Japanese enterprises are particularly susceptible to disruption, and Japanese startups have a harder time than most pivoting. Both of these problems stem from the same root, and today we are going to dig up that root and have a look at it.
Today we sit down with Shogo Kawada co-founder DeNA, and we talk about both the challenges of the company’s early startup pivots and the post-IPO difficulties they faced with new disruptive challengers.
Shogo is now one of the most active and successful angel investors in Japan, and he explains how both the role and profile of Japanese angels is shifting. He also outlines the reasons why their presence is leading to several positive changes in Japan’s venture capital ecosystem.
It’s a fascinating discussion, and I think you’ll really enjoy it.
- How both eBay and DeNA screwed up auctions in Japan
- Why most business alliances fail
- Why startups will always have the advantage with new technology
- How to get started in angel investing
- The only thing the can force Japanese corporate VCs to change their structure
- Why the current startup bubble is different from the dot.com bubble
- What will happen when the current bubble bursts
- Why Japanese VCs never take technology risks
Disrupting Japan episode 97.
Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero and thanks for joining me.
Japanese startups have trouble pivoting. Business and social conventions make it really hard. Once the team, the company or the country has committed to a certain path, with Japan’s consensus-driven approach to decision-making and the importance placed on maintaining social harmony, it makes it very hard for an individual to stand up and say, “Hey everyone, I think we’re on the wrong path here.” Business convention in Japan requires you to simply pitch in and pull your weight.
This is one of the reasons that Japanese companies, particularly the large enterprises are so susceptible to disruption. But some Japanese startups have been able to pivot their way through multiple business models and into a successful IPO and those are the ones that we need to study to find out how they did it.
And today, Shogo Kawada, co-founder of DeNA takes us through the exciting story of one such case study. We talk about why DeNA was able to pivot relatively easily from auctions to commerce to mobile gaming but why it was unable to make the jump from web auctions to mobile auctions or from early mobile gaming to smartphone-based mobile gaming. We discussed the core reason for the problem and examine possible solutions. And we also talk about the rise of angel investors in Japan and how they’ve changed the way investing works here.
But you know, Shogo tells that story much better than I can. So let’s hear from our sponsor and get right to the interview.
Tim: So I’m sitting here with Shogo Kawada, the co-founder of DeNA. Thanks for sitting down with me.
Shogo: Thank you very much.
Tim: I’m sure most of our listeners know DeNA. It was one of the most important gaming startups of the .com generation. You founded it with Tomoko Nanba in 1999 and you’ve become one of the most active angel investors in Japan now. So before we dig into current investment trends in Japan, I want to back up a bit and talk a little about you and DeNA.
Shogo: Basically, we started DeNA as an e-commerce company. It first started, it’s PC-based auction service in 1999.
Tim: Okay. So originally, the idea was to compete with Yahoo Auctions and eBay?
Shogo: Yes, exactly. When we started, at that time, there’s no Yahoo Auction. Yes, there exist already eBay in US market but there is not C2C big market in Japan.
Tim: That was a very interesting time for auctions in Japan because eBay very famously delayed their launch in Japan.
Tim: It took a long time to launch. In the meantime, Yahoo Auctions launched pretty quickly but DeNA was before them. Why didn’t DeNA dominate that market instead of Yahoo?
Shogo: Because when we planned to start that the business, we had some alliance with Recruit and Sony. In 1999, Recruit was very strong in the internet area. Also, Sony was very still at that time more energized company, at that time.
Tim: Yes, yes. In 1999, Sony was a incredibly powerful brand.
Shogo: Yes, yes, yes. So we used their customer base to start our C2C market but in September, Yahoo started and they used their strong traffics into their new started C2C market.
Tim: So it was just that you didn’t have enough of a lead to build up a market before Yahoo came in?
Shogo: Yes, yes. So Yahoo Auction was the C2C number 1 market at that time. We chased a long time but still.
Tim: They got further and further ahead.
Shogo: It’s number 1 market.
Tim: What made you decide to pivot to gaming?
Shogo: Because C2C market, winner takes all. So if it’s profitable but we had a very serious time. So we decided to do business in also the shopping area, shopping mall area so we made our C2C market and we made a profit but not so strongly profitable. At that time, 2003, there’s no iPhone, no smartphone. So everybody did not believe that people buy something through mobile phone. But as you know in Japan, there are i-mode.
