Japan was once home to some of the most innovative companies on the planet, but those companies lost their innovate edge a long time ago. Today, many are betting on startups to change the course of the Japanese economy and to some extent, that’s already starting to happen. Ijichi Sorato of Creww, however, is betting on a different approach to win out, that of Open Innovation.

The future Ijichi envisions, involves not large, old companies being pushed aside and replaced by newer, more innovative firms, but that of innovative smaller firms being co-opted and absorbed into larger firms, either via M&A or via exclusive partnerships and supply chain integration.

We talk a lot about the challenges large Japanese companies face in working with startups and why hackathons rarely produce value for either sponsor or participant in Japan, and the one thing that needs to change before Japanese enterprises can work conformable with startups.

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

Show Notes for Startups

  • The rise and fall of Japan’s own Angel List
  • Why angel investing is weak in Japan
  • How even startups can build long-term relationships
  • Why Japan’s traditional supply chain is breaking down
  • How startups can sell to Japanese enterprise accounts
  • What changes large companies need to make before successfully working with startups
  • Why hackathons don’t work in Japan
  • How Creww might put themselves out of a job

Links from the Founder

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Transcript from Japan

Welcome to Disrupting Japan. Straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero and thanks for listening. Most large Japanese corporations lost their innovative edge a long time ago. But the good news is that many of them realize this and that they’re trying to get it back. Some of them are looking to start ups for business and product ideas and this kind of open innovation holds great potential in Japan. We’re still at the very early stages. But it Ijichi Sorato of Creww things that open innovation programs will not only take off, but will be fundamental in turning the Japanese economy around. He’s so certain of it in fact that last year, against all of his investors wishes and most of his advisors advice, he pivoted his company from one focusing on startup funding and services to one focusing exclusively on open innovation. It’s a bet that’s now paying off as he sees his customer base growing and they’ve just closed another three million dollar round of financing.  In fact his biggest concern now is that if Creww continues to succeed at this pace, he’ll soon be out of a job.  But I’m getting ahead of our story. And it’s best if you hear directly from Serato.  So let’s get right to the interview.

Tim: We’re sitting here with Sorato of Creww. Thanks for sitting down with us.

Sorato: Thank you.

Tim: Pleasure to have you so Creww launched in 2012 and as I understand it, your mission is to help promote startups in Japan in general and to work with larger companies for open innovation and trying to get them to work with startups.  Is that about right?

Sorato: Yes Sir.

Tim: Okay, but I think you can probably explain it much better than I can. So why don’t you explain about what you do at Creww.

Sorato: Basically it’s just as you explained.  The thing is I was in the US when I was sixteen and I went to high school there, went to university there and then formed my first company there. 2005 or something right.

Tim: So how old were you when you started your first company?

Sorato: Twenty one

Tim: Twenty one, so still in college?

Sorato: Right

Tim: What did that company do?

Sorato: Web marketing.

Tim: All right

Sorato: I was in college and you know studying and do the start up at the same time.

Tim: All right.

Sorato: Yeah and two thousand nine I made an online shopping mall for Japanese products selling to the overseas and stuff.

Tim: Oh okay

Sorato: Right and remade the platform in two thousand nine.  Two thousand ten we got successfully acquired by a larger company. And I just fund a website it’s called Angel List Right and I found that was really what we all needed I guess.

Tim: Need here in Japan?

Sorato: Yeah. I mean I when I came back, I found like sort of a community here in Roppongi or should be, there is a small community there.  I thought the website like Angel List is really needed here in Japan.

Tim: So your initial vision was the Angel List of Japan?

Sorato: Right

Tim: How did that go?

Sorato:  First place, I just made a HTML mock up and I just talk with one guy from a venture capitalist, I talk with him and that was fist time meeting but in five minutes I got three hundred thousand dollars.

Tim: Really?

Sorato: Yeah.

Tim: And actually I find that very encouraging because it seems to me that back in twenty twelve, twenty eleven the idea of Angel List in Japan would seem really surprising to a lot of Japanese investors.

