Beneath the Cherry Blossoms with Dave McClure – 500 Startups

Today we sit down with Dave McClure under the cherry blossoms and talk about startups, funding, failure

Dave has long been involved in Japan and in the startup community here, and in this episode, we talk about the progress Japan has made in the past decade and the changes that still need to be made. We go over what Dave sees as the gaps in the Japan’s venture capital ecosystem and also dispel some of the pervasive myths that have spread throughout Silicon Vally and the entire startup world.

We spend a bit of time diving into what Dave and 500 Startups consider to be a risky business model, and it may not be what you expect, but it’s great advice for anyone thinking of starting a company.

It’s a great discussion, and I think you’ll enjoy it.

Show Notes for Startups

Who is doing most of the investing in Japan right now Why Japan needs more angel investors What startups should be looking for in investors How to find a startup idea What Japan should learn from Silicon Valley and what it should ignore Which business models are truly unproven The one thing Japan should change to encourage startups How to really learn from failure

Links from the Founder

500 Startups 500 Startups Japan Follow Dave on Twitter @davemcclure Friend him on Facebook Connect with him on LinkedIn

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Transcript from Japan Disrupting Japan, episode 84.

Welcome to Disrupting Japan, straight talk from CEOs breaking into Japan. I'm Tim Romero and thanks for listening.

Japan, well most of the world really has an unhealthy obsession with Silicon Valley. I’ve been to Japanese language start-up events here in Tokyo where the phrases Silicon Valley, or San Francisco, were mentioned more than twice as often as Tokyo or Japan. And yes, I actually did keep count. And I’m sure none of my friends are the least bit surprised by that. My point is that while Japan can learn a lot from Silicon Valley, the reverse is also true. There are a lot of things going right in Japan, and many things that are developing differently here than they are in Silicon Valley.

Well, today we sit down with Dave McClure, founder of 500 Startups, and we talk under the cherry blossoms about start-ups funding failure, and about some of the most pervasive myths surrounding start-ups and start-up founders. For our listeners who are not familiar with the Japanese tradition of Hanami, or cherry blossom viewing, I’ll explain it to you in both theory and practice because those two can be a bit different. In theory, Hinami is a time to reflect on the transitory nature of beauty, of our possessions, and of life itself. The cherry blossoms bloom only for a few days a year before their pedals fall. And almost everyone in Japan no matter how busy or sick will make at least a little time to go out and walk among the blossoms. The trees really are beautiful, and that beauty is made all the more precious by the fact that they can only be appreciated for such a brief period of time.

In practice, people from all over Japan get together with their friends under the cherry blossom trees, get rip-roaringly drunk, sing karaoke, and have a great and boisterous time. So when Dave and I are talking and in the background, you hear school girls laughing, drunken cheering, and people suddenly breaking into song, you’ll know what’s going on. It was a great party and a great discussion.

So let’s hear from our sponsor and get right to the interview.

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[Interview]

Tim: Cheers.

Dave: Cheers.

Tim: So I’m sitting hear with the indomitable and encourageable Dave McClure.

Dave: Encourageable sounds right.

Tim: So thanks for sitting down. I really do appreciate your time.

Dave: Yeah.

Tim: You’ve had ties to Japan for a long time.

Dave: Yes, probably about 20 years or more.

Tim: And you’ve been actively involved in investing here for about, what, 10 years?

Dave: Maybe seven. I think the first investment I made was a company called Gengo that was, I guess back in 2010. Although I met the founders a few years before that.

Tim: In the past, you’ve talked a lot about how much the start-up ecosystem has changed here obviously for the better in the last 10 years.

Dave: Yeah, definitely.

Tim: Let’s stroll down a bit on the VC side because those same technological trends, cloud computing, the sharing even information of open source that has allowed start-ups to be started for next to nothing has allowed venture capitalists to start for next to nothing.

Dave: Well, next to nothing let’s say for companies maybe for half a million to a million dollars, and for VCs maybe five to twenty-five million dollars, but that necessarily fall from trees, or from cherry blossoms, I guess I would say while we’re here. But yes, it is a lot easier to secure capital from the entrepreneurs and from investors.

