TT-520 -- Where are All the Entrepreneurs? Ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, June 7, 2009 Issue No. 520


- What's new
- News
- Candidate roundup/Vacancies
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A recent article in Forbes magazine, entitled "Searching
For Entrepreneurship in Japan",,
posits that Japan is way behind the US in
entrepreneurship and needs to do something about improving
the environment for breeding new companies so as to
reinvigorate its economy. The article focuses on the
paucity of venture capital invested into Japanese
start-ups, which Forbes says amounts to just $3 billion a year
distributed to 3,000 companies. In comparison it says that
VCs in the USA invest an average of $30 billion a year into
about 4,000 companies.

The article further goes on to say that Japanese VCs
typically earn an Internal Rate of Return (IRR) of just 4 percent,
compared to 17 percent or more by US VCs, thus indicating that
not only the amount of money but also the quality of
companies being invested in is also weak. In other words,
Japanese VC and entrepreneurship is messed up.

The Forbes article seems to have been based on the Stanford
Project for Japanese Entrepreneurship (STAJE),, which is an effort
by a number of Stanford and Todai academics to understand
just what is going on with entrepreneurship in Japan and
why there isn't more VC money and more commercial successes
coming out of Japan.

Check out the site. There is a very good PowerPoint
presentation by Robert Eberhart, which spells out some
possible reasons for the variance in Japanese-US numbers.
Forbes on the other hand, chooses to quote a Hitotsubashi
professor who reckons that Japanese start-ups are scared to
launch in to the global environment, and thus wind up
cannibalizing each other in the Japanese domestic markets.
It is surprising that Forbes didn't try to dig a bit deeper,
because there is a story worth telling here.

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[...Article continues]

We think it is true that:
a) There is a dearth of VC money available in Japan
b) There is a dearth of entrepreneurs
c) There is a dearth of start-ups with global capabilities

Recent financials for two of the biggest VCs show a sorry
picture for venture capital in Japan. The largest fund,
with 3,000 investee companies as of 2006, is JAFCO. The
company in fiscal 2008 posted a net loss of 16.9 billion yen
($172.4 million), while the largest listed VC, JAIC, has started
negotiating for delayed creditor payments after posting a
loss of a massive 34.8 billion yen ($362.5 million). That's a lot for a
VC to lose in just one year.

Both companies are saying that the main reason for their
travails is the terrible state of the stock markets for
IPOs. There were only 49 listings in 2008, less than half
that of 2007, and less than a quarter of the peak several
years ago. But while they are quick to blame the markets,
what other factors are at work here? Are VCs losing money
because the quality of the companies they're investing in
are low, or are the quality ideas getting killed at birth
because of a lack of funding?

We believe some of the major contributing factors are:

A. Failure to Get Past the Start Line

1. There is no doubt that there is a general lack of
interest by most would-be entrepreneurs to take a risk, due
to lack of role models and their brainwashing by older
generations of the importance of a regular salary. Luckily,
the silver lining of the recession clouds of the 1990's
and now is that more and more people are being forced to
realize that the system is broken, and to survive/grow
they need to take charge of their own futures. Just look
at the ongoing expansion in Rakuten online stores, up 4,000
last year to 27,000 retailers, to get a feel for this. An
online store may not seem like an act of entrepreneurship,
but for many younger Japanese and for housewives, it is a
radical departure from the past. They are risking real
money, the comfort of anonymity, and their recreation time
to run these stores.

2. Lack of education about how to run a business. Japan
still has a very low academic focus on setting up and
running companies. At the kids' level, you will seldom find
schools encouraging kids to try starting their own
businesses as a class project -- it's just not part of
curriculum nor the Ministry of Education's value system.
This is understandable, given that the ministry comes
across as one of the last bastions of socialism in this
country... Later, after students graduate and start
working, there is very little adult education to help
people jump out on their own.

The good news, however, is that this is changing, as MBA
schools become more popular. MBAs are ostensibly for the
development of managerial skills, but inevitably these
courses expose curious minds to alternative means of doing
business, including entrepreneurship and NPOs. Some of the
schools on the leading edge of promoting entrepreneurship
include Globis, Keio, and Hitotsubashi. We wonder then,
why Stanford felt it had to choose Todai in their
entrepreneurship project?

B. Operational Hurdles

1. Then there is the bias of the financial system in not
wanting to support risk takers. Now, it's probably only
natural that banks anywhere don't want to risk their
capital on start-ups, but the problem is that there is no
real alternative to the banks. What VCs are active in the
market nowadays tend to invest after a company has gone
through the tough steps of developing a product and is
already starting to record sales -- in order to reduce their
investment risk. To get a product up and running on in-house
funding is tough and it is no wonder then, that Japanese
companies are defined by Eberhart as being too
founder-centric -- you need to be mentally tough to make it
past the start-up stage here.

2. The paucity of early-stage investment from VCs is a real
problem for start-ups in the technology space in
particular, since in order to create world-class products,
they generally need to invest in processes and core
research. Given that small companies employ most of the
workers in Japan, supporting these start-ups would seem
vital to the interests of the nation. We find it strange
that the government doesn't do more to kick-start their
establishment. Tax preferences on angel and VC investing,
special R&D funds for SMEs, and setting up a fund-of-funds
to co-invest with established VCs would both be natural
moves. Indeed, in other first-world countries, government
are establishing funding organizations that co-invest with
private VC funds. These initiatives can be very effective
and importantly for Japan send out the message that
risk-taking is officially sanctioned.

