The Gardener

Back to Contents of Issue: August 2001

For VC/professor Takatoshi Matsumoto, the best companies to invest in are student startups. That makes him a bit of an iconoclast in Japan's VC community -- if there is such a thing.

by Cynthia Sekiguchi

Matsumoto in the new (and still being built) offices of Academy Capital Investment

"I EASILY GET BORED RUNNING a company," says Takatoshi Matsumoto. He isn't kidding about that. Matsumoto started and later left Cisco Systems Japan, Sun Microsystems Japan, and a couple of others. In April, the restless entrepreneur launched yet another company, Academy Capital Investment. This time around, though, he sees himself less as a builder than as a gardener. His latest startup is backing youngsters, especially in university research departments, who have come up with unique and revolutionary technologies. "This is a long term project, a seedling that might put forth buds," Matsumoto explains.

Receiving visitors in his paper-strewn office in Tokyo's Kojimachi, Matsumoto comes across as relaxed and unusually approachable -- but at the same time, like a forest predator at rest, he seems ready to leap up and begin the hunt at any second. His eyes sharpen and his voice takes on the firmness of conviction as he warms to the topic of venture businesses and investments.

The tech-stocks crash in the United States that scared off venture capitalists and left Silicon Valley startups starving for funds last year also burst an IT bubble that had started inflating two years before in Japan. Suddenly in both countries, youth -- now interpreted as lack of experience -- has come to be seen as a handicap instead of an advantage for an entrepreneur. Matsumoto thinks that's a shame and has set out to do something about it. "After reaching age 50, I wanted to give something back to the society," he says. "Accepting an offer from Keio University to teach students, the way I found was to nurture startups."

Incessantly casting about for chances to start something new has given Matsumoto a strong network among business people, academics, and investors both inside and outside the country. Using those relationships and allying with top Japanese universities, he proposes to provide full-service support for new startups across Asia, using the US model of incubation.

To understand how unique his approach is in Japan, look at the existing VC scene. Even today, large corporations control most of the money, technology, and people in the country, and they stubbornly adhere to the old rules. Formality, deference, and introductions are still required to gain access to resources. Independent, bootstrap outfits, the type of companies that sparked the Internet boom and almost everything of value associated with it, are not really viable in Japan. Even if they have a great product or service to offer, the "two 26-year-olds in a garage with a PC" just don't have a reasonable chance.

Mitsumasa Murase, for example, runs Japan's largest venture capital firm, Jafco. Unlike Matsumoto, whose regulation dark suit seems more camouflage than uniform, Murase looks like what he is: an executive from Jafco's parent company, Nomura Securities. While much of the venture capital world is dressed down and relaxed, the 61-year-old Murase is uptight by standards of any hemisphere. Beneath the surface, as well, Jafco is different from venture capital companies elsewhere. While firms in the business usually pride themselves on finding small, unknown companies -- seeing value where others don't -- and supplying the money that gets these startups off the ground, Jafco works like a traditional Japanese company. You can't meet its officials without an introduction. You need existing business. You need contacts. You bow. "We decide how to invest through relations built over the years," says Murase.

Things don't work much differently for entrepreneurs seeking capital from Japanese trading companies, some of which have been testing the VC waters. For years, the trading companies were key components of Japan's economic machine. They provided the capital and contacts for Japanese companies wanting to sell their products overseas. They served an important function in the export-led economy. But as manufacturers built up their own capabilities overseas and had the money to fund market research, the sogo shosha, as the traders are known, were taken out of the loop. "The time is over for trading companies to be intermediaries," says Tadao Watanabe, chairman of Marubeni Hong Kong. As a result, the companies have been looking for new ways to make money. Some went into investment, leveraging off their human and technological strengths. Itochu went first and has benefited from its transition to a venture capital--style firm, a transition that began in the late 1980s when the trading house was the largest company in the world in sales. "Itochu started to invest in technology 15 years ago, and it is fruitful now," says Tomoyasu Kato, an analyst at Nomura Securities.

Over the past decade, Itochu has outperformed the other major trading companies and performed in line with the Nikkei 225 stock average. While it benefited from its early forays into venture capital, however, the company says that New Economy investments, made recently, have been disastrous. "The Tokyo headquarters decided to invest heavily in e-commerce," says Hiromitsu Hasegawa, manager of Itochu's administrative department in Hong Kong. "But a huge loss was made."

Money in Japan has long been locked up in the banks and stuck in the balance sheets of major corporations. The main stock markets have been reserved for mature companies, while the over-the-counter market and the Second Section of the Tokyo Stock Exchange have never fully developed. Entrepreneurs with ideas have had nowhere to go. They needed introductions and contacts, which they usually lacked. Even today, "nothing has changed," insists Tetsuya Tajima, a researcher at Mitsui Knowledge Industry Research Institute. "Japanese still do business through the usual channels, among keiretsu and related companies."