Tim: Right. At that point, Japan was so far ahead of the rest of the world. Although I feel most of the commerce were things like ringtones and small virtual purchases.
Shogo: Yes. And at that time, basically, they did a business with monthly subscribe the contents. So very simple business model but there is almost no e-commerce and at that time there is a kind of just the physical Bluetooth, small physical Bluetooth up here. So every IT business people and every entrepreneur did not believe that people can input their name and address through this small product.
Tim: It was a definitely difficult interface to use.
Shogo: Yes, yes, yes. But for example, young Japanese women high school students use feature phone, the mobile phone kind of the acrobatic skill.
Tim: Right, right, right. Yes.
Shogo: So they put very long mail and after that, I found that if you’re using that button, they can write a novel. So I found that kind of fact so we create a new C2C market in 2003.
Tim: So DeNA was first to market, had a good product to solid user base in peer-to-peer marketplace on mobile and yet when the iPhones became popular, Mercari took the lead. I mean it’s a different technology, a different platform but the same business. Why do you think DeNA wasn’t able to capture that market on the new platform?
Shogo: Yes. That’s a program. So basically I don’t know but the DeNA’s mobile auction market is basically based on the subscription model that was used in the i-mode or like old style mobile phone infrastructure.
Tim: Right, right. With very, very limited billing options and payment options.
Shogo: Yes, yes. And that is totally different from the smartphone. Basically, Yahoo Auction cannot come to the mobile and same the old style mobile cannot get into the smartphone business.
Tim: It’s something we see a lot. So when you look at companies like, say, IBM or Intel and you say, okay Intel was really smart and they got out of memories to focus on CPUs at the right time but they missed the big shift into mobile CPUs. You’re talking about gaps of 20 years but these cycles were really fast. They were only 5 or 10 years apart. It still had some of the same people in place. There are very smart people at these companies that saw it. So you just think the company itself, the processes and the way of doing things became so strong that they couldn’t change?
Shogo: Maybe another aspect is that numerically there’s lots of money, tens of millions.
Tim: Tens of millions, yes.
Shogo: Tens of millions, they get the money. That’s big risk taking. For DeNA, yes they are making profit hundred of million yearly but for them, tens of million investment is big.
Tim: So they don’t want to put their main business at risk?
Shogo: Yes. Maybe it’s a difficult decision at that time invest all the tens of million in mobile market.
Tim: In mobile market. Well, let’s talk a bit about DeNA’s growth in gaming. So after the success in the mobile at the peer-to-peer markets, what drove DeNA into gaming?
Shogo: At that time, we found that there is a big hidden market that are using the mobile phone to access the internet.
Tim: But it seems the same pattern repeated in gaming as in peer-to-peer e-commerce. The strong gaming companies like Nintendo and Sega did not successfully make it into web gaming or mobile gaming. And when the iPhone and later the Google App Store was introduced, that changed the market again. So the distributors didn’t have so much power anymore and companies like DeNA were not able to make that shift. Actually, it’s not just DeNA. I mean we’re talking about DeNA because you’re here with us but across the board, it seems that even when these technological disruptions happen in 5 or 10 years, companies have a hard time making that transition. So from console to web mobile, and then from web mobile to the smartphone, almost no companies made those transitions.
Shogo: Yes, yes, yes. It’s very difficult for every company.
Tim: Yes. Why is it so hard?
Shogo: Because the platform is changing. So situation seems to be stable as a investor viewpoint. Of course everybody use smartphone but every internet business player believe that next platform innovation will come so they are preparing for virtual reality or mixed reality.
Tim: So do you think next time these companies will be more ready for it or do you think they’ll be the same problem, they’ll be able to see the risk but still won’t be able to put their core business at risk?
Shogo: Some company, they are very good at smartphone business. I think they also face such kind of dilemma.
Tim: So as an investor, it’s always smart to bet on the startups taking advantage of a new technology rather than the strong players?
Tim: How should companies protect themselves from that? What would your advice be to Nintendo or what is your advice to companies like DeNA to like, how do we survive the next one?
Shogo: Difficult question.
