VC Outlook

Back to Contents of Issue: December 2000

by Louis Ross

Louis Ross ( is managing director of Obsidian Capital Limited, a global private equity/venture capital group. Earlier he was an equity strategist with Merrill Lynch Japan, as well as a research fellow at the University of Tokyo.

YEARS BACK, WHEN I WAS A FELLOW at the University of Tokyo, it struck me that not one -- not one -- of my Japanese peers aspired to be an entrepreneur. Engaging in entrepreneurship was not seen as a prestigious endeavor. The common goal was entry into a top-tier company or government agency. Being a rank-and-file member of a large company or the bureaucracy simply carried more cachet.

Blame it on Japan's group-oriented culture, in which an individual's identity and social hierarchy is a function of his attachment to a group, be it a prestigious school, company, or elite government agency. This provides a strong comfort level within the group, with associated disincentives for breaking away from it -- including, at times, social ostracism.

In Japan, as has often been written, "the nail that sticks up gets hammered down." In the US, that same nail gets glorified and showered with respect, even though he may fail. The risk of failing is overwhelmed by the prospect of succeeding, and succeeding usually defines the person, regardless of his background. An entrepreneur needs to be a nail. This stimulates competition, which stimulates innovation. In an individualistic society, individual initiative is encouraged and often rewarded. Thus, as the VC industry in the US has gone mainstream, incentives for entrepreneurs have flourished. Japan, obviously, is not an individualistic society as of yet.

Of course, as this magazine has covered, there is a nascent VC and venture scene emerging in Japan. Within this scene, however, there's a strange desire to find Japanese entrepreneurs, as opposed to simply finding entrepreneurs. Many foreign entrepreneurs are attracted to the US because there is realistic hope of bringing their business ideas to fruition utilizing the openness of the market and the abundance of funding. Japan will eventually realize that to compete in the new millennium, it must have its own reservoir of domestic entrepreneurs and tech talent -- Japanese or otherwise. The country should make itself attractive to talented non-Japanese (who often resent having their creativity and determination hampered). There may be little choice: recent signs indicate that the pressing shortage of IT talent and the graying population will force Japan to compete with other industrialized countries for cheap, highly skilled workers from second- and third-world countries. Globalization means standardization, which means direct competition.

The US leads the world in entrepreneurship primarily due to its flexible structure, its highly mobile work force, the acceptance of failure and renewal, and the free flow of labor. Japanese authorities should incite labor mobility for the New Economy to flourish in Japan. They should ensure the development of a diversified and vibrant capital market, making a variety of funding available to its entrepreneurial class.

This recommendation is nothing different from what is required in the economy as a whole as it restructures and deregulates. Large Japanese companies should look upon labor mobility as a vital ingredient to the renewal of the Japanese economy and as a cheap way to gain competitive advantage. Instead of spending valuable resources on keeping everything in-house and attempting to transform generalist salarymen into high-value-added, technically adept employees, they should encourage people to leave and start up their own companies. They can then keep in close contact with the startup, and perhaps fund it and/or enter into arrangements to act as a strategic business partner. If the venture grows and prospers, they can attempt to bring it back within their sphere of influence. Foreign capital flowing into Japan will serve as a vital component here by providing essential risk capital, that rare but critical element of entrepreneurial success. In Japan, there is an abundance of capital, but a shortage of risk capital.

The nurturing of entrepreneurialism and risk-taking is a task for the government, private sector, and civil society to confront and conquer. Build a field of dreams and the entrepreneurs, be they Japanese or foreign, will come

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