Disrupting Japan is two years old and ready to party. To celebrate, we gathered the leaders of Tokyo’s venture capital community together in front of a live audience of made up of the thought leaders of Japan’s startup community. We all had a few drinks and talked about fundraising in Japan, the future of venture capital here, and how startups can best get in touch with and impress VCs.
Our panel included some of the top VC investors in Japan, which naturally led to an amazing discussion.
- Shinji Asada (@asada23) – Japan Head, Salesforce Ventures
- Hiro Maeda (@djtokyo) – Partner at BEENEXT
- James Riney (@james_riney ) – Head of 500 Startups Japan
We discuss the challenges or fundraising in Japan, growing a Japanese company as a foreigner, what Japanese VCs can learn from their foreign counterparts, and what kind of of pitch mistakes will ruin your funding chances.
On a personal note, it’s hard to believe that two years have gone by already. Disrupting Japan has grown larger, faster, and with a more engaged and passionate community than I ever imagined it could.
Today, thousands of people from all over the world listen to each episode, and we are featured regularly in English-language and Japanese-language news and podcasts from all over the world.
And to keep things fresh, I have some big surprises coming up in the next few months, so stay tuned.
I want to offer a sincere thank you to everyone who has pitched in to help make Disrupting Japan a success. There is no way I could have built this by myself. I’m lucky. I have great subject matter to work with. Japanese startups and Japanese startup founders are far more innovative and far more interesting than most in the West give them credit for. I look forward to continuing to bring you their stories.
Thanks for listening!
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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 coming out tonight. You guys are awesome.
All right, to our listeners at home, or wherever you might be in podcast land, we’ve got a special show for you tonight. We are broadcasting live from Super Deluxe in Roppongi with the most creative and dynamic group of people in the world, which is Tokyo’s start-up community. All right, and we’ve got an astounding panel discussion for you, and before we get to that and our kampai, I’ve got to call out three members of the start-up community who really helped put this together. There is absolutely no way I could have done it without them. They are start-ups themselves and you should know a little bit about them.
So, first is Justa.io and I think Elena is here from Justa. Where are you Elena? Everyone wave at Elena. So, Justa is Japan’s, really, best start-up job board. If you’re an engineer or a programmer looking to work at a start-up, or if you’re a start-up looking to hire engineers or programmers, you want to talk to Elena. Second, I want to introduce Creww, with two W’s. And what Creww, with two W’s, does, is they run open innovation programs for Toyota, and Panasonic, and JTV. And these big companies really want to work with start-ups, but they’re bad at it. So that’s where Creww comes in to help out. They also have a start-up kit, which is a bundle of goodies from IBM and Microsoft and a bunch of big companies, that they give away for free. And Kozue is here from Creww. Kozue, where isKozue? Way in the back over there. Now,Kozue will pretend she doesn’t speak English but her English is really good so don’t be shy. And last, and certainly not least, is Digital Hub. You will see these guys running around with cameras and microphones, documenting this event for all posterity. And you want to talk to Steve, who is over there. So, these guys also do great commercial work. You can see it on the website or you can see it right now. They’re going to be producing this, you might be watching this on YouTube right now, and they do amazing work, don’t they?
All right, so without further ado—is that yours? We seem to be one bottle short. Oh, James got two of them, did he? All right. A
nd now, we will go back into English. And I’m going to break with convention here and I’m going to make the introductions because I know you guys and I know if I hand you a microphone and I tell you to talk about yourselves and your portfolio, I would not get that microphone back for a good 30 minutes.
So, on the far left, we have Hiro Maeda, who is currently the head of B-Next. And before that he started Beenoes incubation and acceleration program. Before that, he started one of the very first, and still one of the most successful accelerators in Japan, Digital Garage’s OnLab. And, in the center, James Riney, who is Japan head for 500 Startups. And before that, you put in some time at DeNA as well. And, rounding out our group is Shinji Asada, who is now head of Salesforce Ventures Japan, and before that, you were working at Itochu Techno Ventures and, quite frankly, probably has more years of investing and VC experience than the rest of us here on stage combined. So you can take that either way you like. I meant it as a compliment. So, let’s get started.
Tim: So, the first question I’ve got for you guys: Now, this is, Hiro, especially for you, but all of you, I think in the last few years there’s been a tremendous interest in investment in Southeast Asia. There has been a lot of funds, both from the U.S., that have focused not so much on Japan but on Chia and Asia, and even a lot of Japan funds that have been seemingly more interested in what’s going on in Southeast Asia rather than what’s happening in Japan. And so I’m wondering, what’s behind this? Why is this happening?
Hiro: Yeah, I think 60% of our fund is allocated outside of Japan actually. Primarily India and Southeast Asia. And the reason why is mainly because of China. Over the last decade you see China’s GDP grow 4x and its rankings go, they were up from like 52nd, surpassing Japan and what’s happened is a lot of the Japanese investors, including ourselves, see that and like, “What the hell just happened and why are we not a part of that party?” And so when you think about where is the next China, where can we find the next Chia, you look at basically the companies with really high GDP growth, which is currently India, Southeast Asia primarily, Jakarta, or Indonesia, right, and that’s the reason why a lot of investors, including ourselves, are looking outside of Japan to invest.
Tim: So do you think it’s mostly—it makes sense on the fundamental level or is this more of a herd behavior?
Hiro: It’s more like fear of missing out. So, I mean, it sucks that we weren’t part of Alibaba, right?
James: Kind of, I mean Japan was, right? SoftBank?
Hiro: Yeah, I guess SoftBank was part of Alibaba, but that was the only Japanese entity that was part of it, right? And so, yeah, we’re looking for the next Alibaba.