Sorato: Yeah for sure.

Tim: What happened with that?

Sorato: Okay, so after we get funded and we started our service in August twenty twelve in the first week, we got one hundred fifty startups registered to our website. That was pretty big consider two sides of Japanese.

Tim:  At that time that would be most of them.

Sorato: Right and we have fifty to a hundred investors but the thing is you know people sending me message invest or get appointment and stuff. They start meeting. There’s no way we could track.

Tim: Oh I see. So most of the investment was more of an introduction service.

Sorato: Right. I mean Angel List in twenty twelve was just like that. Just meeting the investor and send him message to meet.

Tim: So the investments were being made but they were being made around, behind the platform instead of on the platform?

Sorato: Yeah.

Tim: That makes it hard to make money.

Sorato: Right. We weren’t sure you know if there any of the investment is made. There is no way we could track. In the first year, we had like seven hundred startups registered.  Then I just realized what we really need in this community is not investors from venture capital.

Tim: Because of that you decided to pivot the focus towards open innovation?

Sorato: Right. If you think about it, this is the only way it makes sense.  In the Silicon Valley I know that enjoying the stars are really one of the most important figure in our ecosystem. But here in Japan. I think we are asking the people to incubate those entrepreneurs to those kind of stage.  That’s one of the most of the venture capitals in the US they are entrepreneurs. They were entrepreneurs before.

Tim: That’s true.

Sorato: But here in Japan, the most of venture capitalist coming from bank.

Tim: Yep, from finance from very good universities

Sorato: Right

Tim: MBA’s but no real world experience at all.

Sorato:  Far more entrepreneurs that have successful experience turn into the investor and I think that’s what we need here in Japan.

Tim: I think so too. I think right now we’re seeing the first generation of that. So San Francisco I think they’ve been through like seven or eight generations of like successful people helping the next. But I think right now in Japan we’re seeing the very first generation and it’s, I think it’s a very positive sign.

Sorato: Yeah. So who’s going to accelerate start up growth? In Silicon Valley it should be venture capitalist. Here in Japan, who’s going to do that and who has the most resources to help Japanese in the startups? Big companies, corporations, enterprises.

Tim: Okay

Sorato: That’s how it works and the reason we don’t have many entrepreneurs investors here in Japan we don’t have enough exits here right?

Tim: Right. MNA’s are still very rare and IPO’s tend to be small.

Sorato: So we need more M&A.

Tim: I want to talk a lot about M&A but before I want to talk a little bit more about your community platform.

Sorato: So right now we are doing the Toyota Info technology center.

Tim: So instead of focusing on connecting start ups to venture capital you pivoted to focus to connecting startups with big corporations.

Sorato: Yes.

Tim: So you’ve had over thirty corporate clients with over a hundred different ideas from startups incorporated so you’ve got some solid successes under your belt now. Can you give our listeners an example of like a case study. What was one of the more successful projects?

Sorato: One company actually acquired startup through this cooperation program.  I think that’s the most promising result here.

Tim: Can you give me the details of how it worked out? Did they start working together on a small project? Was it on a hackathon?

Sorato: What we do here already is called Creww collaboration. This is 3 months program and using the online.

Tim: So how does the program work is it an accelerator, is it a call for proposals?

Sorato: Okay, Let’s say Toyota provides resource. They can all come up to the startups and this information goes to all to one thousand eight hundred startups and now they can just apply using any kind of resource and connecting with their unique service.

Tim: So the client customer says, we have this problem we’re trying to solve.

Sorato: Well it’s not really a problem solving, just open up their resources and they’re just waiting for any kind of idea.

Tim: So what are the companies looking? Are they looking for new products? Are they looking for just getting connected and working with startups?

Sorato: The both. I think they are looking for new products and they want to create new business but they don’t know how.  No one, no startup proposes making new car or something OK so there’s doing that for the last details.

Tim: Toyota knows how to make cars. They’ve got that down.

Sorato: Yeah, but the thing is then what about the time you are not in the car? I mean how Toyota do business other than selling the cars?

