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STARTUP LANDSCAPE

Startup: Add risk, cash, entrepreneur

by Ayako Mie

Staff Writer

Softbank Corp. CEO Masayoshi Son took the world by surprise last month by announcing a $20 billion buyout of U.S.-based Sprint Nextel Corp. In 1980, his startup firm was a two-man computer wholesaler. Now through vigorous mergers and acquisitions it’s angling to be the world’s third-largest telecommunications business.

While Japan’s traditional tech giants continue to lose steam, risk-taking young Japanese entrepreneurs are aspiring to be the next Softbank or Facebook, able to compete in the global marketplace.

Following is a look at the nation’s startup landscape:

When did venture booms occur?

Japan has arguably experienced three venture, or startup, booms, since the war.

The nation became the second-largest economy in 1968 during its unchecked rapid ascent, with its first venture boom from 1970 to 1973, marked by the debut of high-tech startups such as Nidec Corp., now a global motor giant, and Keyence, which makes sensors and microscopes.

The second boom was in the 1980s amid the launch of several service-sector and venture capital firms, including Softbank, travel agency giant H.I.S. Co. and Culture Convenience Club Co., which runs the Tsutaya DVD and video rental chain.

The third boom can be traced to 1995, when the government promoted the so-called incubation of business ventures at institutes of higher education.

College students started Web-based businesses, including Livedoor Co. Its founder, Horie Takafumi, inspired the young by challenging Japan’s conservative corporate culture.

He would later try, and fail, to make a run at Fuji TV, a prominent network deeply entrenched in the old-boy system.

The upstart Horie’s later arrest and imprisonment for accounting fraud and Livedoor’s fall from grace, coupled with a prolonged recession triggered in part by the 2008 subprime loan debacle in the U.S., discouraged young people from taking risks.

Is there a startup boom going on right now?

Rapid technological advances have changed the startup landscape, and some experts say Japan witnessed a startup bubble in 2011.

“The deep penetration of cloud computing lowered the bar. Young people could start businesses at much lower costs,” said Kentaro Sakakibara, CEO of Tokyo-based Samurai Incubate Inc.

Cloud computing allows access to information from the Internet via Web-based tools and applications, instead of a direct connection to a server.

Before cloud computing, Internet-based business owners faced an initial investment of several million yen for servers. Cloud server investments now range in the thousands of yen.

Sakakibara said the rise of social networking services, including Facebook and Twitter, serve as free marketing and advertising tools, a stark difference from the dot-com boom in 2000.

How are startups funded?

A common avenue to raise venture capital is the so-called pitch contest. These are popular in the U.S., where winners acquire funds and connections to prominent Silicon Valley-based venture capital firms, such as Mountain View-based Y Combinator.

Pitch contests have also become popular in Japan. Contests are organized by incubator businesses, such as Samurai Incubate or Open Network Lab Inc., which provide seed funds.

Experts say pitch contests provide efficient ways for busy investors to get a quick glimpse of promising startups. Startup owners also get to know the investors without having to be aggressive.

Samurai Incubate also hosts pitch contests, called Samurai Venture Summits, in which startups make a two-minute sales pitch. The summits started two years ago with only around 50 participants, but more than 1,000 showed up for an event in September.

How much venture capital is being invested?

According to Tokyo-based Venture Enterprise Center, investment peaked in 2006 at ¥279 billion. Things took a hit after the Lehman Brothers collapse and the amount fell to ¥87.5 billion in 2009. Cash has slowly recovered since then. In 2011, the total came to ¥124 billion.

That amount, however, pales in comparison with the U.S., where this year’s venture investment value has already reached $28.7 billion, almost 18 times more than that of Japan.

One of the reasons is that employee pension funds here have strict self-imposed restrictions on investing in unlisted shares. There is no law against such investments, but startups are considered risky as they often lack liquidity and have sparse investor relations compared with listed firms.

According to Venture Enterprise Center, pension funds in Japan accounted for less than 1 percent of total investment value in 2007, compared with 50 percent in the U.S.

The U.S. has been instrumental in creating a better environment for startups. In April, President Barack Obama signed the Jumpstart Our Business Startups Act, which eased security regulations and helped small companies raise funds. The law legalized “crowdfunding” by allowing for a wider pool of small investors with fewer restrictions, including nonaccredited investors, so startups can raise money from any source.

The comparatively lower venture capital cash flow in Japan can also be attributed to the fewer opportunities for investors to cash out. There have been only a few startups targeted by buyouts, so the only way investors can recoup their outlay is via initial public offerings. According to auditor KPMG AZSA LLC, only 11 new startups were listed on the Tokyo Stock Exchange’s Mothers market for startups in 2011.

What is a “lean startup?”

Companies with limited funds are resorting to what is known as the lean startup approach. The concept, coined by Eric Ries, relies on “validated learning” — rapid scientific experimentation and a number of counterintuitive practices that shorten product development cycles.

Entrepreneurs are encouraged to create so-called minimum viable products rather than go through the lengthy process of completing final products, and tweaking improvements along the way based on customer feedback. This approach lets a company shift direction with agility, alter plans step by step and save money.

Sometimes entrepreneurs are forced to change, or “pivot,” their product into a completely different one from the original idea based on customer feedback.

The best known example is Instagram, a photo app for smartphones. The startup project, which currently has more than 100 million registered users, successfully pivoted from the original idea. It was bought by Google for $1 billion in April.

More Japanese startups are also embracing the lean approach. Tokyo-based SonicGarden Inc., a software developer, is one of them. The company created an intranet-based social network service called SKIP that enhances the flow of internal communications, especially at big corporations where sectionalism hampers smooth worker-to-worker contact.

SKIP was originally designed for small and midsize firms, but the first version wasn’t well-received. It had to pivot to target big companies.

To make more profit, SKIP made another tactical shift: It went from a single tenant system, in which each client had to have a server and database, to a multitenant system with a single server and database that handles the information of many clients at once.

The firm spent just a month to develop a pilot plan for each client, and made adjustments based on feedback within a week.

Can Japanese startups be competitive in Silicon Valley?

Currently few are based in Silicon Valley. Experts agree Japanese products are innovative and slick enough for the valley. But Japanese entrepreneurs often lack marketing and branding strategies to attract the venture capital based there.

Shortcomings in English ability meanwhile make it harder for Japanese startups to tout their products.

“Whether you release the product in Japan or somewhere else, the key to success is to first build an English foundation to attract customers,” said Taizo Son, who runs the venture capital fund Movida Japan. Son helped launch Yahoo Japan with his brother, Masayoshi, in 1996.

Critics also agree that startups can’t survive in Silicon Valley unless entrepreneurs aren’t afraid to fail, as it is said that only three companies out of 1,000 can survive there.

“The key part of the mindset is that it’s OK to fail. In fact, we get very suspicious of entrepreneurs who have only seen success,” said Chris Gill, head of the Silicon Valley Association of Startup Entrepreneurs. “Most successful entrepreneurs have tried and failed two, three, four times, before they succeed.”

The Weekly FYI appears Tuesdays. Readers are encouraged to send ideas, questions and opinions to hodobu@japantimes.co.jp