Consider the case of Kazutomo Robert Hori and his startup, Cybird, a pioneering provider of content to Japan's cellphone industry. For Hori, finding money was not a matter of writing up a business plan and taking it around to funds interested in hearing about the next big thing. It meant going the standard Japanese route and using connections in the old economy. Hori spoke to Omron, where a friend of his worked, and got funding. The Kyoto-based electrical control maker then invited Itochu to join in. Jafco invested, but just two years ago, only after Cybird had managed to get NTT DoCoMo, the largest company in Asia, to become a customer. By that time, Cybird and Hori had become well known, and even then Jafco took only two out of 15,000 shares. "There is no VC in Japan," remarks Hori. "The probability for startups is less than one in a hundred million."

Japan's venture capital industry is about one-tenth the size of that in the US. Jafco is by far the largest venture capital firm, twice the size of the second largest, NIF, a Daiwa Securities--related company. Of Japan's 160 venture capital firms, about 21 are associated with securities companies, 74 with banks, and 12 with insurance companies. Nineteen are independent. Together, they have less than $10 billion invested, according to Asian Venture Capital Journal, and only 15 percent of that was committed to startups. Less than a third of Japan's venture capital investments went to companies involved in endeavors that could be classified as New Economy.

Some argue that the venture capital problem in Japan may be a chicken-and-egg issue. There is no venture capital, they say, because there is little, if anything, good to invest in. Just as the large companies and financial institutions control most of the country's capital, so they control the people, the ideas, and the markets. The Matsushitas, Toshibas, and Toyotas of the world still hoard the best employees and dominate major chunks of the economy. Without them, it is tough to develop anything; it is tough to sell a product or a service; and it is tough to get the right employees. "In the US, experienced executives ally with young entrepreneurs," says Yoshinari Yoshikawa, chief executive of IP Infusion. Supposedly some big names did the same in Japan, "but I am still curious to know if that ever really happened."

Matsumoto Asako Ono students
From left: Matsumoto listens to student presentations in his class at Keio University; student Asako Ono; students present their research

Japanese executives know that if they leave their companies, they cannot return. While lifetime employment is reportedly on the decline in Japan, companies still regard loyalty and commitment as important qualities in their employees. "If you fail," says one dot-com consultant, "there's no way to go back."

Is it possible to develop a business in Japan without the help of a large company? "I want to say, 'Yes,'" says Dan Schwartz, managing director of AVCJ Holdings, publisher of Asian Venture Capital Journal. "But I have to say it is muzukashii," he adds, using the Japanese word for difficult.

While most investors agree that venture capitalism is different in Japan, they caution against exaggerating these differences. Even in the most freewheeling venture capital markets of the world, entrepreneurs don't just walk into the office of a VC and ask for money. Usually the startup has some connection to the investor or some connection to a large, established company. And to the extent that Japan's venture capital industry is different, it may have benefited from the differences. While traditional ways kept it largely out of the dot-com boom, the adherence to custom, formality, and deference also kept it away from the bust. By investing in companies with existing businesses and strong financial support, Jafco and others may have forfeited some profit, but they have also avoided substantial losses. Jafco has invested in nearly 2,000 companies, and it says only 6 percent of them have failed.

Then where does Matsumoto's Academy Capital Investment fit into this scene? While the sources of venture capital have been drying up in Japan as well as in the United States, and while much of what has passed for VC in Japan really isn't, in fact, ACI intends to do the real thing. What happened during the past couple of years, Matsumoto says, "was irrational. Companies and investors poured in huge amounts of money, without first doing clear evaluations of what they were investing in. Those who disappeared after the end of the IT bubble had no core competence to run businesses. They had only ideas. Many of their business models relied on advertising and were no more than copies of US models."

Further, he says, "while in the US a venture capitalist would evaluate the character of the CEO, his or her management skills, and the technologies already in hand before providing capital, in Japan people avoid investing in the seed stage. They consider it too risky." Not Matsumoto. "I want to invest in the seed stage of IT-related companies -- for example, in the network business," he says. Matsumoto clearly is more comfortable talking grand design than details -- and the few details he's willing to offer reveal that he is truly starting small. "We are investing in a total of seven startups in Japan and China," he says. "I can't name them because other investors might poach them from us." That concern may sound inconsistent, coming from a man who laments the supposedly risk-averse behavior of other investors. But Matsumoto figures that if someone else does the work and finds truly promising startups, "there are thousands of investors willing to put up the money." Members of the ACI advisory board, mostly former Cisco Systems executives, "tipped us off to the existence of these seed companies, where the staff are all young -- in their 30s," he says. But wouldn't more capital be good for the startups? Not necessarily, Matsumoto says. "Too much capital also spoils entrepreneurs and affects the quality of their management."