3. Japanese VCs also need to change their investment and
operational strategies, by putting larger amounts of cash
to work in each company they jump in to, and by helping to
educate the company's management to grow in skills and
vision. In so doing, they will provide both the necessary
resources and also a means of overcoming the negative
attitudes and fears bred by the current education system.
Some VCs are doing this already, such as Tsunami Network
Partners (TNP) in Kanagawa and Sunbridge in Ebisu, but
these types of firms are few and far between. More often
the VCs choose to reduce risk by scattering their
investments alongside other similarly minded funds, then
proceed to ignore their investees post-investment.

The Forbes article does, however, miss an important source
of funding for Japanese startups, as well as for foreign
firms who are setting up in Japan -- investment by
strategic investors. While we don't have any figures, we
would guess that there are at least 1,000+ strategic
investments in start-ups done by Japanese major
corporations every year. The average amount is typically
between JPY50m and JPY100m, and is made for 5-10 years.
Forbes states that Japanese VCs have an IRR of just 4%, but
if you're a strategic investor, perhaps you may not want
any end-game IRR on your investment at all! Instead, what
you're interested in is cashflow.

Thus, even if an investment appears to be highly valued,
so long as the price being paid results in direct income
and profit (by virtue of being an agent, distributor,
OEM, or something similar) flowing at a rate 5%-10% higher
than the cost of the money for the investment, then it
makes financial sense. We suspect that if Stanford was to
investigate the volume and value of strategic investments,
the reason for the apparent lack of VC returns in Japan
would be resolved. As a case in point, Softbank made much
more money out of its implementation of the VoIP
technology of UTStarcom than it did out of the gain in
shares of that company -- although it did well there as
well. Thanks to UTStarcom's technology, Softbank's Yahoo
BB business boomed and created a multi-billion dollar
revenue channel for the group.

Lastly, what about the fact that Japanese start-ups don't
seem to be able to connect to buyers in the global
markets? We think 90% of this equation is a simple lack of
English-language confidence, coupled with the historic
domination of profitable export business segments by the
major trading companies. SMEs definitely need help to reach
out to the global markets, and we've often wondered why
JETRO, which was originally set up to promote the exports
of some of the world's now most famous brands, hasn't been
repurposed to help SMEs start their export push?

Maybe it is coming, but in the meantime, if a small company
with world-class technology or products gets a call from a
potential foreign customer, they do in fact get scared and
hide under a shell. Usually they will either take ages to
come back with a quote, or they go find an aged (retired)
consultant to help them with English and export issues. As
a result, the potential customer reads the lack of
immediate response as lack of interest, and they go


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+++ NEWS

- Toyota wastes no time raising more cash
- They have less babies in South Korea
- Hybrids snag 12% of new car sales
- Canon to build new SLR camera factory
- Farm Ministry hides 100's of food fraud cases

-> Toyota wastes no time raising more cash

A May filing with the Finance Ministry indicates that
Toyota plans to raise JPY700bn over the next two years, by
issuing massive amounts of new corporate bonds. This comes
on top of an issuance of JPY70bn (US$727m) this last week
and JPY200bn in February this year. ***Ed: So that's
approximately JPY1trn (US$10.3bn) over a two-year period.
We presume that Toyota is either expecting a slow recovery
in autos next year, or, more likely, that they are going to
have to make some heavy investments in electrics and
hybrids.** (Source: TT commentary from,
Jun 3, 2009)

-> They have less babies in South Korea

While the news out of Japan last week was that the
birthrate rose slightly to 1.37 babies per woman but the
population as a whole dropped by 51,300 people, South Korea
has a worse situation. That country in May had the dubious
honor of being the country with the world’s lowest
birthrate, according to the World Health Organization
(WHO). Korean women now give birth to just 1.2 babies in
their lifetime. South Korea was the lowest of 193
countries, followed by Belarus, Bosnia-Herzegovina, the
Czech Republic, Poland, Slovakia, and the Ukraine. In
contrast, Nigeria recorded the highest birthrate with 7.2
kids per women, followed by Afghanistan with 7.1. (Source:
TT commentary from, May 22, 2009)

-> Hybrids snag 12% of new car sales

One reason why Toyota may be in the markets trying to raise
large amounts of corporate debt could be the impressive
sales of its hybrid cars in Tokyo. Apparently in May, 12%
of all new car sales were hybrids, with about half of the
21,601 units being Toyota's Prius. (Source: TT commentary
from, Jun 5, 2009)

-> Canon to build new SLR camera factory

It appears that the slew of baby boomer retirements over
the 2007-2010 period is helping at least some consumer
products companies to weather the economic downturn. Canon
has announced that it will resume the construction of a
new digital SLR camera factory in Nagasaki. The factory
will produce 4m cameras a year and will be manned with
around 1,000 full-time employees. This will be Canon's
first new camera factory in Japan for 27 years. (Source:
TT commentary from, June 5, 2009)

-> Farm Ministry hides 100's of food fraud cases

The Farm Ministry has been caught out by the press, which
has discovered 879 cases of food fraud that had been swept
under the carpet by the Ministry. Apparently only 110 cases
were disclosed to the public, because Ministry officials
felt that it would cause "a big social blow" to those
companies who were the subjects of the original complaints.
There were many cases of old products being repackaged with
new use-by-dates, product coming from China and elsewhere
but being labeled as domestic produce, and products being
sold as organic or wild-caught but which were neither.
***Ed: Let's see if the new Consumer Affairs Agency can do
better than their farming bretheren.** (Source: TT
commentary from, Jun 7, 2009)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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