Over the last couple of years, after an abortive fundraising effort in 2015, I've been avoiding Venture Capitalists (VCs) or attending venture conferences, feeling that the venture funding industry is Japan is all about herd instinct and stereotypes and thus a waste of time for a foreign businessperson. However, I had second thoughts after a friend suddenly couldn't make it to the latest TechinAsia event held in Tokyo during September, and he kindly asked if me if I'd like to go in his place. I thought this would be a good chance to see if the street talk I'd been hearing about how we're now in the "golden age" of Japanese venture investing was true or not.
One of the speakers at TiA was Tim Romero, who has a very good weekly blog where he interviews movers and shakers in the Japanese start-up community. Tim has been around the track a couple of times himself, and in his interviews he is relentless in getting the CEO of the moment to share their secrets and how their industry works. Tim has been quite upbeat about the Japanese venture scene, and his contributions alongside TiA and Slush (a Finnish version of TiA) would indeed give you a feeling that things are starting to improve here.
And yet among start-ups in the international community, "international"
meaning resident foreigners or regular Japanese educated in part overseas, I still see very little VC investment taking place. So what's really going on?
As a bit of background, back in 2015 and the start of 2016, I personally visited and presented to about 25 Japanese VCs, for Japan Travel KK.
Given that the Inbound market was booming I thought that the timing couldn't be better, and our early sales results proved that there is an exciting business to be had. I received 24 rejections and one smallish offer at the time, and so wound up empty-handed but a lot wiser about my strategy and what we needed to do to present a better story.
Unfortunately, I got a somewhat depressing view of the state of venture capital in Japan.
In the course of that one-year period, I found that I could group those
25 VCs into 3 types: 1) Clueless kids and salarymen and not capable of researching or deciding anything, but with money to spend on a round led by someone else. This was by far the largest group, and the lack of smaller early stage deals shows their risk aversion - which is ironic given the nature of their business. Group 2) were a much smaller cohort of smart trans-pacific bilinguals who were obsessed with Silicon Valley trends, valuations, and business results, i.e., they have a unicorn-obsession. This group has plenty of cash and an ability to lead a round, but won't touch anything unless there is a vision of global domination, which means they are making a few over-optimistic bets on CEOs good at hype. Group 3) were smaller shops with sectoral expertise but just not enough people to manage the influx of opportunities, and they were the source of the most productive discussions. But, boy, are they conservative when it comes to dealing with a foreigner...
With Japan Travel I was told by the clueless Group 1 types that they thought the Inbound travel market was too small and that the space wasn't validated because no one has led a funding in the space (which is still true today). And yet, if they bothered to do some research (or to read our presentation), they would have seen the tell-tale signs of a major boom market. Now, in 2017, the Japanese Government says that the Inbound market is worth about JPY3trn in on-shore spending alone. My guess is that total spending on travel to Japan is around JPY5trn a year.
With the Group 2 "size matters" crowd, our focusing on one country meant lack of scalability and therefore an inability to feed their egos.
With the Group 3 realist group, the focus was on my foreigness, my age (not being in my twenties and thus being easy to take advantage of), and the company valuation - they didn't like the fact that we'd already spent half a million dollars developing the systems and capabilities of the company, even though this is a pittance compared to U.S. companies doing similar types of business.
In the end, I decided to continue bootstrapping, developing the business beyond just a portal and into an integrated travel solution provider. To do so, I have done small "friends-and-family" rounds and steadily put the pieces in place. You will have seen the occasional ads in Terrie's Take for each round we've raised (a big "thank you" to our investors).
So, back to TiA, I was interested to see if Tim was right that the VC scene has changed, and whether, as the TiA organizers were spruiking, we're in a Golden Age.
The TiA event took place over two days, held at the La Belle Salle Shibuya Garden building at the top of Dogenzaka in Shibuya - a suitably fashionable location. I showed up on Wednesday morning, registered and made my way in to listen to Dave Corbin, TiA's Japan CEO, give the opening address. There were about 400 people in the audience (my estimate), a pretty good number considering the tickets cost JPY15,000 for the public and JPY60,000 for investors. The attendees were a 30/70 mix of foreigners to Japanese, with most of the foreigners coming from Asia.
You could see that the representation matched Japan's influence around the region, with the biggest delegations being from Indonesia, Malaysia, Vietnam, and Thailand. Certainly I'm aware of an expanding number of Japanese VC funds who are targeting their investments in these countries because of the lack of U.S. and European competition and also because of the rapidly expanding economies there.
