VALLEY VIEW

Back to Contents of Issue: April 2000

by Tom Spargo

One of the net's biggest success stories is the advent of the incubator and the startups spawned from these venture hatcheries. The major reason for incubators' success? Time to market. By providing funding, office space, and administrative services, incubators allow entrepreneurs to save time and energy, allowing them to focus on the most important parts of developing their businesses. Incubators also help to bring entrepreneurs into like-minded communities, increasing networking and helping develop business concepts -- features which are particularly attractive to group-oriented Japanese entrepreneurs. The only problem is that there just aren't that many incubators in Japan -- at least, not yet.

Prior to the advent of the Net economy, incubation in the US was exclusively a government or academic play. According to the Kauffman Center for Entrepreneurial Leadership, there were fewer than 10 business incubators in 1980. By 1985, that number had grown to 70 as universities sought to commercialize research and local governments revitalized declining industrial areas. Today, there are almost 600 incubators in North America.

The private incubator boom is really a by-product of the overall success of the Internet economy. Serial entrepreneurs, leveraging their reputation and connections, decide to set up their own venture funds and incubators in an attempt to repeat their initial successes multiple times. A perfect example is eCompanies, founded by Earthlink's Sky Dayton, which boasts a $130 million venture fund. Entrepreneurs like Dayton have no problem selling investors on the concept of using proven management experience to build better Internet businesses faster.

Until recently, Japan's incubator presence was limited. Regional governments and universities offered support to new ventures in the form of SOHO centers and science parks, but entrepreneurs often saw these sites as cookie-cutter boxes free of real innovation. Yet new government initiatives have paved the way for a dramatic increase in the number of incubators, and progressive, community-oriented incubators are now emerging. SOHO Inc., for example, is an incubation facility located in Yokohama that is funded by MITI. The SOHO Center has all the trappings of a modern incubator, including cybercafe, networking events, and business development assistance. The government is planning to roll out 26 SOHO-style incubation facilities over the next few years. MITI's incubator creation efforts should be applauded. But the Japanese entrepreneur should realize that one of the major values of an incubator is seed funding and IPO management experience -- something only private incubators can offer.

If US incubator evolution is any indication of how incubators will progress in Japan, private incubators should follow after a few more successful Internet IPOs in Japan. One early leader in the private incubation movement is the NetYear Group headed by Sonny Koike. NetYear has hatched several notable alumni, including NetAge and Space Finder. Another player in the private incubation space in Japan is D-brain, which offers venture funding and business development consulting.

One Net player that is surprisingly low-key in Japan's incubation space is Softbank. Softbank's work with foreign startups is well known, but when it comes to domestic startups, the firm has yet to put its full weight behind a Japanese entrepreneurial movement. Softbank's Silicon Valley investment unit, Softbank Venture Capital, features an incubator called Hotbank, now developing into a network of incubators, with Thinktank. com being one of the first affiliations. In Japan, however, Hotbank does not exist. Furthermore, Softbank is not alone. Panasonic US runs the Digital Concepts Center in Cupertino, which incubates 15 to 20 e-commerce startups at a time, but nothing similar for Japanese entrepreneurs.

Starting a company in Japan is difficult and expensive. Being an entrepreneur is made even harder by the cultural tendency for Japanese to work in groups. The incubator solves many of these issues by providing hands-on support during startup and a sense of belonging. MITI's incubator initiatives are a step in the right direction, but greater incentives for the venture community are required. The government recently agreed to provide matching funds for VC investment received by (primarily) domestic startups. Perhaps a similar incentive should be created for VCs that set up incubation programs.

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