Tim: Well, James, your portfolio is only Japan. Are you worried about missing out?
James: Well, actually at DeNA, I was doing investments in Southeast Asia, so I am familiar with Southeast Asia and our Southeast Asia fund has been doing quite well. So I think Southeast Asia is obviously a really important market to be in, but at the same time, I think, at least from the Japan side, part of it is that Japanese just like to be in Southeast Asia. I think there is definitely a little bit of like they just want to travel.
Hiro: It’s fun to party there.
James: But that’s important. I think Southeast Asia has a lot of soft power for VC’s in Japan. However, you don’t really see U.S. money in Southeast Asia and so the only exception is Sequoia and even Sequoia invests from their India fund, right. So it’s not really U.S. money.
Tim: So do you think we’re going to see that kind of growth? Do you think that Japan has the kind of growth potential that Hiro was talking about for Southeast Asia?
James: Well, listen, Southeast Asia is an emerging market, so comparing the macro side, obviously there’s going to be more growth in Southeast Asia, Japan is just a developed market, but there also are going to be other opportunities in Japan that aren’t going to come up in Southeast Asia. More on the technology side, for example, because you have much higher education levels, you have the infrastructure in place, things like that. So yes, maybe you’ll see something similar to what you’ve seen in China. But I think there’s sort of this thinking like, as you mentioned, probably infatuation with Southeast Asia but, I mean, Southeast Asia is a very fragmented market. In particular, when we’re talking about Southeast Asia, maybe it’s Indonesia actually. So, fourth largest country in the world in terms of population, so obviously there is going to be a lot of similarities between that growth that you saw in China, and now we’re seeing something in India, probably the next one is going to be Indonesia as well. And that’s probably getting faster, and faster, and faster, because there’s so much, as you mentioned, on each stage.
Hiro: We are very fear-driven animals.
James: Exactly. VC’s are very emotional, right. The best thing you can tell a VC is, “Oh, yeah, we’re not fundraising. No, we don’t need money.” But, like, “No, no, take our money!”
Tim: So the spreadsheets are all just a front? It’s all a façade?
James: Exactly
Shinji: You know, looking at your question about Southeast Asia, I did some quick research but the facts are wrong actually. So 2014-15, the majority of investments of the VC money was pumped into Japanese start-ups. And for 2016 Q2, if you look at research that’s done by VEC, 67% of the money was invested into Japanese start-ups. So the hype sort of looks like Southeast Asia, looks like the chunk of the money going in, but actually, if you look at the data, which we love at Salesforce Ventures, 67% of the money was actually devoted into Japanese. And if you also look at 2015 amount of money raised by funds, like these two gentlemen, it was about 2 billion, which was 2x the previous year. So there’s going to be a lot more money coming into Japanese start-ups. So if any of you guys are trying to start start-ups in Japan, there’s going to be a lot of money out there.
Tim: I think we’ve got a few people starting start-ups out here.
James: I’m really happy you got that data actually because I felt the same thing when we were fundraising, we were competing with like 15 other funds, it was like, “God damn it,” but there’s so much undeployed capital now.
Tim: Let me dig into that. Because, honestly, I was also under the impression that there was more money flowing into Southeast Asia and Japan. Is it just, are there later-stage deals in Japan? Are the individual deals bigger, is that what’s happening?
Shinji: So if you look at the whole capital amount that’s being raised in Southeast Asia, maybe the comparison might be, on your end, that there’s much more capital there, but I’m talking about Japanese institutional money going outside Southeast Asia versus into Japan start-ups.
Tim: Oh, I see.
Shinji: So that’s the difference here.
Tim: So the Japanese are still overwhelmingly investing in Japan?
Shinji: Yes, and if you look at recent rounds like Life is Tech, I just saw an article about the fintech company, it’s close to like $10 million of funding. So there’s a lot of capital that’s ready to be deployed towards maybe one of your companies.
Tim: And that trend is accelerating.
Shinji: Right. And I’m not trying to persuade you guys to start companies or anything, I’m just.
Tim: I am. The other three of us are, so.
That’s the data so I just wanted to be clear on that.
Tim: Excellent. Let me also ask you, one of the things I’ve been most impressed with on Japanese start-ups—so I started my first company, wow, almost 20 years ago here, and over the last 20 years, over the last 5 years, the sophistication of the average Japanese start-up founder has grown by leaps and bounds. I think it’s the internet has a lot to do with that. People are looking for best practices, they’re looking around the world to see what works, and so the founders have learned and they’ve gotten better. I can’t quite say the same thing for Japanese VC’s, but that’s—
James: Ooh, shots fired! Shots fired!
Tim: No, that’s me. I’m sitting on the other side of the table here.
Shinji: Maybe you had a tough fundraising appearance.
Tim: I’ve had a couple, yeah.
James: Bitter entrepreneur. If you invested, you would think otherwise.
Tim: Well, I’d keep it to myself. But, no, what do you guys think about that? Do you think there is a gap in the behavior or in the outlook between Japanese investors and foreign investors, or between say Japanese institution investors versus this newer, more flexible funds? Is there really a gap?
Shinji: Definitely. I mean, in conclusion, the U.S. VC scene is much more competitive. They’re trying to be the lead investor in the series A round, whereas in Japan, if you’re raising series A, you’ll have syndicates. You’ll have three or four, or maybe six or seven VC’s investing in the series A round. So, naturally, it’s a collaborative environment in Japan, and why is that? Because we’re 1/70 the size of the U.S. market in terms of the VC market. So if the companies are raising more money in Japan, they’re trying to raise 5 or 7 million, they have to talk to 5 or 6 or 7 VCs. So the nature, fundamentally, is totally different. So that’s one.