I personally found the TiA lineup of speakers to be disappointing, revealing little about how to get things done, and over-focusing on validating the VC market in Japan. This is unfortunate, because from my many discussions with attendees, most people where there for two things
only: networking and funding. Yes, there was a "Speed Dating" section for pre-reserved meetings with Japanese VCs, but it was obvious that demand (by start-ups) outstripped supply and that the quality of supply of VCs was poor enough that TiA should seriously re-think its approach to Japan. In particular, it needs to help educate VC firms here how to prospect and build relationships with non-Japanese start-ups.
In spending some time hanging around the Speed Dating area, listening in on some of the conversations and getting a feel for whether Japanese VC has improved, I got the impression that things are still pretty pathetic. What I saw is kids from the VC departments of larger Japanese wannabee VC companies interviewing other kids who want to fund their start-ups. There was a definite lack of expertise, experience, and structure on both sides. For foreign start-ups, the interactions were made worse by major language and knowledge gaps. I came away thinking the following three things:
1. Low-grade human resources. Why are Japanese VCs willing to put their least experienced people into an environment where they are picking winners from losers? Having someone with little practical business experience and inability to evaluate technology isn't going to result in competent screening of prospects from a single meeting.
2. Poor screening process. One assumes that to be meaningful, most Japanese VCs are at least investing JPY20-JPY30m per firm, and this money doesn't grow on trees. For sure after the initial screening the investment will go in front of a committee, but when you are having a low-experience person with no screening structure or understanding of what the other party does, this significantly reduces the quality of deals for committee review, and a higher chance of loss of the investing company's assets. We can see the results of this in the poor returns that most Japanese VCs have (and perhaps why companies don't put their best people in those teams).
3. Low ability to think out of the box. I approached the Fujitsu booth on the behalf of a friend's software company, and found out that the staff really weren't interested in a business that was outside their frame of reference, even if the investee agreed to use their cloud platform and technology stack - which surely is the reason why Fujitsu even has a venture fund in the first place. Instead, they were there to hand out flyers and pens, and seem to have another more obscure process for making decisions on investment.
So, yeah, I didn't get a very favorable impression of the quality of VCs present, and it was disappointing to see foreign startups attracted by the TiA hype, try to figure out what the speed dating investor was really saying to them. Pretty much it was in the "We'll keep you hanging on until you stop calling us," ilk. I did also talk to several other more seasoned Japanese entrepreneurs there, whom I know, and they candidly shared that they were just going through the motions rather than expecting anything concrete to come out of the meetings.
To be fair, the TiA event was a good place to meet other start-ups, and there were several in the tourism sector who were very interesting. They may not find a source of funding in Japan, but hopefully other business opportunities will help justify the cost of attending the show.
I realize that TiA does not represent the whole universe of Japanese venture capital, and there were many active players in the market who didn't show up. But nonetheless, what I did see reminded me that the Japanese VC community is still immature and prone to risk-aversion - meaning that there will be precious few unicorns or even tech IPOs coming out of this market. While Softbank with its super fund is shaking things up and is making the overall sector numbers look pretty juicy, the reality is that Softbank is targeting much bigger investments in much later-stage companies, and current industry data is very skewed.
The fact is that VCs are still not doing much for real startups here.
Especially if you are not in your 20's, Japanese, and have a talent for PR and breakdancing (yes, a security firm CEO started his pitch this way).
About Mr. Terrie Lloyd:
Terrie Lloyd is a 54-year dual-national of Australia and New Zealand, who has lived in Japan for 29 years. A "self-made man" in the truest sense, he formed his first company while in Japan on a working holiday visa at the age of 25. Since then, he has established another 18 companies of his own and many others for clients.
Lloyd has brought his investors 8 successful earn-outs: LINC Computer in Japan and Techman in Hong Kong sold to EDS in 1995, the Web division of LINC Media sold to Chinadotcom in 1999, Layer-8 Technologies spun out to ThetaMusic in 2003, DaiJob Software Inc. sold to Nikko Principal in 2004, DaiJob Inc. sold to Human Holdings in 2005, and Esphion Ltd. in New Zealand sold to Allot Communications Inc. of Israel in 2007. He is currently the founder of JapanTravel.com, one of the premier Japan inbound travel destination and travel agency.