/

Angel tips for Japan startup investors

by Richard Solomon

Contributing Writer

Are you thinking about investing in a Japan startup? Consider these tips from Tokyo-based angel investor Jonathan Epstein before taking the plunge.

Epstein has been investing in startup companies since 2001. He learned his trade from Softbank’s founder and CEO, Masayoshi Son. Masa, as Son is often called, had made several billion dollars investing in Yahoo Japan, a joint venture between Softbank and U.S.-based Yahoo. He wanted to repeat his success by bringing other proven business concepts to Japan. Masa handpicked Epstein for that job from Softbank’s California subsidiary.

Epstein had come to work for Masa in a roundabout way. Over an eight-year stretch, he zigzagged between jobs at well-known companies in Japan and the United States. Along the way, he picked up the Japanese language and an MBA from Harvard Business School. His big break came one day while working at a subsidiary of Softbank in California, at a time when Tokyo was actively buzzing. Masa told him, “Starting Monday, you’re based in Japan.” Epstein replied, “Yes, sir!”

Over the next four years Epstein apprenticed under the tycoon, learning how to form joint ventures, merge companies and invest in startups. He directed $300 million into E*Trade and helped to create Nasdaq Japan. He was present when Masa first met Jack Ma in a meeting which led to Softbank’s initial $20 million investment into Alibaba. The experiences taught him what success looks like and what kinds of people make successful entrepreneurs.

“Having worked for Son, I had a firsthand view of how startups can work and how they can quickly build to make money,” Epstein explains.

Epstein helps Japan startups go global very early on. He puts together multinational teams with unique business concepts which are transferable to other markets. Few other investors can do so.

Japan’s startup ecosystem is embryonic. There are plenty of experienced angels in the U.S. to help entrepreneurs, but not here. Venture capital firms rarely invest in startups, leaving that task to a handful of mostly wealthy entrepreneurs who have built and sold companies before.

Last year perhaps $350 million of seed capital was invested in Japan, a paltry sum compared with the $20 billion of early stage finance available to U.S. startups. Epstein helps fill that gap with his capital, network, and by advising teams lacking his professional skills and expertise. Japan’s nascent ecosystem gives him an edge that he would not have if he were based in Silicon Valley.

He invests small but meaningful sums into mostly early stage startups, providing contacts and strategy that help teams get their businesses off the ground. Diversification reduces risk of any one startup going bankrupt, as many surely will. He usually takes the riskiest slice of equity, tapping his investor network when larger investment amounts are needed. He also secures a board position, but otherwise remains a non-operating partner.

Epstein is chairman of Moneytree and PlusAMP and is a director of Cloudian — three startup firms he helped take “global.” In total, he has seven active investments. His first, a small pre-angel round in Guidewire, is now a $5 billion Nasdaq-listed company worth about 450 times his original investment. An investment in privately held Cloudian, he reports, has an even larger unrealized gain.

Investors can raise the chances of finding good opportunities like these if they focus on people. Most entrepreneurs don’t have a combination of a great idea, good business sense and market knowledge. For those who do, having a dream is not enough. They need passion. Epstein learned that lesson from Masa. He recalls how impressed Masa was by Jack Ma’s passion the first time the two met. “Jack was a bit crazy, but so determined. That’s what turned Masa on — Jack’s true passion,” says Epstein.

Passion is needed to overcome adversity. It can take up to 10 years for a startup to prove itself. During that time, founders have to tough it out. To do so, they need persistence, inner toughness and commitment. This differs from resilience. Japanese are good at sticking with something and not giving up. Epstein once considered investing in one team that had a great product. They had spent years and all their personal money on the project. They had plenty of gaman (patience and endurance), but they had no understanding of the market. “That’s not necessarily what you want,” he says adding, “Teams must have realism about what is achievable.” In the end, he chose not to invest in the firm.

Epstein also looks for flexible thinking in team members who have the capacity to listen. His opinions aren’t necessarily any better than anyone else’s. Nor do entrepreneurs listen to him all of the time. “Not by any means!” he admits. “But if I have a strongly held view, I want to make sure they at least consider it.”

Entrepreneurs don’t necessarily need to have self-understanding. “Many don’t have it,” he notes. But they do need scruples. It’s just a matter of the kind of investments Epstein feels comfortable making.

Not everyone has what it takes to become a successful angel investor. Besides risk capital and experience, angels need the personal capacity to wholeheartedly back entrepreneurs. Founders need empathetic investors who are genuinely on their side because nobody else is. VCs tell them, “You’re not worth this much money.” Big customers say, “Who are you?” Employees complain, “This can’t be done.” Financially and psychologically, an angel’s job is to support the founders because “they are the business.”

Ultimately, angel investing is about the personal connection between the investor and the entrepreneurs. It requires a commitment to the same goals. “Once I commit to the entrepreneurs, I remain as much committed to the people as I am to the business,” he says.

Going forward, Epstein looks to invest beyond the seed stage. There are many big companies in Japan with valuable assets that are inefficiently run. Some may benefit by spinning off non-core businesses. Smaller units may not be big enough to interest investment by private equity firms. “I’d like to help those companies and people, to identify the opportunities and help them move faster,” he says.

Richard Solomon is an author, publisher and spokesman on contemporary Japan. He posts regular Beacon Reports at www.beaconreports.net