Tim: So there’s no real competition among the VC’s for the larger deals?
Shinji: I mean, there is competition in a way, but not as fierce as in the U.S. is what I’m trying to say.
Tim: Okay.
James: So, I actually think the sophistication of the market has gotten much, much better. Now, caveat, on VC’s side too, so there are a lot of smart VC’s in Japan and they’ve gotten smarter. Some examples are like GLOBIS, or these fine looking gentlemen here, or Will with Animation Lab. So there are VC’s that we make a conscious effort to throw deals. When the companies become a certain size, we want these particular VC’s to invest money in them. However, because the nature of the Japanese market is that most of it is corporate venture capital, unfortunately, there are a lot of salary-manned VC’s, and if you look at percentage of unsophisticated VC’s, it’s increasing. But that’s not because the number of smart VC’s is declining. It’s because the other way around, there’s just unsophisticated VC’s coming into the market.
Tim: Okay. Hiro?
Hiro: I highly resonate with both of them. I agree with Shinji basically. It’s competition, right, and competitiveness basically makes VC’s look for ways to differentiate themselves, look for ways to basically add more value. Look at what makes a good VC, it’s basically they’re good pickers and they add value in some way, in either HR, or strategy, or partnership. And, to be honest, in the U.S. it’s much more competitive that everyone’s trying to basically increase those kind of values. And it also helps them marketing-wise, right. When they want to market to entrepreneurs, they say, “We have a staff of 100 people who can help you with partnerships,” but it doesn’t work that way in Japan because there’s not so much competition
Tim: Do you think this is going to change? Because, as Shinji mentioned, there’s a lot more money coming to the market. The money seems to be accelerating faster than quality start-ups. So do you think we’re going to see that kind of competition or do you think it’s going to stay a very, sort of, Japanese-style collaborative and consultative landscape?
Shinji: I mean, the model is if you have more—it’s a demand and supply thing—so if you have one unicorn out there which is literally Mari-Kari, you have money hunting them down about adding value. So the model is going to work that way. But if there’s only one Mari-Kari out there, 9,000 companies, I can’t say “shit” here, but probably shit.
Tim: Sure you can, knock yourself out. We’ll bleep you if it gets out of control.
Shinji: Exactly. But if that’s the case, the model’s not going to work and it’s just going to stay as is. But I hope it’s going to change and—
Hiro: I think the bar is going to get higher and higher for what the expected quality is for VC’s. I mean, I guess maybe James is right, maybe the majority might be not on par, but I think there’s going to be a minority of investors or minority investors who keep on raising the bar. And I think the bar will keep on going higher.
James: Right. So there’s also a question among VC’s, are you competing on brand? Are you competing on value add? Are you competing on valuation? There’s all sorts of things that we compete on and the worst thing is to have to compete on valuation, that’s fucking worst. So we’ve had situations where no one wanted to invest in this company and then we said, “Okay, we’ll give you a term sheet,” and immediately, of course they shopped the deal. I don’t blame them. And then they get a valuation double what we offered. Fortunately, at the end of the day, they still chose us. But that still scared us a bit because some salary-manned VC saying, “Yeah, I don’t get any carry anyway, so it doesn’t matter. I just want to win the deal for synergy.”
Tim: Shinji, do you think that is—do Japanese VC’s, because you’ve worked with a lot of institutional investors, do they view themselves as competing with other VC’s?
Shinji: Not really.
Tim: Okay. So, Shinji and James, you both work for foreign VC’s. And do you think the amount of foreign capital coming into the market, foreign VC’s coming into the market, or Japanese money being managed by foreign companies, do you think that’s going to change the landscape?
Shinji: Yeah, I think James and I are trying to change that. Being in the game and showing into the U.S. world that there is opportunity to invest in Japanese start-ups, so I’m trying to cultivate that.
James: But I think, actually, if you’re taking institutional money from, let’s say, the U.S., who is highly sophisticated about investing in venture capital funds, I think it’s inevitable that the guy who’s running that fund will basically try to match that quality or at least the returns. So yeah I think if you take foreign money, or especially U.S. institutional money, then you would try to aim higher in terms of returns or the quality you offer to them.
Hiro: Because, remember, they’re comparing returns to Silicon Valley, which are like at an insane altitude. Anyway, go ahead.
Tim: Yeah, and the foreign firms definitely view themselves as competing with other VC’s. That’s a big part of the mind-set there.
Hiro: First of all, I don’t want to make it like foreign VC’s versus domestic VC’s.
Tim: No, I meant in approach to the market. Whether it’s, “We’re all in this together,” or “we’re trying to maximize returns for investors,” it’s a different mind-set you bring to the table. And if that maximizes returns for investors and actually viewing it as a competition in the end increases returns, it seems that would kind of force a change among the Japanese VC’s as well. Although, I don’t know. Are Japanese VC’s that return-sensitive or are they really after the synergy?
Hiro: Well, it’s really hard to say because in Silicon Valley, most venture capital comes from institutional investors, like endowments, pension funds, insurance companies, etc. In Japan, that’s not the case. Not only are most VC’s corporate venture capital but most of us VC’s raise money from corporates. So we categorize returns into financial return, strategic return, and then we also have this thing called branding return. And the latter two are not related to financial. It’s synergy or like we want to show the market that we’re very start-up friendly, this kind of stuff. And because of that, VC’s might not be as concentrated on the financial return part.
Tim: You think that’s going to be changing moving forward, yeah?
Hiro: Well, particularly independent VC’s, we kind of have to because if we don’t do the returns, obviously we’re going to have trouble raising money.
