How to Make Startup M&A Work in Japan – Naoki Yamada

Startup M&A is changing in Japan. In August, Naoki Yamada sold his startup Conyac to Rozetta for $14 million.

It was an unusual journey of alternating cycles of rapid growth and near bankruptcy, and today Naoki explains how he managed to make the deal happen and also how M&A is changing in Japan, and it seems that change might come much sooner than anyone had been expecting.

Naoki talks very openly about some of the mistakes he made and give solid advice on how you can avoid making the same ones. And of course, he explains how he handled the negotiations for the acquisition, and why he decided the exit now rather than continue to grow the company.

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

Show Notes for Startups

How two quick pivots saved Naoki's company The risks for startups hiring (and firing) too quickly The temptation and danger of focusing on investors at the expense of the team Why M&A made more sense than another round of fundraising What Japanese acquiring companies are most worried and most excited about The struggles of post-M&A integration Advice for large companies who want to acquire startups

Links from the Founder

Learn more about Conyac at their home page Rozetta's Home page Read Naoki’s thoughts on Nakoki’s personal blog Follow him on Twitter @naokey Friend him on Facebook

[shareaholic app="share_buttons" id="7994466"] Leave a comment Transcript from Japan

Disrupting Japan, episode 65.

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs. I'm Tim Romero and thanks for listening.

Today, Naoki Yamada, founder of Conyac, joins us for a second time. Long-term listeners may remember that he first came on the show a little over 2 years ago and he’s been very busy since then. In August, 2016, Naoki sold his company to Rozeta for about 12 million dollars. But that deal almost didn’t happen and today Naoki joins us again to tell us the story of massive growth, followed by near bankruptcy, followed by massive growth, followed by near bankruptcy, followed by recovery, followed by M&A. So you already know the ending but it’s the story that’s important. Naoki talks very openly about some of the mistakes he made and gives solid advice on how you can avoid making the same ones.

And of course, he explains how he handled the negotiations of the acquisition and why he decided to exit now, rather than continue to grow the company. But, you know, Naoki tells that story much better than I do, so let’s hear form our sponsor and then get right to the interview. [pro_ad_display_adzone id="1404" info_text="Sponsored by" font_color="grey" ] Tim: Cheers. It’s great to see you again. I’m sitting here with Naoki Yamada and we’re going to talk about Conyac. And it’s an exciting story of starting up and growing, and almost going bankrupt, and growing, and almost going bankrupt again, and having a happy ending. So thanks for sitting down with us.

Naoki: Thank you.

Tim: So let’s back up a bit—let’s back up a lot. Tell us about what Conyac is.

Naoki: When was the last time we talked?

Tim: A little over two years ago.

Naoki: Okay. It’s been a while and we’ve changed a lot. We started Conyac as a social translation and we slightly changed our service from customer service to business service in 2013.

Tim: So let’s start from the beginning. In 2009, you started it. What is consumer translation? Was it like peer-to-peer translation?

Naoki: It was more like a community-based translation service. At that time, there were only two options for the translations. One is traditional translation entities and the other one is Google. We wanted to make our service in between those two options, so we asked people who could do the translations outside of the community. We added many translators in our platform and we did translation through those people.

Tim: So was it just very small batch translations of 10 words, or a tweet, or that kind of thing?

Naoki: Most of the translations are for 3,000 small sentences, like letters and stuff. It worked for pleasure but it didn’t work for business?

Tim: Just not enough demand?

Naoki: Right. And it was hard to find people who pay for that.

Tim: Okay. So once you learned that, you’re saying you pivoted to more of a B2B model?

Naoki: Right. It was 4 years after it started, so it took a long time.

Tim: It took a long time to realize that.

Naoki: Yeah, and since 2013, we supported that B2B service and the sales increased 20 from that point.

Tim: At that point, as you were pivoting to B2B, how big was your company? How much revenue? How much staff?

Naoki: The revenue was like about $50,000 a month. And the staff at the time was like 10 people.

Tim: Okay, so that’s back in 2013. Well, it sounds like you’re on your way.

Naoki: In that year, we got investment from several venture capitals and we used a lot of money for the people we hired.

