NEW YORK – Japanese businesses may be taking it on the chin, but venture capitalists are visualizing the world’s second-largest economy as an undeveloped Silicon Valley. As a result VCs are flocking to Japan, with some Silicon Valley firms even relocating to Japan to capitalize on the potentially huge opportunities.
Venture capitalists argue that VC firms interested in the region should be active now. “By next year I think it will be a little too late,” said Yoshito Hori, chairman and chief executive of Apax Globis Partners & Co., which was formed in 1999 when Globis Capital joined with Patricof & Co. The firm closed on a $200 million Japan fund earlier this year in March.
The number of venture funds active in Japan is growing, rising 23% to 160 from 130 in 1996. “There is a new group of venture capital firms in Japan – of which we intend to be a leader – that are well-funded and forward thinking,” said Alan Patricof, whose eponymous firm is a member of Apax Partners & Co.’s global venture capital network, which has $7 billion under management.
Some view the opportunity as so compelling, they are not waiting for companies to contact them. Instead, they are creating the company and then finding the financing.
One such company is Giftken.com, an Internet-based gift service started by Japan Internet Ventures LLC. The VC firm invested $500,000 up front to get the company started, and then looked for a U.S. partner, which it found in Giftcertificates.com.
“This is a great model if you are sure you can get financing,” said Bruno Grandsard, managing director of Japan Internet Ventures LLC, speaking at an Internet venture capital conference sponsored by the Japan Society in New York in November. There is valuable technology located in the U.S., and it can easily be brought to Japan, said Grandsard, whose VC firm incorporated in the U.S. in January 2000. The firm has invested in two companies and has a staff of eight, six of whom are in Japan. Nonetheless, he acknowledged that the risks of obtaining funding later are huge. “We may not end up with funding,” he admitted.
His role with Giftken.com also fills another role. “There’s a big need in Japan for very hands-on investors,” said Grandsard.
For most Japanese entrepreneurs, this is their first business venture and they can use mentoring and advice from seasoned professionals. Increasing the importance of VC’s involvement in management is the challenge of hiring entrepreneurial talent, like engineers and chief executive officers, because many potential candidates don’t want to work for risky operations.
Still, there are indications that all of that is changing. Employees increasingly are shedding the idea that jobs are for life and are willing to take on risky, but potentially lucrative situations. And, the inability of some college graduates to find jobs in the current economic down turn also has meant that people are evaluating nontraditional employment routes.
“In 1999, there was a fundamental change in employees’ attitudes,” with MBAs and engineers leaving their corporate jobs to start new ventures, said Apax Globis’ Hori.
Although the shaky economic climate is helping create a bigger labor pool for entrepreneurial companies, it also means that start-up companies will have to operate in a tough economy. Japan is still reeling from its worst economic slowdown since World War II.
In November, a private research firm, Teikoku Databank, said that corporate failures reached a post-WWII high, rising nearly 23% in October compared with the year-earlier period. The debts the companies incurred were 8.561 trillion, or $79 billion, which was double the previous record of 4.264 trillion, or $39.5 billion in July.
Still, some have fearlessly jumped into the fray, with their eyes focused on the huge opportunity.
One U.S.-based firm, Netyear Group Corp., decided last year to move its headquarters to Tokyo from Silicon Valley. The company is an Internet professional services company that specializes in incubating global businesses.
“In Japan the development of the Internet is behind the U.S. and there is a huge opportunity,” said Fujiyo Ishiguro, who is Netyear’s chief executive.
In 1999, Netyear Group launched its first $15 million fund for venture incubation, which currently is funding 22 business-to-consumer and business-to-business Internet companies. It likely will launch a second fund in 2001 that may be expanded to include VC activity.
In addition to the enthusiasm over the Internet’s potential in Japan, regulatory and legal changes have given a boost to VC activities. Now, stock options can be issued, a key compensation tool of U.S. start-ups. It is easier for companies to go public since an over-the-counter stock market was started and the requirements were eased.
“The Japanese government has started to change psychology by changing laws,” said Patricof.
The amount of venture funds invested into Japanese companies hit a low of $8 million in 1997 amid difficulties in Asian economies, and stands at $520 million through the third quarter of 2000, according to Venture Economics, the publisher of Venture Capital Journal, and the National Venture Capital Association.
One particular change is that the amount of VC dramatically increased. Where the average deal size was $200,000 to $300,000, now the investment amounts tends to range from $2 million to $6 million, with some deals as much as $20 million, said Hori. His firm likely will launch a second fund in 2002.
Barbara Etzel can be contacted at