Tim: The next round becomes difficult. Okay, let me ask you, instead of big market questions, kind of specific questions about how you manage your own funds. And, in fact, the number one question I got to ask you is—and I hate this question and I’m not going to ask this question—but the question was—
Hiro: But you are asking.
Tim: No I’m not. I’m pre-empted, I’m just letting you know what question I am not asking, which is, what are you interested in investing in? What kind of companies are you investing in? And the reason that’s a horrible question—
James: I actually love that question.
Tim: Yeah, I know, it’s easy. But the problem is the answer changes from season to season and from fund to fund and there’s no really meaningful answer. So I’m going to ask you something that’s much harder instead. I’m going to ask you about what I call green lights and red flags. So a red flag would be something that—what is a red flag, like a signal, that when everything else in the deal looks good and it was something you would normally be very excited to invest in but if there’s one behavior, or founder, or one aspect of the team that just makes you feel like it’s not right and you would pass. And a green light would be the opposite of that. It would be something where a deal you would normally pass on but there would something about the founder or something about it that you say, “Okay, I’ll take a second look. This deserves more attention.” So let’s start with red flags.
James: Red flag. So I wrote an article for Tech Crunch Japan about this but it’s integrity. And it’s integrity/incompetence. I say that, not to point fingers, but we had a situation where we really, really loved the founder, we loved the business, we loved everything about it. And then we dove into the numbers, we were like, “Okay, these are the terms, okay, we’re good. Now let’s dive in. Let’s check whether everything that was stated is actually true.” And when we looked at the contracts it was like most of them had been expired so it was significantly different retention, the MRR, the monthly recurrent revenue, was completely different, and all sorts of things like that. So he blames it on the sales team. But whether it’s integrity, a problem with integrity, or if it’s a problem with incompetence, it doesn’t matter. That’s a deal breaker.
Tim: And in that case, if he had given you the true numbers—
James: True numbers, we would have re-considered it, yeah. Maybe the valuation would be lower because it would have to be market rate but still we’d consider it, yeah. But that completely deal-broke it.
Tim: Hiro?
Hiro: Yeah, I’ll say my red light and green light at the same time. It’s basically progress. You meet an entrepreneur two or three times over the course of, maybe, one week to a month. And if the second time you meet them and the third time you meet them, if you see progress in any way, like the way they think is more clear, they have better strategy, or their metrics are increasing, or their convergents are increasing, if anything is going up and to the right, then it’s a really, really positive sign and we love that. And if you’re standing still after a month and not making any progress and we ask you a lot of questions in the first meeting but you’re not giving me any answers in the third meeting, it’s just a red flag. You’re not thinking.
Tim: So in terms of the green light on that one, if you thought the business model was shaky or you just thought that the team was too inexperienced, and three months later they came back and said, “Hey, look, we’re growing,” you’d be like, “Okay, my evaluation was wrong, the numbers are telling the truth?”
Hiro: Yeah. To be honest, we don’t expect the founders to know everything from the beginning. We don’t expect them to be experienced. And to be honest, I don’t really look at the negative side. Everyone’s flawed in some way and actually every entrepreneur that I invested is—thanks, James, you’re perfect too.
Tim: Some of us are more flawed than others.
Hiro: No, but we don’t really focus on the flaws. We try to look at what their greatest strengths are and hopefully one of them is actually bringing the company forward and that’s progress basically. That’s what’s most important.
Tim: Shinji, what about a red flag?
Shinji: So, I would characterize it as consistency. Being consistent with what you’re trying to solve. It’s not just one action, it’s about—VC’s ask a lot of questions about why you founded the company, how you are trying to look for another CTO or co-founder and all that. It’s all about consistency so if it’s not consistent with what the vision is, I start asking questions. Those are the red flags.
Tim: So what would be an example of something that’s not consistent with the vision?
Shinji: So, you know, obviously the entrepreneur is trying to raise money and I would always give advice of a product market fit question or a hiring question. If the entrepreneur starts resonating with me in terms of like, “Shinji, you say this,” I’ll adapt. I’m not running your company, you’re running your own company. If I’m guiding the company, I start feeling very weird. So that’s inconsistency. You have to have your own vision and your own problem solving statement. And just stick with it. So that’s my red flag and green light.
Tim: All right. Actually, you raise a really interesting point there. Let’s get James’ green light.
James: My green is—disclaimer, we invested the seed round so any traction that they have is probably very small anyway. So what I like to look at is who has a CEO been able to hire? Really, really awesome people. They have lots of options and if you look who is willing to join this company, that says a lot about the CEO. Because they’ve interacted with the CEO more than I have. So if the CEO is unable to recruit great people, that’s a significant, really, really bad red flag. And same thing on the green light side. If it’s like, “Oh my God, all these—former Google engineer, this guy exited a company,” it’s constantly impressing me, that is a really, really strong sign.
Tim: So it could be that you think the business is crazy but you would take it as, “Okay, if this group of people believe in it, they’re seeing something I’m not seeing?”
James: That is obviously one point but the other point is that your original thesis is going to probably be wrong so you’re going to have to craft it. You’re going to have to think about things that get thrown at you and you’re going to have adapt. So smart people will be able to adapt. And that’s the important part. And the CEO’s ability to continue to hire great people is important because obviously there’s turnover as well.
Tim: Shinji, you mentioned one thing that I thought was fascinating and I want to drill down on. So you were saying you admire people who have a backbone, who will say, “Look, this is the right way to run a company. I appreciate your advice but I’m not going to take it.” I think in Japan, traditionally, the relationship between venture capitalists and founders has been very hierarchal. That founders, often, in my opinion, listen to VC’s far more than they should in terms of the specifics of how to run their business. And VC’s also tend to not necessarily just give advice but insist on their advice being followed far more than is healthy for either of them. And is this just my perception or is this something that you think is pretty common in Japan? And if so, is it good/bad? And do we see it changing?
