two_things_part_1

Two Things To Accomplish at 500 Japan, Part 1

Note: This was originally written for a Japanese reader, to be published in Japanese. Other readers may lack some context. Japanese version is here.

There are two things that we would like to accomplish with the 500 Startups Japan fund. The first is we would like to be a part of one big cross-border M&A. The second is we would like to help build a truly global company out of Japan. These are in no particular order. We want both to happen.

We have done quite a bit of PR around what we bring to the table to facilitate cross-border M&A. But for the sake of context, or for those that haven’t heard our spiel, I will repeat myself.

It is no secret that the venture ecosystem in Japan is relatively small by global standards. I saw this chart below the other day that listed the top countries for venture capital investment, and I was disappointed to not even see Japan listed. Why?

top_countries_vc

If you look at the venture life cycle, it goes something like this:

1). a smart courageous group of people get together and start a company
2). investors back these smart courageous people
3). the company exits through an IPO or M&A.

The exit part of the lifecycle is the critical component that makes the system work. Because without it, not only would investors not get a return on their investment, but entrepreneurs would not get a return on their time. Both entrepreneurs and investors need the upside from the exit in order to make everything worthwhile. Otherwise, entrepreneurs are better off climbing the corporate ladder, and investors are better off investing in other asset classes.

venture_life_cycle_en

Unfortunately, in Japan, these exits are few and far between. In any given year, there are about 100 IPOs, and possibly 20 notable startup acquisitions. To give you perspective, there about 500 venture-backed exits in the U.S. every year, of which about 80% are through M&A. I doubt that the number of IPOs in Japan can change dramatically in the near future. I also doubt that domestic companies will start acquiring startups fast enough to grow the market. There are progressive companies like Mixi, DeNA, and KDDI that are actively making acquisitions, but the entire industry cannot rely on this list of about 10 companies to acquire local startups. Something has to change.

We don’t think we can directly change the pace of domestic acquisitions. Many large Japanese corporates have plenty of cash on their balance sheets, but they are notorious for hoarding it. Instead, we think we can change the pace of cross-border M&A.

We see opportunities to drive cross-border M&A through two strategies. One is a Technology Strategy, and the other is a Time Machine Strategy.

Remember when Google acquired SCHAFT? That robotics company? SCHAFT was trying to raise from local VCs but was largely ignored. That is, until Andy Rubin discovered the company, realized the potential, and had Google acquire the company.

We believe that there are more interesting technologies like this being developed in Japan that go completely unnoticed by the international community. And as I’ve said before, from a foreigner’s perspective, Japan is seen as a black box. Not enough information about the inner-workings is published in English, and frankly, Japanese are not very good at promoting their products to a global audience. Not anymore, anyway.

With our investment, we believe that we can change that. When 500 Startups invests in local companies, these companies are far more likely to get coverage in global media. This is not just because of our relationships with journalists all over the world, but also because 500 Startups is a globally recognized brand. We also have over 454,000 twitter followers, 112,000 Facebook Fans, and 12,000 YouTube subscribers at the time of this writing (in case you’re wondering, that is more than Sequoia, Andreessen Horowitz, or KPCB). Of course, these are all vanity metrics. But they do matter when it comes to giving your startup a platform to be recognized by a global audience.

This boost in visibility is critically important. Think about who could read about your startup. A big foreign company could read an article and think, “we need this technology, let’s buy it.” While this may sound oversimplified, the importance of getting in front of more eyeballs cannot be underscored enough. The first step to any acquisition is getting on the buyer’s radar in the first place. And if they don’t buy you, they could at least be your customer.

The Time Machine Strategy essentially entails taking a proven idea from elsewhere and applying it to your local market. No, this does not mean that we plan to incubate copycat ideas like Rocket Internet. It just means that we may invest in similar local companies.

Remember when Match Group acquired Eureka? The company that built the Pairs app? Match group had been trying to gain traction in Japan for years but with no avail. Their problem was a familiar one. Simply translating their original website was not enough. Japan is a unique market, with cultural and legal barriers that make it very difficult for foreign companies to enter. As many describe, it is “Galapagos.”

But therein lies the opportunity. Because there are a multitude of entry barriers, it makes much more sense for foreign companies to enter Japan through an acquisition rather than on their own. But acquisitions take time. They are like marriages. Just as you need to date before you get married, you need to date before you get acquired. There is usually a tremendous amount of relationship building beforehand.

This is again, where we come into play. We have built relationships with corporate development teams from all over the world. So when we invest in local companies, we plan to match them up with relevant companies in our network early on. Of course, relationship building takes time. It could take 2 years after first contact. They may not even be thinking about Japan. But just as it takes time to build trust before getting married, it also takes time before making an acquisition.

All this being said, don’t assume that since we are bringing up cross-border M&A, we are only focused on cross-border M&A. If your company goes on to IPO or get acquired domestically, of course, we are happy! We are just providing one more alternative for entrepreneurs. You may think that you don’t want to get acquired. You may want to IPO. I understand that being the founder of a public company is a status symbol, no matter what your market cap may be. But when a $200m acquisition knocks on your door, I think you will reconsider.

In my next post, I will talk about our desire to help build a truly global company from Japan. Getting to a cross-border acquisition would be a tremendous accomplishment, but I think building a global unicorn would be even more impressive. Stay tuned for my next post, when I explain how we’ll help you do it.

 

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  • I like the analysis that Japanese startup exits are limited and therefore cross-border M&As might help encourage more startup activity. Seems plausible. But I believe that Japanese companies often look slow-moving and risk averse in other markets, particularly the US. This might make them less attractive as targets. I’m also surprised that you offer up 500 Startups as a sort of PR firm for the Japanese clients. I have seen VCs promise contacts and visibility before, haven’t see it materialize too often. I will keep an eye on your posts from 500 Japan; I’d really like to see what progress is made in 9-12 months.

    • jamesriney

      Thanks for the comment Jesse. Foreign companies would probably buy Japanese companies to capture the Japanese market, so whether they are slow-moving or risk averse in other markets like the US is somewhat irrelevant.

      The problem with promising visibility and contacts is that the result is very hard to measure, and who introduced who to who is often only known by the relevant parties. My observation being in this business is that it does absolutely make a difference, but there are only a handful of VCs that can actually deliver.