Back to Contents of Issue: December 1999
by Tanya Clark
According to the believers, Japan's Internet is about to hit stratospheric growth levels, catching up with the U.S. within the next three years. Even the less fanatical players in Japan's Internet world argue the next 12 to 18 months will be ones of unbelievable change and opportunity. Why? Because everything -- absolutely everything -- that has been holding Japan's Internet growth back will soon be no more. No more, that is, with a few exceptions.
The sun rises on Japan.com, says Merrill Lynch's Internet analyst Mahendra Negi, predicting a tsunami wave of investment. "With 18 million people online, Metcalf's law is finally showing its impact on Japan. All metrics of Internet growth are pointing in one direction -- up." Writing in a report covering Japan's Internet and software services in September, Negi said: "Signs of a coming Internet tsunami are everywhere, whether it is the rise in share prices of Internet stocks (Softbank, +533% YTD, Hikari Tsushin +966% YTD) or the moonshot IPOs (SB Technology, up 769% on the first day of trading; interQ, up 450%). Finally, we know the Internet has arrived when we hear that the Tokyo Metropolitan Police Department has set up a 24-hour center to handle high-tech crimes in an effort to combat the rapid rise in cyberspace crimes."
So what precisely has changed? Among the most important is the scheduled introduction of fixed fee pricing by the domestic telephone monopoly, NTT, a dramatic loosening of public listing rules, and Softbank's plans for a U.S.-style NASDAQ. And, finally, the VCs are here.
VCs come ashore
like Softbank, foreign securities houses, J.H. Whitney, Hikari
Tsushin, Intel Japan, Globis Corp., Sony, Sakura Bank, and
others are seriously, very seriously, looking to nurture their
own or find startups in Japan worth investing in. It's not
just the pull of a changing Japanese marketplace, says Slawson.
"There is too much liquidity in the U.S. One of my partners
in San Francisco describes it as manic. So a lot of people
are getting pushed out of the U.S. into international markets."
Slawson expects a ton of funds will be established in Japan
over the next year to 18 months. But, he says, "it's another
thing to find deals."
Tanya Clark is a Tokyo-based freelance journalist who writes about Japan and Asia topics-from the Internet to an Asiatic interpretation of Cyrano de Bergerac on the foothills of Mt. Fuji.
That is the biggest remaining problem. "We haven't seen a real Japanese startup in years. Japan is one of the least entrepreneurial nations in the developed world," says Mark Stevens of VC fund Sequoia Capital. Many would agree. And if there are so few, who is going to build Japan's Internet market? Where are all the Japanese going online likely to spend their money -- Amazon.com?
As with many aspects of this country's culture, one must grasp where the country has been to understand where it may go. While the Internet has been exploding in the U.S. and Europe, Japan has been stagnating in a festering recession caused by the collapse of its economic bubble in the late eighties. Japan's government has pressed every traditional lever to restart growth, finally resorting to massive, continuous pump priming to boost GDP growth to positive levels. Most of this spending has been targeted at traditional pork barrel sectors, including construction and manufacturing. As a result, the mindset of Japan's businesses and government remains, for the most part, locked into a mindless faith in the industrial development patterns that created postwar prosperity. Domestic development has been focused on a self-sustaining agriculture policy and the constant rebuilding of roads and dams and new bullet train lines. Nearly every city in Japan looks like every other: Small houses and apartments cower by tiny roads; Power cables loom overhead; Students are taught by rote; Creativity and individuality remain unacceptable in the group ethos dominating the social structures; And the domestic distribution system is a labyrinth of layers of middlemen. Bureaucracy, regulations, and strict social pressure to conform are the norm.
But while lean and mean manufacturing processes stunned the world, Japan's back offices remained crammed to the gills with bureaucratic paper shufflers. Until a few years ago, nary a computer had managed to creep through the doors. Senior management was happiest using them as coat racks rather than tools for efficiency and growth. Startups and entrepreneurship were nigh on impossible in this over-regulated environment, with two of the most recent megasuccess startups being Honda Motor Co. Ltd. (founded in 1948) and Sony (founded in 1946).
The ground begins to
Seeking them everywhere
In Japan "there are quite a few small companies here trying to build ventures in order to attract investment. But the level of technical savvy, context, and vision pales in comparison with most U.S. ventures," says Michael Kato, president of the Tokyo PC User's Group and independent Internet consultant. "In building high-tech ventures, Japan is at least 10 to 15 years behind the U.S., despite the Internet boom and the rhetoric of Japan's catching up. But that doesn't mean VCs are going to stop looking here. On the contrary, VCs know that Japan will eventually breed its own startup ventures, and they don't want to miss out on the boom when it happens. VCs are just going to have to find good ideas at a more immature state than they're used to in the U.S. and other markets.
Further, there is a whole new crowd of Internet entrepreneurs in Japan, says Joichi Ito, founder of Digital Garage. "They have financial savvy and are smarter and more experienced. And this time around, they have business plans." Ito thinks, however, that many are not desperate for angel money. Rather, many of these startups are likely to try and keep control themselves, perhaps only taking a little funding to spur them forward. "If you want to invest in a company that is Japan-based, you need to find startup managers with sales and human networking ability. You need somebody with a professional management background not gained in a big company. Big company people never work out."
Allen Miner, former president of Oracle Japan has founded SunBridge -- a venture capital firm focused on Japan-specific Internet startups. SunBridge's first investment was in May -- a 10% stake in honyasan.co.jp, a virtual bookstore. Quoted in the October Japan Internet Report, he says, "Currently we are looking at several interesting opportunities in e-commerce, media, and Web services. Some are U.S.-based companies targeting Japan, (but) most are Japan-based startups."
J.H. Whitney's Slawson believes quality is a problem. There is a lot of potential in Japan, he says, but "investing wisely is a different story. It can get so frothy so quickly, people get desperate to throw money at things, (and) take some really silly punts." Slawson predicts the market in Japan could get really silly and believes his firm will only seriously invest for another twelve months or so before pulling out. Good deals, he concludes, are hard to find. "We have tried very hard to invest in Japanese entrepreneurs, but there can be reluctance to get involved with a foreign player, reluctance to change," Slawson says, adding, "these entrepreneurs appear to be looking for a brand name." Moreover, "the Internet is moving so quickly that the only people who can respond well are people with rapid management execution style."
tortoise loses the race
"I think that 2000 will be a big year," says Kato, "but the real wave of venture capital investment and development of interesting firms in Japan will come in 2001. This will be a real turning period for Internet business in Japan. The companies that find the pearl-bearing clams in the next twelve months will be the ones that reap the greatest rewards. I think that it will be an exciting ride."
now, sparking Japan's entrepreneurial spirit remains the biggest
challenge for Japan's Internet boom. When that happens, growth
will truly be stratospheric and wise investors will be grinning
all the way to the bank.
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