Tim: An important one though.
Shogo: I need an answer. Actually, we shifted from the PC commerce to mobile commerce, mobile commerce and bargain. So do not relax on the big chair.
Tim: Okay. Let’s shift to startups for a minute. After the DeNA IPO, you ended up leaving the company and spending most of your time working with startups and had become one of the most active angel investors in Japan today. You’re an early investor in Wantedly, Tokyo Otaku Mode, Material Wrld, Smart News, a lot of these companies had been on the show and a lot of them have become some of the real stars of Japan’s startup world. So both in terms of deal flow and evaluation, how did you meet these founders so early?
Shogo: Basically, introduction because I started kind of angel investing 2008. At that time, there is quite limited number of angel investors in Japan.
Tim: So just by being early?
Tim: So they found you?
Tim: Well, that’s a good situation to be in, to be able to pick out the best.
Shogo: Yes. And at that time, there already exist some venture capital but for them, very easly, startup is too early. So some venture capital also introduce some early stage company. Also, many star player startups was started by the good engineers or good entrepreneurs. Japanese entrepreneur world is very small.
Tim: Yes. Getting bigger, getting bigger.
Shogo: Yes, getting bigger but at that time smaller so everybody can access to me.
Tim: So a lot of it is just being in the right place at the right time.
Tim: But things have certainly changed over the last seven years. In Japan, angel investors had traditionally been doctors or lawyers or not really business people but people who have money and that’s really changing. There’s a lot more angels investing. There’s a lot more investments being made. Startup investment in Japan was up 20% last year. Now it’s funny in every country in the world and almost any market conditions, startups are always complaining that VCs aren’t investing enough and VCs are always complaining that the investments are far too expensive. But in your opinion, what’s the balance like now?
Shogo: For good startups, they can choose the investors. Not so good startups, it’s difficult to find the investments. In my feeling, good startup is limited but lots of money.
Tim: Okay. So right now there’s more money than there are good startups?
Shogo: Yes. So we must create more startups.
Tim: Okay. When I talk to Japanese startup founders about what’s missing or what can be improved in the startup ecosystem, the most common response is more angel investing, more angel investors. And I understand that from a startup’s point of view but from an angel investor’s point of view in Japan, what do you see is the value you really add to a startup?
Shogo: Yes. I can do every aspect of the support to the startups. For example, knowing about developing a system, I can support. The knowing about the sales, I can support because I had the experience of the sales manager.
Tim: So do you think the founders need more strategic advice or is it just they need advice from someone who’s done it before and can say, “No, no, don’t worry that will be okay”?
Shogo: Both. Everything. For investing, we have some meeting with investor and entrepreneurs. Of course investor checks entrepreneur but also entrepreneur check investors. So in my experience, the good entrepreneur say that I’m okay. So maybe I’m okay.
Tim: As a longtime entrepreneur in Japan, I can tell you the idea of the entrepreneur checking the investor is a new development.
Shogo: Yes, but for good entrepreneurs and good business plan, many investor want to invest on. So they have the options. They can choose the investors.
Tim: Venture capital in Japan has always been dominated by corporate VC. The increase in the number of angel investors like yourself, has that changed the behavior of corporate VC at all?
Shogo: It’s deal with changing, I feel in Japan, 20 years ago there was only big financial groups, group company was the venture capital. But for example now, Globis is a kind of independent type of venture capitals. So they patronize like the US venture capital partners, almost same, same structure. So such kind of independent venture capitalist number is growing.
Tim: One of the fairly unique and I consider unfortunate aspects of venture capital in Japan is that most of the time the investment committees of VC firms are all people with financial background.
Tim: But it’s very rare to find a entrepreneur or someone with operational experience. Is that changing or is that pretty much the same?
Shogo: In my feeling a little bit changing because some entrepreneur go and join for example Globis. So in the Globis, there is an entrepreneur people. So little bit changing but current situation is as you say, financial background people is main.
Tim: So the traditional VCs are still very traditional with being run by finance people but there’s a lot of new VC companies that are changing the market as a whole? And I suppose in another 7 or 10 years, if the VCs with entrepreneurs involved are producing better returns, the market will shift.
