Just over a year ago, 29-year-old Masanobu Kimura was one of the many eager Japanese individual investors rushing to put their savings in dozens of small venture businesses, including a fast-rising Internet portal named Livedoor Co.

But the collision with “Livedoor shock” on Jan. 16, 2006, put an end to that fever, traumatizing him and thousands of other individual investors who were just beginning to take an active and influential interest in reviving Japan’s stagnating stock market.

After prosecutors raided Livedoor’s offices in Roppongi Hills for evidence of alleged securities law violations, Kimura lost nearly 4 million yen as Livedoor’s price nosedived to one-seventh of its value in about two weeks. Following a steady stream of negative media reports leaked by prosecutors about Livedoor, founder Takafumi Horie and his key executives were arrested, and the stock was given its death sentence: delisting from the Tokyo Stock Exchange.

“Now I only buy stable shares like banks and brokerages,” said Kimura, one of 3,244 plaintiffs suing Horie and Livedoor for their losses. “You have to be careful when you buy shares of venture businesses.”

Kimura is one of many investors in Japan who have distanced themselves from speculation in small and midsize startups since the Livedoor shock. Such firms, usually found on the Jasdaq Securities Exchange or the TSE’s Mothers market, are considered more volatile than the venerable blue chips on the first section of the TSE. And that is where many investors are putting there money now.

According to the TSE, monthly trading volume on Mothers, where Livedoor was listed, amounted to 3.78 trillion yen in December 2005, helping push the index to new heights before his arrest. But volume had plunged to 2.4 trillion yen by the end of February 2006. And by May it was just 1.08 trillion yen.

On Jan. 16, 2006, Mothers hit 2,799.06. On Friday, Mothers closed at 1,010.37.

Horie was sentenced to 2 1/2 years in prison Friday, but his case wasn’t the only one that sent individual investors scrambling for security, market watchers say.

The arrest of Yoshiaki Murakami, founder of the Murakami fund, for alleged insider trading and Rakuten Inc.’s bid to acquire a controlling stake in Tokyo Broadcasting System Inc. also helped taint and warp the public image of emerging companies and their role in mergers and acquisitions, they said.

Murakami is on trial for allegedly making illegal purchases of Nippon Broadcasting Inc. stock during Livedoor’s takeover bid. Rakuten grabbed attention in October 2005 when it tried to pressure TBS into a merger by acquiring some 19 percent of the broadcaster’s stock. TBS shunned Rakuten, and the two parties have been squabbling over the terms of a tieup ever since. Both stories killed enthusiasm for startups.

“It was a head wind for the markets of emerging companies since too many bad incidents occurred in the past year,” said Tsutomu Yamada, market analyst for kabu.com Securities Co. “The markets plunged, individual investors walked away and that trend has yet to change.”

Yamada admitted that Mothers was overheating in the month before Horie’s arrest because more individual investors were getting interested in venture businesses. Now they are buying big-name blue chips instead, like Toyota Motor Corp. and Nippon Steel Corp.

“At the time, it was said that people were shifting their money from savings to investment, but in reality they were speculating,” Yamada said. “Now they are turning from speculation to investment.”

The lesson learned from the Livedoor incident is simple and clear: Investors need to study more about companies before putting their money into them, said Kiyoshi Kimura of the Japan Association for Individual Investors, a nonprofit organization.

“Japanese individual investors are lazy about conducting background checks using financial statements and the Japan Company Handbook series, compared with investors in other countries,” Kimura said. “They won’t learn unless they suffer damage.”

The impact of the Livedoor case, however, was not limited to individual investors. It also made a lasting impact on the next generation of Japanese businesspeople.

Tadashi Kato, executive producer at Attackers Business School for entrepreneurs, said Horie’s case led his students, who are mostly in their 30s, to think about the need for a business entity to focus on its stakeholders and concrete goals, not just profits.

“An organization needs a balance among these three pillars,” Kato said, adding Horie had put more weight on profits.

During his closing remarks Jan. 26, Horie said that what happened to his firm may discourage young entrepreneurs from starting new businesses. But some young entrepreneurs seem to be distancing themselves from Horie’s aggressive style, according to Toshinao Sasaki, a freelance journalist who wrote “The Capitalism of Livedoor.”

The next generation of entrepreneurs, who watched Horie boast about wanting to turn Livedoor into the company with the world’s biggest market value, are forming business philosophies and characteristics different from Horie’s, Sasaki said.

This generation, which is called the “nanaroku sedai” (generation of ’76), is named after Internet entrepreneurs who were born around 1976. And, unlike Horie, they are not obsessed with making money, he claimed.

While Horie — born in 1972 — is not much older than any of the ’76ers, Sasaki said the difference stems from social and economic dynamics of the Internet sector when they first got involved.

In the late 1990s, when Horie and Rakuten’s Hiroshi Mikitani were starting up, they had a hard time gathering financial resources because the economy was bad, computers were expensive and engineers were cool to small ventures, he said.

In contrast, those in the ’76 generation started business around or after 2001. At that time, Mothers had just been launched, giving their startups an easier way to generate capital. In addition, infrastructure costs were cheaper and ventures were gaining in popularity among engineers.

Kenji Kasahara, 31, president of the social networking service mixi Inc., is considered the leading figure of this generation. Generation ’76 “wants to do something fun for business with their friends rather than making the company bigger,” Sasaki said. “This generation views Horie as a negative example to some extent.”

See related stories:
Horie handed 2 1/2 years
A CEO in prison? About time, some say

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