Shinji: That’s a difficult question. So the VC’s aren’t technically a boss. We’re just a shareholder, we own a stake in the company. And if we own a majority of the company then we have legal rights as a shareholder. But ultimately, we’re not the boss. We’re literally just putting in money and just trying to value add, so I think I wouldn’t say it’s changing. It’s already changed. It’s a partnership model. So I never felt that the VC is bossing the company around, but I come from an operational perspective in experience, so if I see a start-up that’s not executing to its max, then I would be very, very pressing and try and get that company to execute as much as possible.
But you wouldn’t want to weigh in on, say, marketing strategy?
Yep.
Definitely yes? Definitely no?
Definitely yes.
Oh, okay.
James: Well, actually I think you might be a little bit right. I do see a little bit of hierarchy going on but also I do see actually some VC’s actually preferring entrepreneurs that kind of listen to them, which is not a great thing. Because I actually talk to a lot of VC’s and I ask them, “Why did you pass on this company? Why did you pass on that entrepreneur?” And you fairly hear that they don’t—basically they’re not listening to what they’re advising on.
Tim: And just to be clear, their background is in banking or they’ve got execution experience somehow?
James: Interestingly, they probably don’t have any executing experience.
Hiro: Wow, strong relation.
James: But never listen to VC’s because even on my best days, I’m right half of the time. I think the right kind of relationship is when it’s mutual, and obviously, they respect each other’s decisions. But then the VC shouldn’t be feeling like they’re running the company, or the entrepreneur shouldn’t be feeling like they’re reporting to their boss.
Hiro: So, here the thing. 500, we invest in a lot of companies and at least in 500 Japan we have two people. It’s really, really hard to find bandwidth for every single company. Obviously we love all our children equally but some are going to get more attention than others. The interesting part is that great companies don’t really need any of our attention. And one thing I’ve found is—it depends on the entrepreneur—some entrepreneurs really want that hands-on help. And then others don’t, like, “Get the fuck out of here, I know what I’m doing.” That’s great. And when I was an entrepreneur, I remember having to do weekly meetings. I was like, “God, I’m spending all this time preparing for these weekly meetings.
Tim: Weekly?
Hiro: Yeah, I didn’t know any better. I was 22 at the time, I was like, “This is VC,” I had no idea. But there’s this spectrum. Some really want that hands on and some don’t. When you want that hand-on, you have to consider that it could go badly. For example, Sequoia, great brand name, awesome returns, they fire CEO’s. Are you comfortable with that risk? Obviously they still get equity, CEO’s still become rich, but you might not have control at some point.
Tim: Okay. Listen, we’re going to wrap up here but we’re going to open it up for Q&A in just a moment. There’s a microphone over there so you can line up. Right now, I just want to give a huge thanks to our panel. They did an amazing job. And for our listeners at home, we’re just about to start the Q&A, and we’ve got someone, so please, ask away.
Audience Member: Hello. Thank you for holding this session. Theoretically, there is an amazing person that wants to join our team. Senior level, Japanese. And they are for it. Their fiancée is happy for it to happen but the soon-to-be in-laws are against it. And they are, as we speak, going over to speak to their in-laws, theoretically. Any advice that you would give this person?
James: I have advice. Have their VC speak to these parents and ensure them that they have very reputable companies backing the fund that’s backing them. For example, Mizuho Bank, Mitsubishi Estate. For example, companies that they know, so that there’s some credibility. It’s not like this .
Tim: I’ll give you something from my own experience. I used to run software development here at Zurich, Japan. A wonderful company, great job, I was bored out of my mind. And it’s a job that I really should of liked. I had no excuse for not liking it, I was just bored. And I quit that job to join a start-up, doing a market entry into Japan, and my wife kind of got it. My in-laws didn’t get it. And I think the key is the fiancée is really going to have to work on the in-laws. So somehow my wife convinced them it was a good idea. I have no idea how she pulled that off. But I think James’ advice is a good one.
James: I mean, if she was convinced, if she was able to convince her parents to marry this guy, then she probably can convince her parents to have him take a more adventurous job. So, I don’t know. Get the fiancée to get working.
Shinji: But theoretically, if you’re the CEO, you’re the guy that has to be there. Don’t get a VC start talking about how good your company is. That’s a little bit weak.
Hiro: You do what you’ve got to do, man! Fuck that.
Audience Member: Thank you all for the excellent advice.
Audience Member 2: Hi. So I’d really to ask the question that you don’t want to ask.
Tim: Well, that’s what Q&A is for. Yay.
Audience Member 2: So what kind of company do you want to invest in? What are the qualities? Like, what kind of company?
James: Great companies. We want to invest in great companies.
Audience Member 2: Define great.
James: Well, listen, VC’s are not fortune tellers. We have no idea what’s going to be hot. Very, very high level framework is, “Why this? Why now? And why you?” So, “Why this?” is this is the problem, but why is this the appropriate solution. There’s probably many solutions but why is this the best one. Another one would be “Why now?” So, okay, great, you found a solution, but why is no one else doing this? And then the last one is, okay, great, the other two are checked off but is this actually the team to execute? Why do you think you have a unique advantage over someone else who might also come up with the idea, or find out that you’re actually doing pretty well, let’s copy it?
Audience Member 2: Okay, thanks.
Hiro: I’m not going to really answer your question but I’m actually very bullish on categories but if you think about it like, in 40 years from now 25% of Japanese population is going to vanish, decline. So the things I really want to invest in are, like companies that basically make people more efficient, make companies much more efficient.