Shogo: Yes. But the number is still limited, still mainly financial guy. But that’s not so bad because when the company get big investment, we need financial technology. So the financial knowledge is one of the most important things for venture capital.
Tim: Another social shift I see, and this is so important in developing a large number of angels in Japan, but traditionally, people who founded companies and took them through IPO, in Japan the goal is to kind of run the company until they died or retired and turned it over to their children. That seems to be changing.
Tim: In your case, what made you decide to retire from DeNA or become an advisor and spend your time working with startups rather than the traditional path, staying in the company?
Shogo: That, I have a long story. Actually, before I started DeNA when I was a university student, we and my friend struggled to start our own business. It was late 1980s and early 1990s, at that time Japanese financial situation is very old style. There is no Risk Money. So it is very difficult to gather Risk Money. And also there is no internet so it’s difficult to make a difference using a technology like that. So I decided, I proceeded to the graduate school. My friends continued to try and in 1991 to 1996, I spend my time in the graduate school where I met internet. So I surprise potential of the internet so at that time I decided someday I will do business in the internet. But I felt that Japan is not the country of the capitalist, it’s the kind of country of the socialism or you know, very well-made commie.
Tim: I know exactly what you mean. I think that historically, Japan might be the one country where communism would have worked.
Shogo: Yes, yes, yes.
Tim: So it was capitalist but it was this weird top-down controlled, collaborative capitalism.
Shogo: Yes. So I found that most important things Japan should have is investor, capitalist. So at that time I decided someday I will become a capitalist and I will invest to the young generations and the technology.
Tim: So your goal was not to build a company and run it forever. Your goal was to be an investor and the company was just a means to do that?
Shogo: No. I also like to do business. So I enjoy starting DeNA and growing DeNA. But when I was at the 39 years old, I’m with very young engineers. At that time in US, iPhone is released but at that time there is no iPhone in Japan. But we met around 10 people and 7 people over there, they had iPhone already and they also starting to use that. Surprise, wow.
Tim: Just how fast it was moving.
Shogo: So at that time I found that it’s too late to start investment when I became 50.
Tim: You think by that time you just wouldn’t understand the new technology?
Shogo: Yes. So I decide to do that 8 or 10 years ago.
Tim: Among other angels you’ve talked to, has their motivations been similar to yours?
Shogo: Yes, maybe. So the other entrepreneurs also had some program to seek angel investors. So now many entrepreneurs start to invest on the new companies.
Tim: It’s fantastic and it’s amazing how fast it’s grown. Just 10 years ago there was nothing really.
Tim: Now, both of us were around for the 2000 .com bubble here. A lot of people are saying this is another startup bubble but to me it feels different than 2000 did. I think we’re seeing a genuine ecosystem develop here and to what extent do you think that the changes we’ve seen are permanent and sustainable and to what extent do you think we’re at risk of another bubble and everything resetting to the way it was 15 years ago?
Shogo: Yes. Basically, bubble is a kind of secret phenomena so sometime it’s going to happen again.
Tim: But do you think it’s going to reset? It will go down but do you think it’s going to reset? So for example, after the 2000 bubble, there was just nothing. It just wiped it out for years. So you’re right, market cycles, startups, it’s cyclical. But after this bubble bursts, which might be next year, it might be in five years, do you think it’s going to be like after 2000 or do you think that what’s been built is strong enough that it’s going to continue?
Shogo: Yes. But basically we remember that .com bubbles, they are the small fragile exist but I think that next thing are not .com like super bubble.
Tim: Okay. So maybe some ups and downs but long term trend is going up.
Tim: Excellent. Looking at the financial side of the startup ecosystem, what do you think is kind of the weak point or what would you change?
Shogo: In Japan these 10 years, Japanese fund get money through the internet service or a software kind of the business, not really, really technology-based service. So in my feeling, Japanese, where they get the fund is little bit reluctant to invest on the technology business.
Tim: So you’re saying like things that are relatively low risk like SaaS companies where you know in six months whether you made a decision.
Tim: So what would be like a technology company, like life sciences?
Shogo: Life sciences also or IOT, kind of the hardware or even in the internet low level hardware-based or middleware-based technology. A little bit difficult to evaluate and difficult to — the Japanese fund does not like to take the technology risk.