Tim: So the client companies are coming in with a very open minds to some ideas?

Sorato: Right

Tim: I’ve got to say that’s refreshing.  I’ve worked with a lot of big Japanese companies. Openminded is not usually what I, the first thing I think of when I’m talking about them.

Sorato:  I don’t know. Yeah I mean everyone say that. Actually you know when I started this kind of service three years ago venture capitalists, our investors stop us doing that.

Tim: They were against it.

Sorato: Yeah

Tim:  Why did they think they’re be just be no interest?

Sorato:  That’s right and I mean they didn’t think it could be a good business. I mean no one believes that Japanese big companies change their minds to you know work, start working with startups.

Tim: Well from my own experience, every large Japanese company has a small team that is focused on researching startups and talking about startups. Most Japanese companies want to talk to startups and talk about startups. But it seems there’s still a big gap between really working together.

Sorato: Right.

Tim: Why do you think that is? Let’s let’s talk about that.  What is the biggest problem that big companies have with working startups and what’s the biggest problems that like small companies have with working with big companies.

Sorato: The first line is very easy. I think it’s credibility.

Tim: Big companies don’t see small companies as credible?

Sorato: Never. I mean that’s the tradition right.

Tim: Yeah.

Sorato: I mean they have like a medium customer base. Collaboration means that Toyota using the startup service to throwing out those one medium customer base. And if the product has something wrong, some problem it’s going to jeopardize Toyota’s credibility as well.

Tim: Startups by nature want to change things fast and try different things and if it doesn’t work, we’ll fix it later. And that is great for innovation but I could also see why a company like Toyota would be very worried about using technology like that.

Sorato: Right. Yeah I mean they see startup service as a risk.  At the same time there is no choice for big companies not to work with startups. There’s no choice you know. It’s really a balance. They see risk but they see the benefit at the same time.

Tim: So far you’ve had over a hundred ideas from startups that have been integrated into your clients’ product line. How many of those times evolved into like a real long term relationship or an MNA or.

Sorato: Well okay let me explain how it works. I mean this is a three month project and after that. All nine big companies in the startup can start brainstorming. They don’t have to meet for three weeks. after that big company choose which one to do the presentation in front of them.

Tim: Oh okay. So like a second round.

Sorato: Right. So let’s say five startups got choosed, they go to Toyota’s headquarters  ora total poet of had to go whatever right. After that they finally get to choose.

Tim: Now are the companies on the startup side, are these companies introducing their products that they already have or are they kind of saying hey here’s some new idea that we could build?

Sorato: No,we don;t do that.

Tim: So it’s. It’s all existing products, existing companies.

Sorato: Yeah, I mean we are helping out the startups, you know not the big companies.

Tim: Hopefully you’re helping both

Sorato: Helping big companies.  But the thing is we don’t

Tim: This is a really interesting point because traditionally the large gap in these companies had a very strict supply chain.  So if you were in Toyota’s supply chain you didn’t sell to Honda. Is that changing now? Are these companies willing to work with small startups that are also working with their competition or is that something that the big companies are still worried about?

Sorato: So if they want to hold the startups and don’t want to go to their competitors and staff.

Tim: You can buy those.

Sorato: Yeah I mean

Tim: Are these large companies starting to accept that situation as the new normal?  As the new way things are?

Sorato: Yeah. I mean if they want to hold the startup they often decide to do the investment. So that they can monitor and stuff.

Tim: Let’s talk about open innovation in Japan in general.  I think we both think this is so important for Japan to survive and continue to be an economic power for the next fifty hundred years.

Sorato: Yes Sir.

Tim: What do you think are the most important things that a startup can do to make themselves friendly to enterprises?

Sorato: Enterprises, they don’t have imagination. I mean they do. I mean they cannot really understand what startups are with means you know.  What we do here, okay so many companies holding the events. Like meet up events with the startup and big companies and nothing happen here.  In  meet up events there is no commitment either side, both sides.  Startups don’t have commitment and big companies don’t commitment right. So they say nice to meet you, let’s do something in the future.  Then of course of course and never happen. Why our platform is working is we have commitment you know as a company. But the thing is, it’s too unique and they cannot understand it.