Tim: That’s what start-ups are supposed to do.

Naoki: I was thinking that if I had more people, we can raise more sales and revenue, but I did not know.

Tim: Okay, so how big was the round?

Naoki: It was not that big for the current variation. It was like 0.6 million dollars.

Tim: Okay, $600,000. And you went out and you hired how many people?

Naoki: About 15 people.

Tim: Oh, wow. So you went from about 6 people to 20 people. 20 people, that’s a lot of people for 600,000 investment.

Naoki: For that much revenue.

Tim: You had to be burning through cash. How did you do that? Let’s talk about that because that is—having to hire that many people in how short a timeframe?

Naoki: Like a year.

Tim: So what kind of people were you hiring? Mostly sales staff?

Naoki: We hired a couple salespeople, and also we hired engineers. It was good to create new features but it didn’t lead to the sales, so that function, it lead to that real money.

Tim: So the engineers were generating new features but it wasn’t helping to drive revenue. When you’re growing that fast, how do you maintain a corporate culture, when you triple the size of the company in one year?

Naoki: It was a big mistake I had. I didn’t think that much about the culture and stuff, so everyone thinks differently and teams were spreading into many parts.

Tim: So different teams just going in different directions?

Naoki: Right. After a year and a half, many of the members decided to leave the company because of a lack of culture, and a lack of a big vision. And at that time, we decided to pivot ourselves a bit to more like a general crowd sourcing service. It was a crowd sourcing translation service at that time and we decided to a more varying kind of service, so that we can order things besides translations, like research, marketing.

Tim: So if someone wanted to create blog posts?

Naoki: Right. It worked well but many of our members think that we lost our culture and our vision at that time because—

Tim: But I can understand that, right. The company is pivoting a bit, you’ve got different teams going in different directions. So how did you try to pull it together?

Naoki: Actually, we couldn’t get it together. The teams were about to explode and many people left the company. Less than 10 people were left.

[pro_ad_display_adzone id="1653" info_text="Sponsored by" font_color="grey” ]

Tim: Okay, so you went from like 6 people to 20 people—

Naoki: Going down to about 6 people again.

Tim: So the people who left, was that people who left because they were frustrated and tired, or did you have to lay people off because you were running out of money?

Naoki: I was actually not laying off people. They left.

Tim: They left? But you didn’t hire replacements for them?

Naoki: It was hard to replace people because we were actually losing money, so if we replace people, the money went.

Tim: I can imagine this is a very frustrating situation.

Naoki: Right. For about one year, it was tough.

Tim: So you went to 6 to 20, to 6 again. Was it the same 6 people?

Naoki: No. Only a couple people were the same.

Tim: That sounds like a really difficult thing to go through. Looking back at it, now that you’ve kind of come out the other side, what would you do differently?

Naoki: I could do many things differently. If I were there right now, I would just create a [UNCLEAR 9:31] culture and tell people more about what we are doing and why we are doing that kind of stuff.

Tim: So communicate the vision and the activities?

Naoki: Right. I didn’t talk much with the members at that time because of—I can’t remember why I didn’t talk, but—

Tim: Well, believe me, I understand. A lot of it is, as a CEO, the job is very stressful just by itself and sometimes talking to staff, talking to all the staff, it always seems like something you can delay. You can do it next week or there’s no urgency to it.

Naoki: And also I was actually considering that the money is—we were losing a lot of money so I was thinking to get investment, I mean in the next round, at that time. So I was talking a lot with the investors, so I didn’t have that much time with the members. That was my excuse.

Tim: So did you know things were going wrong or did you just have not enough time to deal with it?

Naoki: I was noticing frustrations but I was not looking at it directly, so that was my biggest mistake.

Tim: Your advice to other founders would be like—

Naoki: Talking with the members.

Tim: Deal with the members, first priority. Okay. At this point, you’ve pivoted a bit, you’re doing translation, you’re doing general bilingual content creation, you’re back down to 6 people. What was the company looking like? What were your revenues?

Naoki: We were almost bankrupt at the time, within three months or so, then one of the sales members got a big deal from a big company and then we survived.