Venture Capital Dilemma: The Short-Term KPI vs Long-Term KPI

Sometimes entrepreneurs forget that (independent) venture capitalists have to raise money too. We know exactly how it feels to get rejected over and over and over again. Fundraising is hard! We know, because we have to raise a new fund every 2-3 years.

In venture capital, you can think of Fund I as the seed round, Fund II at the Series A, and Fund III as the Series B, and so on and so forth. For each fund we have to show traction. We have to deliver solid KPIs after each fundraise, just like how entrepreneurs have to do the same. But one thing that is challenging about venture capital is that the relevant KPIs in the short term are very different from the long term.

In the short term, what matters are mark-ups. Mark-ups are when you invest in a company at a certain valuation, and then another investor invests in the next round at a higher valuation. These are called “paper gains” because although the perceived value of the stock you own has gone up, you haven’t actually returned any money back to investors yet. So the increased value is only on paper. To actually return money to investors, our companies have to exit (the company has to get acquired or go public). However, exits take time. Companies of great value typically take 7 – 12 years before any liquidity event.

The challenge for venture capitalists is that we typically deploy capital over 2-3 years, and have to raise a new fund before we’ve gotten any cash distributions. Which means that when we raise Fund II, we are being evaluated based on mark-ups, or paper gains.

So the dilemma is… do we invest in trendy, sexy companies that will be able to raise money at higher valuations quickly, or do we invest in unsexy companies that may actually be better, viable businesses in the long-term? The answer may seem obvious to an outsider, but it is a very real dilemma that venture capitalists face.

This is one of the major reasons why there is so much herd mentality in venture capital, and why investors flock to buzzwords like “blockchain,” “AI,” and “virtual reality.” Or why former Googlers and Stanford grads are able to raise so easily. Even if you are an investor that sees through the facade, you know that these are some of the considerations for mark-ups.

Just like any other venture capital firm, we think about this dilemma at 500 Japan. The long-term KPI is actual cash distributions, which is what really matters, so we play the long game. High-impact companies typically take a long time to build. This is a get rich slowly business, and we’re patient.


Why Bilinguals In Japan Should Try A Startup

We Japanese-English bilinguals in Japan tend to be too complacent. There are so few of us, yet so much demand, that comfortable jobs are available with little to no effort. Foreign companies, or “gaishis,” need bilinguals, and Japan is one of the few places where even some of the most educated don’t speak English. That is why Google or Facebook or Goldman Sachs are more likely to hire you if you speak both languages. Tokyo, in particular, is a place where you can have a great salary with minimal effort, while living in one of the most comfortable cities in the world.

In other words, life in Japan is pretty great as a bilingual. So why give all that up to work at a dinky startup?

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3 Metrics To Spot A Great SaaS Company

Published in Japanese here.

I like to joke sometimes that I really want to invest in the “paper industry” in Japan. Of course I don’t literally mean paper. What I mean is that I want to invest in companies that are using software to tackle industries or processes that are dominated by paperwork. Software has been eating the world for a while now, but I think Japan has been behind the curve. There is still so much blue ocean to sail.

Fortunately, SaaS is becoming sexy in Japan, and we are starting to see many more entrepreneurs and investors getting excited about this space. This is fantastic, but one thing we have noticed amongst early-stage SaaS players is that there is not much clarity on which metrics are important and how to interpret them.

There are obviously many important items to look at, but here are 3 that can help you determine whether you have a great SaaS company.

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My 2017 New Year’s Resolutions

It is that time of the year again when people start making promises to themselves. Promises about what they want to do, change, or accomplish.

In 2016, the major changes I made were:

  • Keeping to a strict morning regimen (gym at 5:30am, make breakfast, then start working at 7:00am sharp)
  • Significantly reducing my carb intake and transitioning to a mainly protein and salad diet (I was getting a little chubby!)
  • Switching from “toriaezu beer” to “toriaezu high ball” at nomikais. The beer was making me chubby. (For those that don’t know Japanese, “toriaezu” basically means “for now.” “I’ll have a beer for now”).

I plan to stick to the above changes this year, but there are a few additions I would like to make.

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How To Not Go Insane As a Startup CEO

A lot of people say that running a startup is like jumping off a cliff and building a plane on the way down. They say that because it is true! There is a reason that statement is cliche. Millions of things need to get done within a very limited amount of time, and it is literally a matter of life or death (for your startup).

Under that level of pressure, it is hard for anyone to keep it together and not go insane. But staying level-headed is critical to the success of your startup. Digesting information and evaluating your options while you’re stressed out is a recipe for making poor decisions. Stress will also make you irritable, and that irritability is contagious. Your team is affected by you way more than you can imagine, so you better get it together and be a leader for them.

Of course, as with most things in life, that is easier said than done. I think stress management is one of the most underrated aspects of running a startup. Most of us assume that startups are hard. VERY HARD. But we tend not to talk about how to actually manage the resulting stress.

The three pieces of advice I can give are…

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We Care About Facts, Not Forecasts

Sometimes we encounter seed-stage founders in Japan that pitch us with detailed projections about their business. They’ll show us a slide or a spreadsheet presenting that they’ll make X amount of money within X years, sometimes even forecasting as far out as 5 years. Most seem ambitious, few seem conservative, but they all have one thing in common. They are made up!

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