, I think it’s kind of a motivation for the universities also to promote this program to their let’s say students and professors.

Tim: That’s a great program. But I’m also curious, there are a lot of university funds all over Japan. National universities have funds now, a lot of private ones, but they’re much smaller than University of Tokyo’s funds. And I’m curious, what are your thoughts on the future of innovation in big cities? Let’s say, Tokyo and Osaka versus the more rural, more distributed innovation.

Kei: I would say a lot of universities in Japan has good research IP s innovation coming out. They also have good students, but they kind of lack the business opportunity in the rural areas.

Tim: Through the customers?

Kei: Right. So, the goal of this first brand, and also the AAF one that we were talking about, is that each company founded in each university, that’s fine. There’s maybe a good entrepreneur, there’s a good research there. There might be a good mentor, or let’s say a venture capitalist there supporting these companies. But when you want to do actually business, you have to come to Tokyo or Osaka or the big cities. So, I think it’s like a bridge for us that we support throughout the fund, the funds, and also throughout this program that these rural companies come into Tokyo and then they can start talking to large corporates. So, I think that kind of a role that we play in this ecosystem.

Tim: That model makes a lot of sense. Because I mean, fostering startup innovation in less populated parts of Japan, I mean, it’s high on everyone’s agenda. It’s something METI’s thinking about, the Ministry of Education is thinking about. And it’s hard to do. Do you think this is a kind of scalable model where you can have the innovation and the research and the creativity happening anywhere, but developing the network where Todai or organizations in Tokyo could facilitate connections to venture capital? Connections to customers?

Kei: Well, I think it is a scalable model. First of all, right now in Japan, in non-logical cities, the universities still lack new startups and new companies coming out. So, we are like ground zero right now, but luck here or not, most of all the businesses centered in Tokyo. I think 80%, 85% Tokyo, maybe Osaka, also Kyoto too. But it’s very centralized. So everyone coming into Tokyo to actually do business is, I don’t know if you call it scalable, but it’s a doable kind of model that we see right now that this is not just for Japan. This is also for global companies too, I think.

Tim: Oh, no, I think so. I think it is true around the world. It’s just particularly true in Japan and we are here in Japan.

Kei: Yeah. Particularly in Japan. Tokyo is where everything kind of centered right now.

Tim: But there is one thing that I think the one flaw in that model is the long-term structure. Because if every time you’ve got a great startup from Sapporo and then end up moving to Tokyo, Sapporo doesn’t really develop an innovation culture.

Kei: That is a really good point. So, I think a lot of cases where they have headquarters in Sapporo or Hiroshima, and they have the second big office in Tokyo, business development people are in Tokyo, and then the research people, or that’s the CEO and the research people are in Sapporo. So, that’s kind of the case that we see a lot.

Tim: I think that’s right. That really is needed. And I think like that is something that Fukuoka and Kyoto have done really well.

Kei: Yeah. They’ve done really well.

Tim: For whatever reason, the founders just don’t want to leave. They’ll open a sales office in Tokyo, but the headquarters stay there. But a lot of other cities like they’ll move.

Kei: Yeah, that’s right. That’s right. I have a company which I invested in Nagoya it’s called Grand Green. They do gene editing for plants. All the guys are in Nagoya, but the CEO business development guide pretty often goes to Tokyo to business. So it’s like that, the trend’s like that right now,

Tim: All, all of my friends from Fukuoka are like, oh yeah, I’m in Tokyo twice a week.

Kei: So, they come often. That’s how happen. So I mean, if we can be the bridge in that point, that’s I think a good way to that we can support these non-Tokyo Ventures.

Tim: Looking at the research that’s being done, not just at Todai, but at universities in Japan now, what are you most excited about?

Kei: I’m excited about a lot of things. But I think there’s a couple of areas that there’s going to be potential. Number one is quantum computing. Then also I personally have a lot of interest in say, mili-waves. So, we’ve invest in a company called Baseband with what they do glass based peer reflector. Very exciting product on the mili-wave. Also, me, myself, I have a kind of interest in food agri-tech. Food is something that — Japan is very good at food, I think.

Tim: Yeah, it’s a really interesting market for food.

Kei: Question, do we actually need innovation in food? But yes, I think we still have that potential to do.