Tim: So it’s too new?

Sorato: Yeah. So just presentation,  I mean presenting their sort of service to a big companies.

Tim: I see so like the understanding gap is too big?

Sorato: Right. Okay then what we do is first month we educate those big companies and you know how the startup works and stuff like that.  After we got the commitment, they start providing resources and the startup propose along with those resources, so that they can understand.

Tim: Okay. So it’s like a introduction of the startup process slowly and safely to big companies.

Sorato: Yes that’s a crowd funding. They know what the crowd funding is but the thing is they don’t know how they can do business with it. So startups choose their resources and propose so that not just selling their product, but are using the resources to do something you know. So that they can imagine how it works.

Tim: Okay. So it’s not just not simply introducing a new product is it’s working together, collaborating and working through the project together.

Sorato: Right.

Tim: Well that makes sense so that’s actually building up that relationship which is so important here in Japan.

Sorato: Right. So they bring both sides, the startup and the big companies bring their assets and work together.

Tim: And the typical project you said is three months?

Sorato: Three months.

Tim. Three months.  Okay well that makes sense.  So we’re talking about a more. It’s not just introducing products it’s building a relationship between big companies and small companies.

Sorato: First one month of our sales activities is educating big companies to us. Startup ready. That’s what we call it, Startup Ready.

Tim:  What do you teach the companies to get them startup ready?

Sorato: Oh, just forget about all the traditional stuff they’ve been doing that for the last sixty years

Tim: That would be tough to teach them in one month

Sorato: We are running tech school so that one person from big companies can participate. Inform thirty people in one class. And entrepreneurs come to the class and teach how the startup works and how you know the laws

Tim: So these are actual classroom sessions that you’re giving to employees of large companies

Sorato: Right.

Tim: Taught by startup founders. I like it.

Sorato: I mean this is really helping because this is community you know.

Tim: All right. The startup founders were just telling their own personal stories?

Sorato: Those kind of entrepreneurs who already working with big companies and are telling the big companies how to work with a startup. We just started six months of ago so.  Four hundred eighty people participating this school for last six months. Pretty good.

Tim: I’m very impressed and kind of happy to see how interested large Japanese companies have tbecome in startups and open innovation. It’s until very very early here. One of the things I think is really missing in Japan from the start community,  so right now there’s a lot of talented engineers in Japan

Sorato: Right.

Tim: But there’s a real shortage of experienced senior managers. Someone who’s working for Toyota or Mitsubishi,  it’s really hard to get them to leave and work with a startup.

Sorato: Yeah. Yeah it is.

Tim: Do you do you see that changing or do you think that’s going to pretty stay that way?

Sorato: Really changing.

Tim: Is it?

Sorato:  Yes. I mean my friends they are startups right?

Tim: Yeah

Sorato:  I mean they hire people from big companies and they

Tim: So even like senior managers from these companies are leaving to work with startups?

Sorato: Sometimes. Yes. Not all but

Tim:  That would have been unthinkable twenty years ago.

Sorato: Yeah for sure right

Tim: People would have wondered like what he did to get kicked out of the company.

Sorato: Yeah, right. Terra Motors is one of them too.  I think it’s changing but still it’s minority for sure right.

Tim: Well that’s true but it’s. It’s first steps

Sorato: First steps yes

Tim:  And right now we don’t we don’t have that many startups here anyways.

Sorato:  It’s already getting easier, better environment for startup.

Tim: I think one of the mistakes a lot of people in Japan make when looking at the startup community is comparing it to Silicon Valley. We don’t have enough MNA, we don’t have enough venture capital and that might be true, but I think that the successful model in Japan might look very different from America. Do you think that open Innovation in Japan will become a much bigger force for innovation than it has say in the US?

Sorato: We started this open vision three years ago right. But two years ago the pretty much the same model was made in the US.