Audience Member 2: Like increase the population?
Hiro: That could be great too. But anything to get educated people, or to get people educated into Japan, from outside of Japan. So I invested in a company that does that. But one category I’m also looking at very heavily is called the software as a service category, basically for enterprise. And a little bit of a plug, we’re doing a conference, the software has a service conference in Tokyo on October 10th, so search for my Twitter handle DJTokyo. And we have a coupon code for Disrupting Japan. It’s called “disrupt,” all lowercase, “disrupt.”
Audience Member 2: Thank you
Shinji: My short answer would be sales, just like Hiro said. There’s a lot of productive operations in Japan and having switched from a traditional Japanese sales company to Salesforce, it’s totally different. And there aren’t that much B2B start-ups to begin with so you should go to the sales conference that he is doing.
Audience Member 2: Okay, how much is it?
Hiro: If you use the “disrupt” coupon code, it’s 4,000 Yen. It’s a little bit expensive but, trust me, it’s good.
Tim: So, in the 60’s, the advice was plastics. Now it’s sass. Step right up.
Audience Member 3: Okay, I have a question. I hate to ask for unsourced claims but I read from somewhere that the portfolio of a Singapore VC’s is bigger than the portfolio or Japanese VC’s. I don’t know. Japan is 110 million people. Singapore is 8 million.
James: You’re talking about amount of capital invested into start-ups?
Audience Member 3: Actually, I wanted to ask, is this true? And if, then why? And what is your view on this kind of thing?
Shinji: I don’t know your source so I have no—
Tim: I think there’s two different things we need to look at. There’s is the total amount of capital that Singapore-based VC’s have and, for financial reasons, there’s a lot of VC’s who are based in Singapore who invest all over the world.
Audience Member 3: I disagree with one important point here. I don’t believe Japan doesn’t have money. I think the risk is something which bothers me but, okay.
Tim: There’s lots of money. The trick is getting them to give it to you.
Audience Member 3: I came here, actually, not to ask about my problem.
Hiro: To be honest, I actually don’t know why Singapore is more than Japan but I have an idea, or I have my own opinion of why Japan is significantly low. One, I think it’s just, of course culture is a factor, which everyone mentioned, but I think upside is a factor as well. So, in the U.S. about 80% of the exits—we make money off the exists, not only just off investors but also entrepreneurs. So exit can be IPO or M&A. In the U.S. 80% of the exits are through M&A, whereas 80% is through IPO. And, unfortunately, the reason in Japan you have to go to IPO at some point is because raising growth capital, historically, has been very, very difficult. And at some point you kind of have to go public to raise money and that’s how you raise liquidity. But what happens is that you go public prematurely. The moment you go public, you’re looking at short-term rather than long-term, so it stunts the growth of the company. Because the shareholders are thinking about, “Next quarter, are you going to be profitable?” or whatever.
Tim: So Japan could be much larger?
Hiro: Japan could be much larger. So there’s not much M&A in Japan, which is one issue that’s impacting returns in general. And then the other thing is that it’s kind of this strange chasm, if you go public, between 200 million to 300 million, or 500 million for that matter. Actually, I would even say 100 million to even, like 900 million or a billion. It’s very hard to raise money after that, actually. And then once you get over this billion part, it’s easier to raise money. So between 100 million and a billion, it’s this ridiculous gap, like how are you going to get there? You need to accelerate growth, you need to raise money, but you can’t because you’re already public. But now there’s signs of growth capital being available. For example, is the example that we’ve been mentioning but there’s also BizReach, there’s also SORACOM, there’s also Smart News, so we’re seeing examples of companies being able to raise in the private markets, and so that’s changing, but I think historically that’s what’s been stunting growth. It’s the lack of growth capital and the lack of M&A.
Tim: Shinji, you’re our numbers guy. Do those numbers stack up between Singapore and Japan?
Shinji: Sorry, I don’t know any numbers for Singapore, so—
Tim: I’m not actually a VC so I’m free to talk off the top of my head here. I think what you’ll find is that there is a lot of VCs based in Singapore. And if you add those numbers up, they’re investing all over the world. And that’s a very large number. But the Singapore market is tiny. I think Nagoya has a larger GDP than Singapore does. And there’s not a lot of Singapore companies that you hear about. There has been a few acquisitions so I think—I don’t have the numbers either—but I think the value of Singapore start-ups is a tiny, tiny fraction to the value of Japanese ones.
Shinji: Right. But your question is based on the fact that it’s going to be difficult to raise money, as I said before, 2015 had VC funds raising 2 billion dollars of money. So there’s money out there, okay. You need to focus on sass.
Tim: Sass. Sass, that is the message for today. If you want money, sass. Thanks a lot. Come on up. Don’t be shy.
Audience Member 4: Okay, so I’ve got a bit of a weird question. My business partner and I are pitching an idea tomorrow to a “salary-manned VC,” and the way situation works is that if we pitch it and it’s successful, they’re going to immediately own quite a big chunk of it. And we haven’t exposed this to anyone else. So the question is, do we go with them or do we hold it back and expose it to the rest of the market? That’s one. And two, when is the best time to go to a VC? I guess it varies depending on the company, on what you’ve got, but—
Tim: I’m going to jump in. How big a chunk is a “big chunk?”
Audience Member 4: It varies.
Tim: In your case.
Audience Member 4: In my case, it could be anywhere from 10 to 90% based on the investment.
Tim: That’s a hell of a range.
Audience Member 4: It is.
Shinji: 90%?
Tim: 10 to 90.
Audience Member 4: They left it intentionally vague.
Hiro: It sounds like you should go to another VC.
