This Is Why Japanese Startups Can’t Pivot

Japanese enterprises are particularly susceptible to disruption, and Japanese startups have a harder time than most pivoting. Both of these problems stem from the same root, and today we are going to dig up that root and have a look at it.

Today we sit down with Shogo Kawada co-founder DeNA, and we talk about both the challenges of the company’s early startup pivots and the post-IPO difficulties they faced with new disruptive challengers.

Shogo is now one of the most active and successful angel investors in Japan, and he explains how both the role and profile of Japanese angels is shifting. He also outlines the reasons why their presence is leading to several positive changes in Japan’s venture capital ecosystem.

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

Show Notes

How both eBay and DeNA screwed up auctions in Japan Why most business alliances fail Why startups will always have the advantage with new technology How to get started in angel investing The only thing the can force Japanese corporate VCs to change their structure Why the current startup bubble is different from the dot.com bubble What will happen when the current bubble bursts Why Japanese VCs never take technology risks

Links from the Founder

Follow Shogo on Twitter @shg A brief history of DeNA

[shareaholic app="share_buttons" id="7994466"] Leave a comment Transcript Disrupting Japan episode 97.

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

Japanese startups have trouble pivoting. Business and social conventions make it really hard. Once the team, the company or the country has committed to a certain path, with Japan’s consensus-driven approach to decision-making and the importance placed on maintaining social harmony, it makes it very hard for an individual to stand up and say, “Hey everyone, I think we’re on the wrong path here.” Business convention in Japan requires you to simply pitch in and pull your weight.

This is one of the reasons that Japanese companies, particularly the large enterprises are so susceptible to disruption. But some Japanese startups have been able to pivot their way through multiple business models and into a successful IPO and those are the ones that we need to study to find out how they did it.

And today, Shogo Kawada, co-founder of DeNA takes us through the exciting story of one such case study. We talk about why DeNA was able to pivot relatively easily from auctions to commerce to mobile gaming but why it was unable to make the jump from web auctions to mobile auctions or from early mobile gaming to smartphone-based mobile gaming. We discussed the core reason for the problem and examine possible solutions. And we also talk about the rise of angel investors in Japan and how they’ve changed the way investing works here.

But you know, Shogo tells that story much better than I can. So let’s hear from our sponsor and get right to the interview.

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[Interview]

Tim: So I’m sitting here with Shogo Kawada, the co-founder of DeNA. Thanks for sitting down with me.

Shogo: Thank you very much.

Tim: I’m sure most of our listeners know DeNA. It was one of the most important gaming startups of the .com generation. You founded it with Tomoko Nanba in 1999 and you’ve become one of the most active angel investors in Japan now. So before we dig into current investment trends in Japan, I want to back up a bit and talk a little about you and DeNA.

Shogo: Basically, we started DeNA as an e-commerce company. It first started, it’s PC-based auction service in 1999.

Tim: Okay. So originally, the idea was to compete with Yahoo Auctions and eBay?

Shogo: Yes, exactly. When we started, at that time, there’s no Yahoo Auction. Yes, there exist already eBay in US market but there is not C2C big market in Japan.

Tim: That was a very interesting time for auctions in Japan because eBay very famously delayed their launch in Japan.

Shogo: Yes.

Tim: It took a long time to launch. In the meantime, Yahoo Auctions launched pretty quickly but DeNA was before them. Why didn’t DeNA dominate that market instead of Yahoo?

Shogo: Because when we planned to start that the business, we had some alliance with Recruit and Sony. In 1999, Recruit was very strong in the internet area. Also, Sony was very still at that time more energized company, at that time.

Tim: Yes, yes. In 1999, Sony was a incredibly powerful brand.

Shogo: Yes, yes, yes. So we used their customer base to start our C2C market but in September, Yahoo started and they used their strong traffics into their new started C2C market.

Tim: So it was just that you didn’t have enough of a lead to build up a market before Yahoo came in?

Shogo: Yes, yes. So Yahoo Auction was the C2C number 1 market at that time. We chased a long time but still.