Tim: Do you think that’s because of general risk aversion in Japanese business or do you think that’s because so many VCs are only finance people and they don’t have technology expertise or marketing expertise?
Shogo: I heard that some people say that early 20s, some Japanese independent venture capital invest on the technology area but it’s past.
Tim: Well, it is high risk, it is. But that’s a shame because the fundamental research that’s being done in Japan is incredible it’s almost a cliché. Everyone in the world knows that Japan produces amazing basic research but has a lot of difficulty turning that research into products.
Shogo: Yes, exactly. Yes.
Tim: And maybe a big part of it is just the VCs aren’t giving them the money to allow them to attempt it.
Shogo: Regarding to such kind of hardware technology or technology investment, the old style Japanese VC is better. For example, JAFCO investment Cyberdyne.
Tim: By the time a company gets that big, it’s very easy to invest in. I mean you’ve got fairly reliable growth, you can model the company financially. Whereas, as an early stage startup like a SaaS startup, you can still kind of model it financially and invest a little bit but a new technology company, you can’t do that.
Shogo: It takes money.
Tim: Yes, it takes money and kind of gut feel.
Shogo: Yes. Gut feel is also important but actually, the money is the most important because for example, SaaS type business, we can make a prototype very cheap, almost no money but in a hardware area, we need 1 million at least to make some prototype.
Tim: Yes. You travel quite a bit between the US and Japan and well, globally really. We were just chatting in Berlin two weeks ago. What do you think is the most important thing that Japanese startups should learn from US or global startups?
Shogo: We, Japanese entrepreneur, have very strong internal pressure to go global but it is very hard. We had very hard time go global. Language is one of the problem and also US is very difficult place, very competitive place to do IT business. So Japanese people tend to think that do business in the US imagine that go global but I think US is one of the most risky places.
Tim: It certainly is one of the most expensive places.
Shogo: Exactly. But there are other options or Asia or Euro.
Tim: I’ve noticed a lot of Japanese startups are going to Asia. Southeast Asia is their first part of global expansion. Wantedly, one of your investments recently opened up in Singapore, right?
Tim: Okay. So maybe don’t focus on the US so much, look at global market.
Shogo: But it depends. It depends. For example, Smart News is now doing US business. It depends but —
Tim: Let me ask you about Japan as a whole. So we can look at the economic numbers and talk about how fast venture capital and startups are changing. We can look around and point to specific changes that these startups are making. But you and I kind of live in a startup bubble in Japan.
Tim: Most of our friends are entrepreneurs or VCs. Do you think that the attitude towards entrepreneurship and startup founders in particular is really changing in broader Japanese society?
Shogo: Totally changing. I feel that yes, because I remember when I was a university student and trying to do my business at that time, everybody believed that doing own business is kind of the dropout.
Tim: Yes. The idea was you couldn’t get a good job so you had to do your own.
Shogo: Yes. So we studied at pretty nice university and after graduated there, we can go to the very famous Japanese companies like Sony or Honda or Toyota. It was easy but we tried to get out from that lane so everybody see that that’s dropout, negative things.
Shogo: But now the university student do business, nice. Maybe 50% of people see that it’s nice.
Tim: Why has it changed? What’s been responsible for the change?
Shogo: Maybe there was many young entrepreneurs emerged.
Tim: So role models? Let me take down a little more on that because to me it seems so but my viewpoint is so biased on this. So how much of that admiration is about money and the story of relatively young people making money quickly and how much is a shift? What I mean is that so one’s status in Japan is very, very much dependent not so much on the person you are but the family you come from and the organization you represent. It’s not just you, it’s your group determines your status.
Tim: That’s why university professor or a manager at a top tier Japanese firm will have much more social status than someone who got rich trading commodity features. Have you seen a shift where these entrepreneurs, these founders are being respected and given social status because of what they’ve achieved or what they’ve tried to do or simply because they’ve succeeded and made money?
Shogo: Both. Totally. For my generation, we are kind of stranger. When I was starting my own business, it’s dropout. When I joined the McKinnsey company in 1996 before starting the DeNA, at that time some people know McKinnsey but not super famous like Sony or like that.
Tim: Really? Okay.
Shogo: So every time I choose strange, strange, strange, and after that, status changed.