Tim: What was the second part of the question?
Audience Member 4: When is the best time to go to a VC?
Shinji: You know, you have a complicated situation there, but if you’re selling your company, if you’re selling 90% of your company, you should not do that, obviously.
Tim: Well, it depends on how much he’s selling it for.
Shinji: You’re going to be the smallest shareholder in the company but you’re the founder. It does not make any sense so you should talk to other people. And secondly, when’s the best time to fundraise? If you think you have product market fit and you’re controlling your own destiny with cash flow, you have leverage. If your cash balance is going down like this and you have, I don’t know, $1,000 left in your bank, you don’t have an option. They can buy 90% of your company, so control your own destiny is my short answer.
James: So, I feel like there’s a lot of missing information so, for example, what are you doing? Is it a very capital intensive business?
Audience Member 4: It will be, yes.
James: It will be. So that’s one thing to consider. And how much are you looking to raise?
Audience Member 4: 10 million.
James: Wow, okay, that changes the problem quite a bit. It’s very hard to raise 10 million with no product, I’m assuming.
Audience Member 4: Pure concept at this point.
James: Right, so that changes it a lot. Selling 90%, maybe that’s a little bit too much, but maybe not completely out of the question. Maybe between 60 and 80 is maybe not unreasonable considering the fact that they’re just betting on you. So what can you offer to the VC’s? Like, do you have some sort of technical background?
Audience Member 4: Yeah, we have IP and we have a strong technical background, my team and I.
James: And it’s not replicable?
Audience Member 4: Depending on how smart you are, you can replicate anything. It’s kind of a strange question.
Shinji: Why don’t you just join that company?
James: It’s not a strange question.
Tim: It sounds like an acquisition.
James: I’m asking whether it’s defensible. How much do they need you? It’s a power balance, who has the upper hand. As Shinji was saying, if you have a lot of cash in your bank account, then you’re fine. You’re not really stressed to raise money, so you end up with better terms, obviously. In your particular situation, raising 10 million with nothing, I actually think that maybe you consider it if they’re willing to do it. It changes the dynamics quite a bit.
Tim: I’ll chime in on when to talk to a VC or how to talk to a VC and you three can tell me whether it makes sense or whether I’m totally full of it. But I think when you’re raising money, VC’s, like you were saying, they’re herd animals. And the first question out of almost every VC’s mouth is, “Who else is investing?” So if you want to raise money you’ve got to have a defined start date and a defined end date. So if you’re going to start fundraising on June 1st, you can talk to people beforehand and say, “I haven’t quite decided, we’re not ready to talk valuation,” you let people know, but you’re not going to sign it. And then when it’s time to go it’s like, go, “This is going to be six weeks, you’re either in, you’re out,” and make everyone move along that same time. And the biggest job you have raising money is herding your VC’s like cats to all execute at the same time. So I’d say just make it a really structured thing. Does that make sense, guys?
Hiro: Actually, for early stage investors like us, it’s a little different actually. The earliest you can get their attention is probably the right—why would it stay? Because the earliest you can get their attention, you should meet the VC’s or the investors and try to talk through the idea, get them to know you, and those kinds of things, and hopefully you’ll have a second and third meeting with the investor. But if you can’t get their attention the first try, then make some progress, make some difference, develop your product, whatever it is, and try to get their attention again.
Tim: Show them what they’re missing.
Hiro: Yeah, show them what they’re missing. And if you still can’t get their attention, then do more progress. And then if they still don’t return your e-mails then they’re probably missing out on something really big or they just really don’t care what you’re doing.
Tim: Or you should be talking to other VC’s.
James: By the way, can you get traction first? Is there anything you can do without this 10 million initially?
Audience Member 4: Yeah, of course. We’ve got money, we can prototype stuff. But to really—
James: The more progress you make, the more likely you are to get better terms. So you might want to raise like a seed round from investors that will signal to other herd investors that this is a good company. And that might be the way to go.
Audience Member 4: I’ll see you afterwards.
Tim: All right. Good luck with it.
Audience Member 5: Hi guys. Thanks for your questions, or answers, so far. I have a pretty term—or more of a wide question and I kind of want to know—I like to think about ideas. You know, holes to fill in society or whatever. Things to improve upon. But I’m not sure how to go from point A to point B. Like, how do I go from idea to start-up?
Tim: Wow. Okay, that’s a pretty broad one. That’s a great question, it really is. I just want to see who’s going to distill a great answer for this one.
Audience Member 5: I understand it’s pretty difficult question but any advice, or anything is appreciated.
Hiro: Well, I mean, if you have any idea at all that you think is quite interesting, or whenever you go to the shower or do whatever, you realize that your brain is gravitating towards that idea, that’s probably an idea you want to execute upon. And the way to execute it is talk to customers. Talk to potential users, talk to customers, and see if it’s even a valid idea. And then from there, you’ll realize, “Oh, shit, you know, this thing is going to be really big,” or it’s like, “Ah, never mind, people are repelling against my idea.” So I always get this question basically, like everyone has tons of ideas, hundreds of ideas, they don’t know which one to execute on. There’s always one or two ideas that your mind just tends to gravitate towards. Yeah, right, and that’s the one you want to try to execute on.
Tim: Which, I think what Hiro is getting at and what I’ve said is just try to sell it. Try to get someone to pay real money for it. And if you can make that sale, if you can make people—because when people start talking about money, if you say, “What do you think of this idea?” people don’t want to hurt your feelings, and they’ll say, “It’s a great idea, you should totally do that!”
James: Don’t ask your mom.
