How VCs drive (and murder) global startup ambition in Japan

What keeps Japanese startups stuck in Japan?

It's not a lack of opportunity or ambition. It's not a lack of knowledge or talent. In fact, one of Japan's most experienced venture capitalists thinks that VCs themselves that are the problem.

Today we sit down with Ken Yasunaga, founder and Managing Partner of Global Hands On VC, a fund focused on finding and supporting the Japanese startups with the highest potential to succeed in the global market.

Before founding GHOVC, Ken was managing director at INCJ (Japan's public/private $21B venture fund) as well holding multiple leadership positions in the Japan Venture Capital Association.

We talk about the unique opportunities for investment in Japan, the trap of going public here, how some VCs are holding startups back, and why this might be a turning point for Japan's new global startups.

It's a great conversation, and I think you'll enjoy it.

Show Notes

The two most pressing needs in Japan's startup ecosystem What's driving the increasing quality of Japanese founders Why we are not seeing Japanese unicorns What's preventing Japanese startups from going global The trap of going pubic in Japan Why Japanese startups struggle to go global The importance of mentors and hands-on support The important role of foreign VCs in Japan The right role government needs to play in supporting innovation in Japan Are Japanese founders becoming more conformist?

Links from our Guest

Everything you ever wanted to know about GHOVC Check out GHOVC on YouTube Follow Ken on Twitter @ken_yasunaga Friend him on Facebook Connect on LinkedIn

Transcript Welcome to Disrupting Japan. Straight Talk from Japan's most innovative startups and VCs. I'm Tim Romero, and thanks for joining me. Talking about how Japanese startups need to go global is like talking about needing to go to the gym to lose those 10 pounds. I mean, everyone agrees it’s a great idea, a necessary one in fact, everyone is incredibly supportive. There are classes, networking opportunities, a wide and encouraging network. We all agree that it needs to be done, but somehow very few actually get off their ass and make it happen. Well, today we sit down with Ken Yasunaga, who is going to explain what he and his team are doing to fix that. The going global part, I mean, getting motivated to go to the gym is a discussion we'll save for a later time. Ken is the founder and the managing partner at Global Hands-on VC a fund. He and his partners put together to focus on finding the Japanese startups with the strongest global potential, and then providing them with the resources and guidance they need to actually do so successfully. Before starting his most recent fund, Ken managed one of the largest Japan government VC funds and has advised both METI and the Cabinet Office on startup policy. So, we also dive deep into the role that government should play in supporting the startup ecosystem here. The IPO trap that many Japanese startups fall into, the unique opportunity for foreign VCs in Japan. And of course just what it's going to take to get Japanese startups to succeed in global markets. But, you know, Ken tells that story much better than I can. So, let's get right to the interview.