Tim: No, I agree. Japan is such a great market because Japanese people are so serious about food. They’re willing to pay higher prices for good or unique or special niche foods. It’s a really good market for AgTech.

Kei: Yes. It’s a very good market for AgTech, Foodtechs. I haven’t done much yet, but I think there’s a lot of potential there. Actually, one of my interns, or let’s say working with me, he’s doing culture journey me kind of thing. He’s like the, one of the top researchers in Japan. And also I think biotech is also interesting part. And also semiconductors. Well, seeing the geopolitics moving on right now, semiconductor in Japan, I think we still have chance, not still, but we will have chance in the future.

Tim: Well, there’s some big national investments happening there.

Kei: They’re happening there right now. So semiconductor is one of our areas that we are looking deeply into right now.

Tim: Well, listen, Kei, before I let you go, 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, anything at all about Japan, the educational culture, the way professors think about innovation, the way academics and business collaborate, anything at all to make things better for startups and innovation in Japan, what would you change?

Kei: Now I have two things in mind right now. I’m just trying to choose one right now.

Tim: Okay. I’ll give you two strokes of the magic wand.

Kei: You can probably edit it into one. So, one thing is the language, the younger generation right now in Japan are more, let’s say, used to English now because from a younger age, they’re learning the language. And if you go on the streets, let’s say ten years ago, no one spoke on the streets, but now we have more non-Japanese people traveling into Japan. So, but I think we still have a big language barrier when we talk about business. But I don’t know if it’s the education system or if it’s just culture or not, but if it can change that, I think we can have a more interesting position in the global markets.

Tim: Is the problem that people can’t understand developments going on around the world is the problem they can’t sell internationally? What’s the problem it causes?

Kei: I think it’s that when it comes to business, when you sell product, I think there’s still a big problem there. When we do a deep tech investment most of the founders can read English, they can also do presentation in English. But when it comes to business table, that’s a different story. It’s like hard negotiation. You have to understand like the context and nuance of what people are saying, which I try to join as much as possible for our portfolio company, but still, I think we have a room that we need to improve. If we can do that, I think Japanese companies will have much more chance, we can do more business also Japan. So, that’s one thing if I can change, I like to change in the society. And number two, if we can change the senpai-kohai kind of culture, I think that can change the Japanese society big time still.

Tim: And just for our listeners, there’s no real equivalent in America, but in Japan, you always have a junior and senior relationship. There are no equals exactly in Japan. So, if you go to elementary school and someone is six months older than you, and he’s your senpai, he will always be your senpai 40 years later. It just doesn’t change.

Kei: So, it’s a good way that we look up older people saying, okay, they live longer, they know more than us, so we have to take care of them, kind of that senpai-Kohai culture. But at the same time, this is really hurting that I think the business culture, the Kohai, the younger one always have to get approval from the senior guy or there’s that big process that which makes, I think Japanese companies take time when they make decision.

Tim: So do you see it more as the problem is as senpai-kohai in terms of age or as senpai-kohai in terms of hierarchy authority?

Kei: Both. But more on the hierarchy authority in the sense of business. And also when it comes to the large corporates, since we have the senpai-Kohai culture, always the large corporates has a big power over the startups in Japan. Now, I had a very interesting talk with a non-Japanese fund guy. He was saying that why is Japanese companies always harsh on Japanese startups and very soft on…

Tim: Oh, that is so true.

Kei: Let’s say non-Japanese international companies, I mean, it’s always that case where, let’s say American company, large corporates are always soft. They’re like, okay, we can sign NDAs. We will sell your product. They’re always nice to say. On the other hand, when it comes to Japanese companies, they are always like, okay, I’m not trying to offend Japanese companies. But it’s like that culture that I think we still have that we are very harsh. It’s not caused much a harsh on the Japanese startups.

Tim: I see this too, but I see this also very strongly in VC, where a lot of VCs assume this Senpai relationship and start telling founders, well, here’s how you need to run your business. And these people have never run us. They’re smart finance people. So, that’s a really interesting issue. And in fact, when I was at Google for startups, one of the common problems we had would be we’d get this really smart dynamic 32-year-old founder who had just hired a 55-year-old head of sales. And both sides really wanted it to work. They didn’t have attitude problems, but just culturally, that’s very difficult in Japan. We kind of brought in like American protocols to like, well, here’s how you can have these meetings. And it worked really well, but it’s hard.

