DJ Selects: Why Your Startup Accelerator is Going to Disappear

Almost all startup accelerators are going bankrupt and going away.

Hiro Maeda, the founder of two of Japan's most successful, and most different startup incubators explains both the brief past and precarious future of startup incubators and accelerators. We talk not only about the mechanics and challenges of what it takes to make an incubator successful, but Hiro has some practical advice on when founders should consider joining an accelerator and how they can avoid the 99% of them that provide no real value.

Hiro also explains why so many Japanese VCs today find investing in South East Asia more attractive than Japan, the forces behind Japan's startup boom, and what the next ten years holds for Japanese startups.

Show Notes for Startups

The motivation behind the founding of Open Network Labs Incubator How to measure the success of an incubator How Japanese VCs will be deploying capital in the next few years The success of Beenos's Inception Program and why they had to shut it down Why public companies have trouble with startups How to tell a good incubator from a bad one Why most incubators provide no value The coming shakeout in the incubator industry What’s driving Japan’s startup boom The future of Japanese entrepreneurship

Links from the Founder

Beenos Hiro's Blog Follow Hiro on Twitter @djtokyo Friend him on Facebook The SGE Facebook Page

[shareaholic app="share_buttons" id="7994466"] Leave a comment Transcript from Japan Welcome to Disrupting Japan, straight talk from Japan's most successful entrepreneurs.

I'm Tim Romero. Thanks for listening.

I hope you and your loved ones are staying safe and staying healthy during this coronavirus crisis.

I honestly can’t see too much more than that, because one of the things I learned in releasing our previous episode is that the situation can change dramatically from the time I record to the time I release and then again from the time of release and the time you get a chance to listen.

So about the only thing I can say right now that I know will make sense when you listen to this is that I hope you are doing OK and staying healthy; or failing that getting better.

Today, I’ve got a great Selects show for, so we can sit down over a beer with Hiro Maeda, one of the most insightful Japanese VCs. This interview was recorded back in 2015. A lot has changed since then, but a surprising amount of things have not. When we first caught up with Hiro he was just about to launch his new fund, and I’ll give you an update on what happened after the show.

What might be even more interesting, however, is that the predictions Hiro makes in this interview have not come true as quickly as expected, but many of them are playing themselves out in slow motion right in front of us. Intro Today, we sit down with Hiro Maeda and talk about Start-Up Accelerators. Now, Hiro is the creator of both Digital Garages, Open Network Lab and the Beenos Inception Program. These are two of Japan's best known Start-Up Acceleration Programs.

Their approaches are very, very different. Naturally, we talk about both the past and the future of Start-Up Acceleration in Japan, and the critical differences between the good ones and the bad ones.

What impressed me most about our conversation was Hiro's commitment to running his Accelerators just like Start-Ups.

Now, we dive into the fundamental reasons behind the attraction that Japanese VCs now have for Southeast Asian Markets. As well as the reasons behind what we both see as the coming hard times for Start-Up Accelerators, and the coming good time for Japanese Start-Ups.

I will let Hiro explain all of that in his own words. Let's get right to the interview.

[pro_ad_display_adzone id="1404" info_text="Sponsored by" font_color="grey" ] Interview Tim: I am sitting here with Hiro Maeda of Beenos formally. The man who found the Open Network Lab with Digital Garage. Today, we are going to talk a lot about Accelerators. Because you are a man that knows.

Hiro: [laugh]. Thank you.

Tim: Thanks for sitting down with us.

Hiro: Thank you for having me.

Tim: Let's get right into it. I am really interested in your experience and setting up and running the Digital Garage Open Network Lab Accelerator. Why don't you tell us a bit about it, and what your goals were in starting that Accelerator?

Hiro: Yeah, so this was back in 2010. It was right after the Lehman Crisis. It happened in 2007, 2008, 2009 was no one was investing in start-ups in Japan. It was basically myself, Joey Ito, who is currently the Director of a MIT Media Labs, and also the Founder of Beenos, or the former Founder of Beenos Taru and then the CEO of Digital Garage.

We all kind of got together, and were discussing what can we do, right? Yeah.

Tim: Okay, let's back up here for a second. How did all of these people end up in the room getting together? Because that is a pretty diverse group of people right there.