Tim: So now there’s not as much social pressure on people who choose a strange career path?
Shogo: Yes. For me and for my friends, we are kind of socially risk taking but now it’s not so social risk taking to do startups.
Shogo: Two things. Not so strange come to the entrepreneur committee. Entrepreneur is almost common things, no more people joining the startup ecosystem. So startup ecosystems average quality is getting normal. I think that’s good thing because the size of the startup committees become big.
Tim: Yes. Have you seen the same shift in the venture capital community? Angel investors were not traditionally particularly respected within the VC Community.
Tim: Again, the status of VCs was always how big of a fund is this person managing. It was very, very easy to measure. Has that changed? Are VCs appreciative of what angels bring to the ecosystem or is that hierarchy still in place on the finance side?
Shogo: Regarding the VC and the angel investor, we have very good collaborations. Because for VC, easly stage startup investment is risky so some venture capital introduce me to some or arrange these things then I take risk and after several years the company became qualified. Again, I would ask them to invest again. So that kind of collaboration exist so now this is very not good with VC on the business. No problem, basically.
Tim: So it’s an understanding of the role each plays in the ecosystem?
Tim: Excellent. Well, listen, before we wrap up, I want to ask you what I call my magic wand question and that is, if I gave you a magic wand and I told you you could change one thing about Japan, anything at all, the education system, the legal system, the way people think about risk, anything to make things better for startups in Japan, what would you change?
Tim: Birthrate. Okay.
Tim: You think one of the big problems is the demographics we’re facing?
Shogo: Yes, that’s it. Mostly, I think, yes.
Tim: Do you view that problem more as in the cost of maintaining an aging population or from an innovation perspective?
Shogo: Both. Everything, everything. The market shrink, it’s very serious issue. But as global people, human being, I don’t know it is really bad things or not because this is a social trend that country is developed.
Tim: Yes. All developed countries. Yes. Japan is just one of the more sever examples.
Tim: But it is interesting because I think that with an increasing population, you get a bit of free GDP growth, with a decreasing population growth you get a penalty, a shrinking of GDP. But the other component of it is productivity increase. It’s an interesting question to wonder whether increases in productivity whether it’s robotics, an automation or AI will offset the shrinking the population.
Shogo: Yes, exactly. So this is an aspect of improvement. In a short time birthrate is most important trigger. But for very long time it is a kind of shift to change, it was civilization so maybe.
Tim: Yes. But it’s certainly safer to have a growing population.
Tim: Excellent. Well, Shogo, thank you so much for sitting down with me.
Shogo: Thank you very much. Thank you very much.
And we’re back.
Shogo’s story of DeNA’s partner strategy with Recruit Holdings provides a really important lesson for all startups. A partnership with a large firm seems like a great way to open doors and gain access to large enterprise customers that the startup could never reach on their own. And hey, sometimes it really does work out like that but most of the time it does not.
In fact, the more innovative your product or service is, the harder it will be for your partner to sell it. Your partner’s sales force will be able to understand and explain small improvements and minor variations in workflow.
But if you’ve got something unique, something that requires the end user to think or behave differently, something that could bring them an order of magnitude gain, well, you’ll have a very hard time communicating that message when it’s being filtered through your partner’s enterprise sales force.
Also, it will come as no surprise to you that we here at Disrupting Japan have a particular in how disruption takes place in Japan. Shogo’s explanation of how DeNA, after it found significant success, could not pivot to counter threats from new startups with new business models is something I’ve seen happen again and again in Japan.
We’ve had other founders come on the show and tell similar stories. Even when the original founders are still at the helm, even when they see the disruptive change coming, even when the new market disruption is happening only a few years after they themselves were the initial disruptors, they are still unable to make the changes needed to survive this disruption. Unfortunately, neither Shogo nor I have any solid advice to the companies to prevent this from happening but Shogo’s advice as an investor was good. In these situations, always bet on the startup.
If you’ve got an idea about how companies can survive disruptive innovation, Shogo and I would love to hear from you. I mean we really would, so come by disruptingjapan.com/show097 and tell us about it. When you come to the site you’ll see all the links and resource that Shogo 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 Tim Romero and thanks for listening to Disrupting Japan.