Matsumoto says he drew upon his own money for the initial capital, a total of ¥50 million. He expects the first fund-raising from third parties to reach ¥15 billion. Financial institutions have yet to be tapped, but he says the first stage of financing has brought in ¥1.5 billion from major IT-related companies in Japan. That's pretty small change in the VC world. As an experienced entrepreneur in his own right -- but one who had big-time backing from the outset for his most successful ventures -- Matsumoto is no dummy about the odds that ACI will hit it big any time soon and incubate the next Yahoo. "We might be in the red for a while," he acknowledges.

So what's the motivation? By all accounts, Matsumoto is a born teacher who, at this point in his career, really does see himself as able and willing to be of service by doing what he loves to do. He sees teaching as a large part of what being a VC really is all about: "It's necessary to educate the startups to enable them to compete in the international field if Japan wants to lead the world's economy," he says -- and it's a matter not only of world leadership but of continued prosperity. "Japan may be a poor country in the near future if nothing is done. I want to invest starting from the technology departments of the private universities."

In the United States, he says, "90 percent of the startups come from universities." In Japan, meanwhile, the universities "have considered themselves sanctuaries, keeping their distance from the business world. It's a shame. Hundreds of good ideas hatched in the research departments have sunk without a trace there." With that in mind, Matsumoto became a professor at the forward-looking Kanagawa prefecture campus of the venerable, Tokyo-headquartered Keio. At the university, he says, "there are already five startups, and I do believe in their potential."

You have to attend one of Matsumoto's classes to see how wrapped up in teaching he has become. From Tokyo, that requires a one-and-a-half-hour train trip to Chigasaki Beach, where a golf course in front of the Keio campus contributes to the abundant greenery. In the center of the campus is the Media and Governance Department, where Matsumoto holds forth on "information technology management." Before the class starts, Matsumoto is already there, chatting with his students. Namiko Ito, his secretary, smiles, saying, "He loves to talk with students. Between class meetings, too, they approach him constantly."

Sometimes Matsumoto brings well-known business people to speak to the class. He likes to get the students talking, so he also sets up debates. The theme for today's debate is Amazon vs. Barnes & Noble. A group of students makes presentations using PowerPoint illustrations. It's a relaxed atmosphere, with some students drinking milk or munching sandwiches. They don't call him sensei, or professor, but just plain Matsumoto-san. Every student carries a laptop, for making notes and accessing sites during the class. The class is surprisingly dynamic; none of the 20 students sleeps or uses i-mode, frequent scenes in other universities. Students keep asking questions while Matsumoto remains quiet, not participating directly in the discussion. Only from time to time does he interject a question, such as one about the total sales, profits, or market shares of the companies. Finally, when the discussion become fierce, he comments, explaining management's point of view and asking students to come up with ideas to deal with management's problems.

Students, clearly, adore him. "I can't feel the usual professor-student distance with Matsumoto-san," says Itaru Terashima. "He likes to go drinking with us. He speaks on all those off-the-record issues that you can't find in the media. You know, those gray topics." Takayuki Hara agrees with Terashima, saying, "Yeah, he explains to us why Cisco Systems doesn't become a listed company." Asako Ono likes the fact that the professor pays real attention to the students. "One day, I made him an awful cup of tea -- and he still remembers it. I'm ashamed of the tea, but it is good to know that he cares about each of us."

Ono says taking the class was a natural for her, as she is participating in a Keio startup. But plenty of the students are just nibbling, with other plans in mind. Terashima wants to work in management for an NGO, Hara at a publishing company. Ken Komuro, who is studying environmental information, admits that he may not have what it takes to get into a startup. "Now, I am a bit scared to go into a venture business," he says. "It's too bad I didn't jump in during the IT bubble like some people I know. I could have entered and exited quickly. Today we are in a wait-and-see mood."

Matsumoto is satisfied, nevertheless, that he's getting somewhere. He has seen enough of the new generation to know that the burning ambition to be a lifetime salaryman "is not really a matter of our culture," he says. "In fact, there are signs that Japanese students are changing their preferences. These days, many want to go to interesting companies rather than brand names; I have high expectations for them." It's not the students but the investors who disappoint him. Although some people show interest in what he's doing at the university, in the post-bubble apathy that afflicts the country that's mere lip service. "They only say 'Fantastic!' and that's it."

Clearly, then, if he's bored with being the builder and running companies that he's started, Matsumoto still finds excitement in his role as gardener, in interacting with students. Perhaps that's one reason he professes to be in no hurry to fulfill his objective. He is, he says, prepared to wait five years or more to nurture students who can compete internationally.

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