Interview Tim: So, we're sitting here with Ken Yasunaga, the founder and managing partner of Global Hands-on VC. So, thanks for sitting down with us. Ken: Well, thank you for having me. Tim: I've really been looking forward to this conversation because we've known each other for quite some time now through several iterations of our career path. So, let's talk about your thesis at Global Hands-on VC because I think you're addressing two really important needs in Japan's startup ecosystem. Ken: Yeah. So, let me first tell you what the Global Hands-on VC. We call it the GHOVC. This is a VC fund that invest to the Japanese technology startup. And that provides some hands-on support and including help them going global and established by two Japanese and three Americans. We are currently managing our first one. It's a very exciting time. We see a lot of great startup in Japan and wanted to go global. So, I mean, the basic thesis is, Japan's startup market is growing fairly rapidly, especially in the past 10 years. Currently, the money supply has been 10X and also what the biggest difference we see is the type of the entrepreneurs like ex-Google guy or ex-McKinsey guy. They started to get into this entrepreneur field and they play the role as a founder or sort of management. This market is good, but the only challenge is we don't see any of the unicorn. I mean, there's some unicorns but we don't see any of the global startup coming from Japan. Tim: Let's break that down. So, let's talk about the importance of going global and fundamentally, why do you think we're not seeing these unicorns from Japan? Ken: I think there's a lot of great company, but mostly they are playing in the domestic market and unicorn. And you think about what is the ingredients of the valuation. I think it's a cells much supply by the growth rate. So, can you expect like $200 million revenue from Japan and expect it to grow in the 10% or 20% of KGAR? It's very hard to have that kind of number with only domestic market. Now you can get like up to a hundred million dollars or so revenue, but it's very hard to get more than that. Tim: I agree with that. But what I don't quite understand is so that it's common sense at this point that startups need to go global, but it really has become common sense. I mean, METI is pushing this hard. When I was at Google for startups, we ran programs to encourage it. You've been talking about it for a decade now. The founders seem to support it. So, what's the barrier? Everyone's talking a lot about it, but why aren't we seeing it in practice more? Ken: I think one of the big obstacle is how the investor behave. There is some IPO market in Japan. It's growth market. If you have like $30 million revenue and the 2 million of the net income you can go public and VC investor want the company to go public and get some returns. And that's how the Japanese VC ecosystem worked. And there's a lot of VC who has benefit from this early IPO market. But the return itself is mediocre. Tim: You know, that's really interesting because I think you're right. Historically, the Japanese venture industry has been set up almost at the inverse of the US theory. Where in the US you'll have maybe 20% of your portfolio will do really well and make up for 80% that will go to zero, there'll be 20% superstars. Where in Japan it's been more like 80% of your portfolio, you'll be able to march to a nice, safe kind of low valuation IPO and 20% something will happen and you won't. So yeah. Clearly, if that's your model, you don't want startups taking this big risk of going overseas. Is that changing now or is that still the case with most VCs? Ken: I think most VCs are changing. They realize that low valuation IPO is not good. But more interestingly more startup entrepreneurs started to think going public in Japan is not the end game. The company has to grow beyond the IPO. IPO is just end of one chapter. And if you go public there, now you got the public company position and you can raise more money or you can hire better people and grow the company more. But historically, all the Japanese startup are satisfied with the being the public positions. And then there's no further increase of the Japanese startup after going public. And the limitation of how to raise money and how to get some bank financing, and there's not much secondary public offering from those startup now that will severely limit the growth of the ex-startup when public company. So, it's not good for the entrepreneur, it's not good for the employees. I also have a lots of friends who went public, make some money, good money, but that's it. The growth rate is really low and there's no further growth. And people are stuck with water report and the investor relationship. And there's a… Tim: It's much harder to run a public company than it is to run a startup. Ken: Yeah, exactly. Exactly. Tim: In fact, a lot of my founder friends, when we were discussing their global expansion plans, they were getting pushback from their VCs saying, oh, no, no, go global after UIPO. And no, no, don't do that. Ken: Yeah, yeah. Tim: Go global first. It'll be a whole lot easier. Ken: Yeah, exactly. Exactly. Exactly. I mean, especially, you have lots of competitors and these global competitors is gaining the market when you are just playing with this domestic market. So, in order to fight, you have to be there to fight together. And also another point is, if you succeed in Japan that will become the mental obstacle to go global. I think I will call it innovation dilemma caused by the success. So, if you succeed, it's hard to get out of that model, but if you want to go global, the product offering or service business model can be totally different from the Japanese domestic market. Tim: Why is it hard to people just become too attached to the way of doing things or too proud of the product or both? Ken: Yeah, I think people believe even the management people, employee or investor people believe, or if you succeed in Japan that is a success model that that model has to be copied to play in the other market. But reality is you have to change the product. You have to weigh the people work. And mentally people are a little bit afraid of going into the new place, getting into the business model. So, it's very hard for them to change themselves. It's on the toll of their existence. So, I think in that sense, the big objective is to fight against your competitor under win the market share and get more revenue and get more profit. That's the name of the game. So, it's too late for the market development wise and case study wise,