Kei: It’s hard. That is something that we have with our young entrepreneurs also, since they’re young sometimes they do lack experience. So, we tell them, bringing a senior guy who’s done business, who’s maybe done factory buildings or who’s done engineering whatnot. But when we do interviews, we always are careful of this senior guy that he’s not going to rule. Let’s say he’s not going to bring his own way so that they can communicate. So, we are very careful when we bring a senior person to a startup that he has that kind of mentality that where he can learn new things, but at the same time, he can bring in his knowledge too. So, Semapai-Kohai, if we didn’t have that, we’d probably have to think about it.

Tim: Is it getting better, like in your search for these people?

Kei: I think it’s getting better, but I mean, as throughout the society, we still have that senpai-kohai very strong. And this is never going to disappear for sure. That’s why I want that magic wand to disappear. But I mean, there is good points to that.

Tim: No, no, I mean, it’s socially, there’s a lot…

Kei: Socially there’s a lot of good points to that. But when it becomes kind the company operation and business, I think we want it to disappear. And it’s getting better in the sense that the startups are trying to make that culture to be open to everyone. I think the ones that are successful have changed in the sense that there are not much of that senpai-kohai kind of thing. So, it’s changing, but still it’s very in the roots of a Japanese society. So if you can change, that’ll be good.

Tim: It’s a hard thing to change, but it sounds like we’re on the right track. Well, listen, Kei, thanks so much for sitting down.

Kei: Thank you so much for having me.

Outtro

… and we are back.

In the week that followed that conversation. I spent a lot of time thinking about senpai-kohai culture in Japan. And for our overseas listeners, in the adult world, the senpai-kohai relationship is not really about authority or a pecking order exactly. It’s a bit more indirect. It’s more about expectations and protocol and giving deference to the senpai rather than this senpai having any kind of actual authority.

As Kei pointed out, this framework does a lot to hold things together and helps keep society running smoothly. But it really does hold back innovation here.

Of course, maybe innovation and stability are always at odds with each other. A happy content population probably won’t want to change things too much, but a population in crisis, well, they need to change things and they need to change them fast.

So, yeah, I fully agree with Kei that senpai-kohai culture is holding back innovation in Japan, but also that we cannot and should not simply try to rip it out of society. There are a lot of good things about it as well. Japan needs to find a way to keep the good aspects and work around the bad.

And, you know, I think that’s already happening, and has been making slow and steady progress over the last few decades.

Traditionally, or at least back in the eighties and nineties, the way people got around the senpai-kohai protocols and similar restrictive corporate hierarchies was through alcohol.

The reason salary men of that era went drinking together three times a week was not because they necessarily enjoyed each other’s company, but because that was the only way you could talk about certain things. There was a general understanding that, you know, after a few beers, you can dispense with the protocols and the deference and just say what you think.

No one would ever hold it against you.

That kind of corporate drinking culture is pretty uncommon in Japan these days, and you definitely don’t see it at startups. And while that is certainly appreciated by both the spouses and the livers of today’s employees, I think it also points to a flattening, or at least a reduction of the deference that Japanese are expected to pay to traditional hierarchies and senpais.

Of course, there’s still a long way to go, and I think the future will not be in eliminating the senpai-kohai protocols, but in developing new protocols to work around them.

In the same way that failure has been reframed and normalized in terms of MVPs and market feedback and pivots. New protocols and new framing will enable young founders to manage older, more experienced staff and to normalize a more appropriate level of VC involvement in startup operations.

Now, I’m not sure what the final structure will look like or how quickly we can get there, but ever since the Meji Era, Japan has shown an amazing ability to take the best ideas from the West and integrate them into society.

This continuous successful blending of the old and the new is one of the things that makes Japanese culture so truly unique.

 

 

If you want to talk more about university startup innovation in Japan, Kei and I would love to talk with you. So come by disruptingjapan.com/show235, and let’s talk about it. And if you enjoy disrupting Japan, please share a link online or just tell people about it. Disrupting Japan is free forever, and letting people know about it is the absolute best way you can support the podcast.

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

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