Tim: Well it’s similar,  I think the company in the US most successful is probably Techstars right?

Sorato: Yeah they just started accelerating program with Disney and stuff like that.

Tim: But it’s so funny, it’s amazing to me to look at Japanese technology companies. In the seventies, the sixty’s seventy’s and eighty’s were just world leaders in innovation. And now, did you see that who it was Panasonic’s new little robot shaped phone?

Sorato: Sharp

Tim: Sharp. Yeah, it was Sharp’s little robot shaped phone and it’s like that is not innovation. The need to reach out outside of their own companies. Why do you think Japanese companies used to be so innovative and so global have become so siloed so so just so bad at what they do? Why do you, what do you think happened? I think they just became too big I mean they have so much stuff to protect compared to startups.

Tim: So you think it’s just the internal politics is preventing anyone from doing anything innovative.

Sorato: Right but those cultural keeping company in the safe way.

Tim: Yeah. It is very hard for them to kind of change direction. Right now.

Sorato: So that open innovation is the only way for big company to grow

Tim: To innovate, to grow, yeah. Do they realize that yet?  I know your customers do.

Sorato: Yeah, yeah, yeah some do. But I think more and more companies do realize the circumstance they’re in. They know that they have to change. But they cannot.

Tim: If open innovation is truly a way to let Japanese companies innovate, that’s wonderful and leads to increased MNA, that’s fantastic. One thing I’m curious about. I’ve been through one of my companies was acquired by a large Japanese company.

Sorato: Cool

Tim: Yeah.  I’ve got to say that Japanese companies are not good at integrating the companies that they’ve acquired.

Tim: Yep.

Sorato: But there’s very much a feeling that the acquiring company is the victor and the the company they’ve bought has been defeated. Somehow.

Sorato:  I see.

Tim: Have you seen that in the early stage M&A’s that you’ve seen?

Sorato: I think as we say it’s really in a first step right now. All companies need to run, how it calls, you know, the Post March Integration. Big companies will fail for sure.  I mean

Tim: So they just don’t have enough experience with that integration.

Sorato: Yes, yes  anyone need to learn but I think it’s getting better and better though.

Tim: I mean I guess you’re right. They’ve got so little experience in it they have to do it badly a few times before they figure out how to do it correctly. I find it interesting this, your structure of having the companies work together for three months or so. All kinds of approaches people have taken to open innovation. There’s hackathons, there’s the corporate incubators, there’s the general call for solutions. Have you tried these other models or do these other models also work in Japan.

Sorato: I think our as the is the best.

Tim: Well obviously.

Sorato: No I mean the

Tim: It’s interesting, hackathons are really big in the US it’s a way to get large companies get too exposed to what can be done with their technology, new ideas; but they don’t seem to be very successful here in Japan. Why do you think that is?

Sorato:  all I think there is no commitment

Tim: The commitment again.

Sorato: Yeah. I mean first of all, not serious people going to hackathon. In the U.S. and other place of the serious entrepreneurs or serious startup even register and go to the hackathon, but here in Japan, students or people working for different companies and doing, you know using their spare time to go to the hackathon and stuff. I don’t really look at

Tim: So is the problem that the companies don’t take the participants seriously or is the problem that the people who participate in hackathons aren’t that’s highly skilled to deliver really.

Sorato: I think it’s both.

Tim: Both of them?

Sorato: Yeah

Tim: Okay.

Sorato: But still idea is great you know, some ideas so great, from students, from anyone you know. But the thing is after the great idea came up there was no one want to proceed in the big companies.

Tim: That’s a really good point.

Sorato: There’s no outcome.

Tim: So on the one hand the, even if you get a brilliant students who comes with a great idea, he’s going to go back to school and the company can’t build it themselves, so there’s no real value produced.

Sorato: Right. But on the other hand, at the startup doing the things very seriously right but the big companies always facing the same program, who’s going to do this.

