What You Need to Know to Raise Money in Japan

Startups and venture capital work differently in Japan.

The rounds are smaller, the priorities distinct, and while the same terms are used, people quickly discover that the definitions are often subtly different. The game is played differently in Japan.

Today we get a chance to clear up a lot of the confusion as we sit down with James Riney, founder of Coral Capital and head of 500 startups Japan. We talk about some of the most significant changes that Japanese venture capital has seen over the past five years, and we look at how things are going to develop going forward.

James and I also break down the business model behind venture capital funds themselves. It's something that all serious startup founders should understand, but few do.

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

Show Notes

How venture funds raise funds Why Japanese banks and corporates are changing their attitudes towards Japanese startups The tradeoff between sector-specific and general VC funds What the hell is a Series-A anyway? How VCs try to appeal to the "right kind" of startups The real problem with IPOs in Japan How Japan's new, bigger funds will change Japanese VC in the long term What you never want to tell a VC when you are raising money What VCs do with their portfolio companies that don't work out How Softbank's Vision Fund is changing the market Advice to foreign founders who want to raise money in Japan

Links from the Founder

Everything you wanted to know about Coral Capital Check out James' blog Follow him on Twitter @james_riney Friend James on Facebook

Leave a comment Transcript Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs.

I’m Tim Romero and thanks for joining me.

Today, we’re going to do something a little bit different. We are going to talk about the state of venture capital in Japan. If you are raising money in Japan or thinking of investing in Japan, you really want to listen to this.

Now, normally don’t interview VCs on Disrupting Japan. It’s not that VCs are not interesting. I’ve got nothing against VCs. I mean, some of my best friends are VCs. No, it’s just that VCs have a tendency to talk in the abstract.

They talk about general trends and their portfolio companies, and I have always found that it is far more informative to go straight to the source, to talk to the founders about what they specifically are doing to capitalize or respond to those market trends, to have them tell you about the real challenges that startups are facing right now, and how that fits into the bigger more important society-wide stories.

Well, today, we’re going to do both. Today, we sit down and talk with James Riney of Coral Capital, and we examined the business of venture capital, how VCs view advertising and customer acquisition, and what causes some VCs to make money and others to lose money.

It is not exactly like it is for startups, but it is surprisingly close. We talk about the most important changes happening in Japan’s startup community, of course, but we also dig into the challenges facing venture capital funds in Japan, and Coral Capital in particular.

We talk about what VCs look for when evaluating a pitch, things you should never tell a potential investor, what the next few years of venture funding in Japan will look like, and hopefully, we will clear up some of the confusion about the difference between seed and pre-seed, and pre-series A and series A rounds.

But you know, James tells that story much better than I can, so let’s get right to the interview.

[pro_ad_display_adzone id="1404" info_text="Sponsored by" font_color="grey" ] Interview Tim: So, we’re sitting here with James Riney, the founding partner and CEO of Coral Capital and former head of 500 Startups Japan, and we are going to be talking about venture capital.

James Riney: Yes, it’s good to be back, Tim.

Tim: It’s great to have you back on. Now, a lot has changed since – when was that, four years ago?

James: Yeah, it must have been three, 3 ½ years ago, something like that. 2015, right? Something like that, yeah.

Tim: Now, so much has changed about venture capital and startups in Japan. We will get into that, but first, I want to dig into venture capital as a business, what the business model behind venture capital? Because that’s something that many startup founders understand.

James: Yeah, I mean, I think especially in Japan, but even broadly as the venture ecosystem, the fundraising side for venture firms is a little bit opaque, and maybe some founders don’t necessarily realize that especially the sort of startup funds like us, we have to go out and raise our own capital.

Tim: Yeah, yeah, in much the same way startups do, but actually, even before that, so stepping back before that, when someone decides to start a fund, what do they do? Do they start with investing theses, do they start with a couple of high net worth individuals?

James: Yeah, so in a lot of ways, we have to tell a story as to how we are going to win in the market, and in our case, money is our product and money is commoditized. So, what we have to sell to investors is why we have some sort of unique advantage and why entrepreneurs are going to take our money as opposed to the other 10, 20 guys in the market, right? And then also, the founding team, the partners of the fund, they may or may not have history together, so in a lot of ways, it’s similar to a series A startup in the sense that we don’t know the dynamics among the managing team they are going to go and how are they going to market and what kind of investments they are going to make?

Tim: So, in the case of like Coral or 500, what is the pitch to the investors? What is that advantage you are selling them?

James: So, in our case, we launched our first fund under the 500 Startups brand, for the first story for us was selling the fact that there were not brand name Silicon Valley firms really investing in Japan, and so the selling proposition was PR a Silicon Valley style firm operating in Japan, and because we are bringing that sort of know-how in that brand, entrepreneurs will choose us over others.

Tim: Who are the investors? Are they banks? Are they pension funds? Are they other startup funds?

James: Yes, so this is a dynamic that is sort of unique to Japan, so in Silicon Valley, one of the firms will raise from institutional investors. In fact, most of the capital is from institutional investors, so that includes pension funds, insurance companies, endowments, etc., whereas in Japan, a lot of the capital for startups come from corporate, and so that is in the form of corporate venture capital or in the form of funds like us that have to raise from corporate. Up until recently, there has not been a lot of institutional capital be invested into the market, but now, some of the funds including us are able to raise from these institutional investors, and so it is starting to move and starting to change.

Tim: Why is it changing? Do you think it is just because institutional investors feel that startups are a more safe or valid investment or that the number of startups have grown big enough that it is an investable asset class for them?

James: It’s a bit of both, right? So, institutional investors want to – I mean, unlike corporate, they are investing for purely financial return, right? And, for institutional investors, they have seen the likes of Mercari that grew to multibillion-dollar IPO within just five years, and then we have like Rakusul and a few other pretty big exits in the ecosystem, and so institutional investors look at those returns and they feel that there is actually something here domestically. Mind you, a lot of these managers in the institutional firms have invested outside of Japan into the top tier firms in Silicon Valley, so they are familiar with it as an asset class, but they have not really look to Japan as a place to get similar returns.

Tim: Okay, and when you are pitching these investors, so obviously, you have to pitch your strategy or the advantage you have. Do you or do most funds pitch a specific target, say we are going to be investing in B2B software or we’re going to be investing in life sciences, we’re going to be investing in anything we think is interesting?

James: We are a sector agnostic firm. If you look at all the top tier firms in the world, almost all of them are not sector specific. They don’t focus on a particular area. Now, that said, if from a marketing perspective on both the fundraising side and be investing side focusing on particular area could be important. For example, AI or blocking are like hot topics in Japan right now. Because it is a specific mandate and it checks boxes for a lot of these corporate executives, they feel more comfortable investing in a fund like that, whether or not viable in terms of creating superior returns.

Tim: So, are most funds general or are they focused?

James: I would say most funds are general, but I think the sort of trade-off you have here if you focus on a particular area is that even though you might see all the AI and blocking companies, you might not see any of the other companies, right? That is sort of the trade-off that you have, and in Japan specifically, I don’t think that the market is big enough to specialize in a particular area. There is only a handful of really big accident and they vary across multiple different areas, and so you don’t really know where the great companies are going to come out of, and if you are pigeonholed into a particular area, you are going to miss out.

Tim: There do seem to be a lot of these targeted funds in Japan. That is a drone fund, there is a couple of AI funds.

James: Right. It’s probably more feasible to have a broad perspective because if you have an idea of where you want to invest,