Tim: But if you say, “Would you pay $20 for this?” that will cut it in half and if you say, “Will you pay $20 for that?” then you know if you’ve really got something. Now, you can’t always do that but if you can, that is the quickest way to know if you’ve got something real, I think.
Shinji: And, you know, obviously the short answer is that it’s always easy to build a product. Even if it’s not a real product, you can use prototyping tools out there. And even if you’re talking to the customers and you’re talking about your idea, that it’s going to solve something, it has to be a product. You can say that it’s going to solve the search problem but what the hell does that mean, right? You have to show it for the customer to believe it.
Tim: So when you say the product, do you mean something that’s the exact same thing—what do you mean exactly by “product?”
Shinji: If the idea is just in phases, everybody is just going to say, “That sounds cool. Come back with a product.” In short, just write a sketch. As I mentioned previously, there’s tools out there that you can just build something out there.
Tim: Something to show people?
Shinji: Something to show people, right.
Tim: Okay, excellent. Excellent. All right, thank you. So we’ve got time for just one more question. Come up on.
Audience Member 6: I guess I’m lucky. Hi, guys, thank you for the session. I have, actually two questions. First one is at the beginning, for a start-up, where do you think it’s easier to raise money, in Japan or in Southeast Asia. Actually, specifically I’m thinking about Kuala Lumpur, Malaysia. And the other question, if I decide to start off in Japan, do I look more credible to VC’s in Japan if I have a Japanese co-founder?
Tim: Ooh, good questions.
James: Good question, I like the second one. First one, I actually don’t know. But probably if you’re a foreigner in Japan, it’s easier to raise in Southeast Asia. That’s just my honest opinion. I’m a foreigner that’s raised money in Japan so I kind of know. I think it’s an uphill battle.
Audience Member 6: Why is that? Is it because of the language barrier or—
James: Well, I speak fluent Japanese, so it’s not the language barrier. But there’s sort of an unconscious bias and it sounds like you’re a solo founder. So that’s one. The other one, to answer the second part of your question, I think you should absolutely have a Japanese co-founder with you. But it’s not necessarily a bad thing to be a foreigner. The great thing about being a foreigner in Japan, can you speak Japanese?
Audience Member 6: Yes I can.
James: So that’s a really important point as well, is that you can get to benefit from all the societal-cultural nuances that are beneficial to you, like everyone’s very polite to you, great service, all this stuff. You don’t necessarily have to adhere to them. You can go straight to the CEO and ask for things.
Audience Member 6: But you know I’m a woman so it’s a little bit different, I think, in society in Japan. I’m a foreigner and I’m a girl.
James: Sounds like an excuse. I would say use it to your advantage. I mean there are times when I wish I also was a girl and I had boobs that I could—
Tim: We don’t want that taken out of context.
Hiro: But it really depends on what country your target market is. If your target market is Kuala Lumpur, then you should raise money in Kuala Lumpur. If your target market is Japan, you go for Japan because VC’s can basically invest in ideas or companies where they highly resonate with the idea. So most likely, the chances are higher in the country that you’re trying to target. What was I going to say? Foreigner. So, foreigner, if you can basically give a compelling reason why you. James said that you need to be able to answer, “Why you?” and “Why now?” and if you’re basically able to give a compelling reason for that, then it really doesn’t matter if you’re a foreigner or a woman. Just give a compelling reason why they have to invest in you, and why you’re the only one that can address this idea and this opportunity.
Audience Member 6: Well, you know of course I’m going to try but it’s just like I want to be prepared, what they kind of expect of me.
Shinji: It will be really scary if you’re just trying to raise money and have a co-founder that’s Japanese. That’s a nightmare. Just imagine yourself—
James: Wait, what? Why?
Shinji: If you’re just trying to act and you’re trying to just fund-raise, it’s a nightmare.
Tim: Oh, so it’s got to be a real one, not a fake one?
Shinji: Let’s say your market is Malaysia and you raise money from a Japanese VC, they’ll obviously be telling you about the Japanese market. So imagine then, for each board meeting, you’re going to have a handful of nightmares every single night. So just raise at your market. And look for founders in the market.
Tim: Well, let me add a bit, one from my own experience and one from the experience of so many people who have come on this show. I’ve raised money as a foreigner in Japan for a number of start-ups. I can’t say it was easy but I don’t think it’s necessarily easy no matter where you are. And I can’t say whether it’s harder being a foreigner because I’ve never raised money as a Japanese person in Japan. But it’s possible. And I think that if you’ve got a strong idea, and some traction, and a good team, you’re going to be basically on the same footing. I think the other factors are going to be so much more important than your nationality. And the other thing is sort of like what James was hinting at, or James was saying, is that there’s no inherent advantages or disadvantages. There’s differences and you use them to your advantages. And there’s been an awful lot of women entrepreneurs who have come on the show in the last two years. And every single one of them has said that they don’t really think about the fact that they’re a female founder, or whether it’s an advantage or a disadvantage. It’s just one of a thousand different situations that they’re in and you try to do the best with what you’ve had. You try to take your uniqueness and turn it into an advantage. So, on one hand, the differences that might make it harder to raise from a VC will make it so much easier to get press attention.
James: Really good point.
Tim: So I’m a firm believer there’s no inherent advantages or disadvantages, only differences you can capitalize on.
James: Just play to your strengths. Don’t worry about it. And fill in the pieces that you feel like are missing.
Tim: Excellent. That’s a great question, though.
Audience Member 6: Thank you guys.
Tim: Okay guys, I want to thank our panel one more time. And I want to thank all of you for coming out here in the rain and supporting us. And most of all, thanks for listening. I’m Tim Romero and thanks for listening to Disrupting Japan. Thanks a lot, guys. We’ll see you next year!