Tim: What’s your opinion of sort of the high level of the current state of the funding ecosystem here in Japan? So there’s a lot of seed funds, there’s a lot of traditional funds that are available for like mezzanine financing.

Dave: Right. Well, there’s not a lot of angel investors. There’s not a lot of funds that are being run by operational ex-entrepreneurs. I think a lot of the capital that you see in Japan is coming from more traditional financial sectors either government related or financial services related—certainly a lot of corporate entities that are doing investments. But some of those folks are maybe less family with the risk-taking that an entrepreneur has. There are a few folks who I think have been—maybe prior to gaming companies like Gree or DeNA—They probably have a little bit better appreciation or maybe Rakuten or SoftBank. But I think still a lot of the capital sources are more traditional. And so there’s maybe a different thought process or framework around how to deploy that capital that’s more conservative.

Tim: Is it hurting the ecosystem, or is it something you just is just different?

Dave: Well, I don’t know if it’s hurting it necessarily any more than in the past. I would probably prefer that at least an early stage of capital come from folks who have operational experience and understand needs of entrepreneurs a little more. But capital is good. I think having some amount of capital is certainly better than none. And as you mentioned, I think there’s a lot more informed sources of capital than there may have been 5, 10, 15 years ago for sure. But there’s definitely got to be people who have an eye for what products are functional, what type of these cases are going to work. Maybe who are more grounded in what the actual problems to be solved are. I think sometimes there’s a little bit too much fascination with sexy topics just because everybody talks about robotics, or talks about AR, VR, or talks about drugs. You get a lot of capital flying at very glamourous, shall I say, types of business.

Tim: Well, the trends happen all over the place. But for example, from a start-up point of view, among young Japanese entrepreneurs, there is this kind of idea that the natural first step is joining an accelerated. An accelerator—The way I see it is an accelerator—$50,000 in working capital is not really going to get you very far. And it seems like you’re—

Dave: Yeah, maybe 6 to 12 months, but it probably won’t get you to a real company of any scale unless you get a little bit more capital or maybe can sell products and bootstrap your way there through cash flow.

Tim: So what should start-ups be looking for? Is it that operational experience that you were talking about before?

Dave: Well, I hesitate to put everything into the same bucket or category because different businesses lend themselves differently to how they grow. And I think sometimes we’re guilty of just assuming that all companies are similar, and that’s not really the case, I think. You have people running a ramen shop, and you have people running an automotive sort of business, and you have people running internet businesses, and there really are different capital needs, and different growth structures, different customer base. So I think sometimes people get too much in this glamorous kind of worship mode about start-ups, when I’d rather they really focus on who is the customer and what is the problem you’re trying to solve, and be passionate about that. Because I think we’ve—We’re at the point where not entrepreneurs are so glamorous, it’s more sexy than starting a band. I feel like people—

Tim: Yeah.

Dave: —do a start-up just to be cool. And turns out running a start-up is actually pretty hard, and pretty painful, and doesn’t pay very well—

Tim: Yeah.

Dave: —and is not for the faint of heart.

Tim: Yeah, I agree. It’s astounding how the attitude has changed. I was in high school, everyone was starting a band, and now everyone’s writing an app.

Tim: I guess for some folks they will find their way to success, but it’s a better structure—In my opinion it’s better when entrepreneurs start businesses because they’ve had a frustration, or a pain, or this problem that they’re trying to solve that they’ve understood for a while, or they know the customer, and what the needs of those customers are, and how they’re going to address that. As opposed to just, ‘Hey, I’m a coder, and I want to be a start-up entrepreneur. And what’s the brightest, shiny object around the corner that I can build some apps around?’

Tim: Well, at the end, it’s you’re building a business. You’re not building a product.

Dave: Yeah, and I think people sometimes forget that. So there’s a giant risk in going from just a concept and idea to a functional product. And even with a functional product,