Tim: This is great. I think we’re both looking at the beginning of trends for open innovation where everything’s going in the right direction. And so when you’re, if you look ahead ten years from now, do you think Japanese companies will have figured out how to work with startups directly by themselves? Or will they still need Creww to get in the middle and make sure everyone plays nice together?

Sorato: I know in ten years, after ten years, they know how to treat startups.

Tim: So you will be a victim of your own success.

Sorato: Yes. This is the beginning of our business and this is not the goal. It’s OK.

Tim: No that’s great I mean it’s it’s one of those difficult situations where you know what you want, you know what is best for everybody right. Let me ask you if I gave you a magic wand and said you could change one thing about Japan to make it easier for large companies to work with startups, what would you change?

Sorato: The one thing that I can change, all big companies evaluation system. This is the biggest for the

Tim: So the evaluation for products,  for vendors, for employees?

Sorato: Employees

Tim: Oh for employees

Sorato: Yes, yes

Tim: How would you like it to change?

Sorato: I think right now people are taking risk, is not evaluated well. The person from big companies don’t work hard I mean, let’s say the problem of the members of the big company saying, we’ve got to do something new to survive this, so they made a new department. Like innovation departments new business department, whatever right? And they place people right there, five or ten people there.  But the thing is they don’t have a specific order.   So those ten people don’t know what’s going on I mean they know what to do.

Tim: And they’re usually career employees. They don;t know how to innovate.

Sorato: Right. They struggle and they try to do  something new. But if they fail, their evaluation is still missed. So they cannot even take a risk

Tim: This is true in Japan corporate evaluations kind of work on the on the minus points system. D doing a good job you don’t get any points but you lose points for doing a bad job.

Sorato: Right that’s for sure. Well what I believe here open innovation, we need good entrepreneurs, but we need good intrapreneurs as well for sure. Right?

Tim: Yeah well that’s the only way the corporate culture is going to change.

Sorato: Right and then those  entrepreneurs needs to have a passion, but they often time, they have to take their own risk. The persons evaluation goals gets messed up and I mean I think this is the biggest problem. So that

Tim: I can see that.

Sorato: they cannot take a risk.

Tim: Yeah. So they’re being told to be innovative but they’re being evaluated as as if they were

Sorato: Normal

Tim: Just part of the normal chain of command.

Sorato: Right, right and this is really double standard and I think it’s really stopping those big companies and startup working together.

Tim: Listen this has been a great discussion. Before we wrap up is there anything that you want to talk about?

Sorato: I don’t know I think as you say right now it’s just trend is starting you know. I mean we’re in the middle of something right now.

Tim: What I think Japan is going to be a very good and very different place in ten years.

Sorato: Oh yeah, for sure.

Tim: It will be something to look forward to when we’re both around.

Sorato: Right. And we are hoping that we can play a big role in those big changes.

Tim: I’m hoping so too. Hey listen thanks so much for sitting down with me.

Sorato: Thank you Tim

And we’re back. Sorato’s take on open innovation is an interesting one. Every year there are more and more Angel investors and entrepreneurs who turn investors in Japan. But it’s nowhere near the levels we see in the West. I think it’s very possible that open innovation programs in Japan could end up filling much of the role that venture capital plays in the U.S.. I also found it fascinating that so much of Creww’s open innovation activities have very little to do with technology and products, but are instead focused on education and setting up frameworks to enable trust to develop between enterprises and startups. After all, business is very personal in Japan. The early, although limited success of Crewws and other open innovation programs here in Japan is encouraging, over the next few years, we’ll start to see if it turns out to be just another corporate fad or something truly transformational.

If you’re a startup with a surprising story about working with a large Japanese corporation or if you work at a large corporation have some surprising stories to tell about working with startups, we’d love to hear about it. So come by DisruptingJapan.com/show033 and let us know what you think. And when you drop by you’ll find all the links and sites that Sorato and I talked about and much much more in the Resources section of the post. But most of all, thanks for listening and thank you for letting people interested in Japanese startups know about the show. I’m to Tim Romero and thanks for listening to disrupting Japan.