Back to Contents of Issue: February 2000

George Hara, Managing Partner, Defta Partners

George Hara

George Hara's got a reputation as a Japanese VC who never invests in Japanese companies. But with his homeland in the midst of a venture company boom, he's changing his tune, and his San Francisco firm, Defta Partners, is opening a Japan office. Hara aims to use his well-honed skepticism to weed out Internet wannabes from Internet willbes in Japan.

He got his start, typically enough, at Keio University, in Tokyo. After spending several years doing archaeological research in South America, he went to Stanford's b-school, where the entrepreneurial bug bit him hard. Then, MS in hand, he launched two startups, the first involving fiber optics, the second networking software.

He began his VC career in Silicon Valley in 1985, then in 1990 joined as a partner at Accel Partners. In 1996 he started Defta, which has invested in a hundred-plus firms, including Zoran, Unify, PictureTel, Borland, Cycolor, and Oren Semiconductor. Over 20 have gone public on Nasdaq, and Defta's valuation now tops $2.5 billion. Senior editor Noriko Takezaki spoke with Hara at Tokyo's Keio Plaza Hotel.

So, what made you change your mind about investing in Japanese companies?
I see that opportunities have started to mature in Japan. Since March of last year, the VC environment here has changed drastically, and, in particular, the emergence of the new Mothers venture startup market is quite encouraging for those of us looking to foster venture companies in Japan. Also, Japan's environment for M&A activity has become much more encouraging. There always were opportunities for M&A deals here, but the targets were usually poor performers looking to sell themselves regardless of price. In terms of quality and quantity, there was little here to attract serious money. Looking around Japan today, however, I'm seeing an increasing number of strategic M&A deals taking place, and there are more and more opportunities for late-stage investing. But I still want to approach the Japan scene cautiously, and I certainly won't get caught up in the current venture company boom -- that's why I spent two years preparing for the start of my business here.

You mentioned Mothers; and Nasdaq Japan will open later this year. What do you think about the emergence of these?
I doubt whether both will succeed. Think about the size and market scale; even in the US -- where the stock market is huge -- there's only one market, Nasdaq, for venture company stock dealing. In Japan, meanwhile, we've got Mothers, the OTC, the TSE Second Section, and soon Nasdaq Japan. All this in a country whose overall market size is less than one-fifth of America's. I think this will hinder the growth of stock markets as a whole in terms of the number of transactions, as well as in aggregate market valuation of the companies listed.

You mean neither Mothers nor Nasdaq Japan will succeed?
Well, what I've been suggesting to the Ministry of Finance and the Japan Securities Dealers Association is to unify all the existing stock markets, except the TSE First Section, into one, creating a single "Big Mothers" market. That way, disclosure of corporate information, the principle of investor self-reliance, and the listing and delisting of companies can all be centralized, helping investor self-reliance. In the current scenario, Mothers might end up as the poor performance ghetto for companies who can't make it on the OTC market.

What kind of companies are you interested in here?
Defta Partners will focus on Internet/ecommerce applications on consumer platforms, especially in Japan. I believe the IT platform for the Internet will very quickly shift from the PC to the consumer platform, where the Japanese electronics industries are very strong and we can grab the best opportunities in the convergence of the Internet and the consumer platforms.

Any particular fields you're looking at now?
Taking into account how businesses may develop in the next several years, my interests lie not only in the Internet arena, but in the fields of telecommunications and broadcasting - and in their convergence via the Internet. In these fields, many technologies will be emerging, like embedded real-time OSs, and user interfaces for Web appliances. Since Japan leads the world's home appliance market, I'm very interested in the development of new Net-enabled home appliances, mobile phones, and TVs.

How would you characterize Japan's current Net venture boom?
I think 90 percent of the Net venture companies in Japan will face bankruptcy in a few years -- they will not be able to finance themselves adequately. Even stock analysts in Japan may not understand those business models, so they can't give Net startups a fair valuation, no matter how good the underlying core technology is. In the US, many Net ventures have enjoyed high valuations even though they aren't making any profit. Thus they can afford to spend large sums on R&D for future business growth, or they can make strategic M&As to enhance their positioning. For Japanese entrepreneurs, however, such strategies would be difficult under the current circumstances.

And the VCs themselves?
There are many venture capitalists here who've hastily prepared for working with startups. Many are from zai-tech [financial engineering] fields. As was said in the United States in the '80s, that kind of background is the least suitable for working with startups, because they can't understand the mentality of startups and as a result won't take responsibility and help out when the startup faces a critical juncture. They can't guide or coach the startups properly. The promising VCs are the ones whose partners have experience themselves in starting or managing successful small businesses.

What is Defta Partners up to?
We've been investing in Silicon Valley ventures, as well as in other companies in the US and Israel. We've put funds into Zoran, which has developed industry standards in DVD and JPEG; Internet Dynamics, a leader in the VPN field; Oren, which is developing semiconductors for digital TV; Ultra Guide, working in medical devices; Cyber Gold, doing a micropayment engine; and Accelerated Networks, a developer of xDSL communications technology. Accelerated Networks' shares made a 250 percent equity return in 1997. And I'm involved with the Alliance Forum, a nonprofit organization that aims to promote exchanges between venture companies in the US and Japan. I'm currently serving as chairman.

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