Hiro: Other than myself those three actually knew each other. They always wanted to do something, right. Digital Garage was just moving into a new office. They had some extra space. They actually started off with what can we do with this space?

Tim: Okay.

Hiro: I got pulled into the discussion, and then I was at the time really looking into Tech Stars and [00:02:47].

Tim: Right, right.

Hiro: The two Accelerators in the U.S. that were starting to do very well. I basically proposed that why don't we just do this in Japan?

Tim: You are trying to replicate wht was happening in San Francisco, and then well in Boulder.

Hiro: Yeah. Tech Stars.

Tim: Happening in the States.

Hiro: Mm-hmm.

Tim: You are putting this together. You were learning as you were going.

Hiro: Mm-hmm.

Tim: It has been up and running now for 5 years?

Hiro: Yeah, I think 5 years, yeah.

Tim: All right.

Hiro: Yeah, yeah.

Tim: When you are running an Accelerator, how do you measure the success of the Accelerator? Is it the return of the Portfolio. It is the number of companies that are still in operation after 4 years? How do you measure success from the Accelerator point of view?

Hiro: As an Investor, the closest way to measure success is return on capital and I guess mark-ups, right.

Tim: Right.

Hiro: I guess how much more valuable your Portfolio is. We are right now about roughly about 20 X mark-up. Our entire Portfolio is 20 X more valuable than it initially was.

Tim: All right.

Hiro: Which is pretty good. We will see how much of that becomes cash.

Tim: Right.

Hiro: I am hoping it will be somewhere above 10 X. That is one way to kind of measure success. I actually think the purpose of an Accelerator – I mean we do have fiduciary duties to make big returns. The other thing we have to do is increase the success rate of start-ups to get to the next phase, right.

The other thing we look at is actually how many of the companies that enter our incubator or accelerator are able to raise money from VCs?

Tim: Right.

Hiro: Right. I don't know what the exact number is right now. At one point, we had 70 percent of the companies that go through our Accelerator were able to raise their next round. Whether is was $100,000 dollars or $500,000 dollars or a million dollars.

Tim: That's pretty good. Listeners in San Francisco wouldn't be particularly impressed with that number.

Hiro: Yeah.

Tim: Anyone who has been dealing with start-ups in Japan for the last 10-15 years knows that is extremely impressive.

Hiro: Yeah. We were proud of that. We were pretty proud about that.

Tim: Well, actually that brings up a good point. There seems to be a real Series A crunch in Japan right now. What do you think is behind that crunch? What's the best way to solve it?

Hiro: To be honest there aren't that many Series A Investors in Japan to begin with.

Tim: Right.

Hiro: There is only a handful you. What probably happened is we had more seed Accelerators emerge, more seed funded start-ups. Those seed funded start-ups are having a much harder time raising money.

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Tim: Here is the dynamic I see. Let me know what you think. The nature of starting a company has changed. You can do it with much smaller teams. With much lower amounts of capital. The economics favor not only lots of people starting companies, but investors making lots of very small $10,000 dollar to $50,000 dollar bets. We had a whole emergence of pre-seed, early-stage financing come up.

Hiro: Yeah.

Tim: The people who have to step in next and set a price, and put in three-quarters of a million dollars. Seem to be the same people that were doing it 10-20 years ago.

Hiro: Mm-hmm, mm-hmm. That is the case. I mean yeah. I don't see that many new funds being formed investing in the series A or B range. It is usually the same kind of people, the same brands, pretty much the same people, right.

Tim: It does seem that most new funds are focused on see, early stage, the strategy of lots of small bets.

Hiro: Mm-hmm, mm-hmm.

Tim: What about some of the larger funds now? The incubate funds. These are funds with hundreds of millions of dollars. There is not enough start-ups to invest in.

Hiro: Yeah.

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Tim: You can't invest that $10,000 dollars at a time.

Hiro: Yeah, yeah. I am not sure what their exact strategy is with raising $100 million dollar fund in Japan. My guess is they want to do more in emerging markets like Indonesia.

Tim: Yeah.

Hiro: The other is they want to be able to fund the full stack. They want to be able to fund the seed, the Series A, the Series B and C. They keep on doubling down on companies that are doing well in their Seed Portfolio.