Tim: They got further and further ahead.

Shogo: It’s number 1 market.

Tim: What made you decide to pivot to gaming?

Shogo: Because C2C market, winner takes all. So if it’s profitable but we had a very serious time. So we decided to do business in also the shopping area, shopping mall area so we made our C2C market and we made a profit but not so strongly profitable. At that time, 2003, there’s no iPhone, no smartphone. So everybody did not believe that people buy something through mobile phone. But as you know in Japan, there are i-mode.

Tim: Right. At that point, Japan was so far ahead of the rest of the world. Although I feel most of the commerce were things like ringtones and small virtual purchases.

Shogo: Yes. And at that time, basically, they did a business with monthly subscribe the contents. So very simple business model but there is almost no e-commerce and at that time there is a kind of just the physical Bluetooth, small physical Bluetooth up here. So every IT business people and every entrepreneur did not believe that people can input their name and address through this small product.

Tim: It was a definitely difficult interface to use.

Shogo: Yes, yes, yes. But for example, young Japanese women high school students use feature phone, the mobile phone kind of the acrobatic skill.

Tim: Right, right, right. Yes.

Shogo: So they put very long mail and after that, I found that if you’re using that button, they can write a novel. So I found that kind of fact so we create a new C2C market in 2003.

Tim: So DeNA was first to market, had a good product to solid user base in peer-to-peer marketplace on mobile and yet when the iPhones became popular, Mercari took the lead. I mean it’s a different technology, a different platform but the same business. Why do you think DeNA wasn’t able to capture that market on the new platform?

Shogo: Yes. That’s a program. So basically I don’t know but the DeNA’s mobile auction market is basically based on the subscription model that was used in the i-mode or like old style mobile phone infrastructure.

Tim: Right, right. With very, very limited billing options and payment options.

Shogo: Yes, yes. And that is totally different from the smartphone. Basically, Yahoo Auction cannot come to the mobile and same the old style mobile cannot get into the smartphone business.

Tim: It’s something we see a lot. So when you look at companies like, say, IBM or Intel and you say, okay Intel was really smart and they got out of memories to focus on CPUs at the right time but they missed the big shift into mobile CPUs. You’re talking about gaps of 20 years but these cycles were really fast. They were only 5 or 10 years apart. It still had some of the same people in place. There are very smart people at these companies that saw it. So you just think the company itself, the processes and the way of doing things became so strong that they couldn’t change?

Shogo: Maybe another aspect is that numerically there’s lots of money, tens of millions.

Tim: Tens of millions, yes.

Shogo: Tens of millions, they get the money. That’s big risk taking. For DeNA, yes they are making profit hundred of million yearly but for them, tens of million investment is big.

Tim: So they don’t want to put their main business at risk?

Shogo: Yes. Maybe it’s a difficult decision at that time invest all the tens of million in mobile market.

Tim: In mobile market. Well, let’s talk a bit about DeNA’s growth in gaming. So after the success in the mobile at the peer-to-peer markets, what drove DeNA into gaming?

Shogo: At that time, we found that there is a big hidden market that are using the mobile phone to access the internet.

Tim: But it seems the same pattern repeated in gaming as in peer-to-peer e-commerce. The strong gaming companies like Nintendo and Sega did not successfully make it into web gaming or mobile gaming. And when the iPhone and later the Google App Store was introduced, that changed the market again. So the distributors didn’t have so much power anymore and companies like DeNA were not able to make that shift. Actually, it’s not just DeNA. I mean we’re talking about DeNA because you’re here with us but across the board, it seems that even when these technological disruptions happen in 5 or 10 years, companies have a hard time making that transition. So from console to web mobile, and then from web mobile to the smartphone, almost no companies made those transitions.

Shogo: Yes, yes, yes. It’s very difficult for every company.

Tim: Yes. Why is it so hard?

Shogo: Because the platform is changing. So situation seems to be stable as a investor viewpoint. Of course everybody use smartphone but every internet business player believe that next platform innovation will come so they are preparing for virtual reality or mixed reality.