What excites you as an investor?
Being more of a contrarian has made for a lot of exciting verticals to focus on. If many investors head in one direction, I automatically look at what they have left behind. If you look at artificial intelligence (AI), right now a lot of the effort and energy is going into autonomous vehicles and looking to solve generic wider problems. This is the cycle I observe with the startups looking at narrow applications and looking at wider stencils.
So, the question I would ask myself is: If you want AI that is able to navigate exigent circumstances with many real-life variable elements – like autonomous vehicles – what kind of or how many millions of tests do you actually have to create and run to train those neural networks progressively and make them effective enough to deploy? How much does it cost, in time and actual dollars, to run those tests? Can those tests be replaced with simulations in virtual environments?”
With the above questioning, I look at simulation startups. That approach is much more interesting to me. What are the niches those sorts of pressures create organically?
Would you say you are suspicious of the market as a whole and look for value in places less fashionable?
I guess that is a very eloquent way of putting it. That is number one. Number two is that if there is so much investment or so much energy going into a specific vertical, then there will always be an abnormal amount of liquidity that flows through those pipes. When those pipes become full, they expand, and they create atypical cavities and gaps in the marketplace. Those gaps are also where I invest a lot of my time to find new ideas.
How does your methodology change from industry to industry?
One constant way that I look at investment targets is that I try find the right question. Creating the right problem statement takes the most energy. And once that is done, I simply research the industry and the company online.
Give an example of a problem statement and how you might view a company?
One example is when Cloudera got investments for their big data offering and Horton Works was IPO-ing on the stock exchange. This industry was seen by many as the next value goldmine. When I saw that much money being shoved into those pipes, I had a couple of predictions and those predictions came true.
Number one was that it is not lack of technology output from big data that is going to be the issue, it is going to be that you will not find enough data scientists to build out the outputs that you want. It is because those data scientists are being employed by Cloudera or the likes of Google, or they are actually building out their own startups. That is what market abnormalities create. It creates giant vacuums of talent that go into different black holes or, secondarily, they themselves actually want to dream bigger and build out their own companies. Based on that problem statement, there are not going to be enough data scientists and algorithmic engineers to go inside companies to solve problems that these big corporations need.
With that I asked how Google solves those problems. Google has one really important thing that they do – they use an algorithm repository, company-wide, for engineering teams that enables them to retrieve code in a consistent manner. I said to myself: “Why is there no algorithm marketplace that does the same thing? I literally typed in “algorithm marketplace” and Algorithmia popped out. We invested in the seed round with Madrona capital, and their series A was done by Gradient Ventures, which is Google’s AI fund. If Google’s AI fund is convinced enough to invest in Algorithmia, then my problem statement was material and durable.
The deal count from consumer sector corporate venturers has been dropping since 2015. What do you think about that?
A lot of CVCs are becoming much more careful of the investments and the bids they make. At the same time, you have to be contextual to what kind of corporations you are dealing with. I see, more often than not, CVCs having a surprisingly high turnover rate. The investment manager next year might not be there just because of economic incentives, reorganisations or company priority shifts.
Those irregularities might be seasonalities. At least on Rakuten Ventures’ side, we have always been patient about investments but internally we also count follow-on investments as investment executions. We do the same number of executions per year. We simply might not have been doing new investments that are visible to other people.
Consumer corporates investments in emerging businesses are focused on the consumer, services and financial sectors. Can you just speak to that?
I am very careful about fintech investments at the startup stage. Historically, fintech has one of the highest risk profiles and failing ratios. Name me five fintech companies that have actually been successfully IPO-ed or had monster exits. And if you can only name five companies, then that is a hard vertical to invest in as a venture capitalist.
It is just a very hard business because the incumbents are equally smart and more agile. When they really need to do stuff, they will do it. PayPal’s Venmo did peer-to-peer transfer of money. The Federation of Banks in the US launched Zelle, and it took them only one year to scale out and become three times the size of PayPal’s Venmo.
You have said you try to keep your stable down to about 17. Can you explain the rationale behind that?
The reason I would say 17 to 15 companies is because we are not a commercial VC. The way that commercial VCs would activate is to ensure their risks are disbursed, and for them not to deploy capital to their widest extent is doing a disservice. We suffer no penalties for being patient. This is the biggest superpower that a corporate VC has. I do not want to focus on spending too much time investing in many companies but simply make sure that Rakuten Ventures can grow as a brand with good reputation and good exits. You cannot go full sprint from the very start.
As trust builds between Rakuten Ventures and its parent, might you be employed as a vehicle to do larger investments?
Definitely. That would be one of our aspirations. As with anything, you have to take baby steps first. I am very much reticent about large capital deployments. Once we start the flywheel of dealflow, those will opportunistically and organically generate one or two clips that will provide us with opportunities to invest a lot of money in a few companies.
What might we expect this year?
We have already closed one deal. It was a follow-on for an e-book subscription company. We are probably going to do one or two more deals in London in the third quarter. Annually we are trying to do at least four to six investments, whether it is follow-ons or new deals.
You are based in Singapore while your corporate parent is based in Japan. There is both financial independence and geographic independence. How does that impact the way you think about making deals?
The unit was set up for Southeast Asia, but, to be honest, I did what I wanted to. I was just hoping not to get fired the next day. That has been my modus operandi.
Was there a point in time when it happened?
There was. When you look at a strategic investment department, it has all the bells and whistles of what a perfect Power-Point looks like for a department. It is going to be super-intelligent, and “we are going to invest in the best strategic stuff”. It has never worked out historically unless you have absolute control and material freedom of liquidity. When I got in, I said that this is not going to work and I ripped it all out and simply said let us be a true-blue VC firm with a single LP.
Was Rakuten Ventures originally set up to be a strategic investment fund?
It was, and then I just started ripping it all to shreds. Thankfully, it has been a very good run. If you look at us just by the numbers, we are a statistical anomaly. We have 14 companies and not one has folded. Several of our companies are profitable – they are running at a very nice clip of growth. We are very lucky to have such motivated and high-quality founders to work with.
Were companies caught in that tension between strategic imperative and financial goals at the start?
Thankfully not. If anything, you want to be the right umbrella for your founders. If you are not going to be that, then you really have no business doing corporate venture capital investment. We just made sure that, number one, we are the correct umbrella to drown out all the corporate noise, and then look at adding value to the business.
What is your pitch to potential portfolio companies? How do you stand out when you are not leveraging Rakuten as a strategic CVC might?
One of our strongest suits, weirdly enough, has been our insight into the founders’ products, the company’s products, and that is simply how I fed back to the companies. This is how I feel about your products, this is where I think the problems are, this is where I think the growth is. I like your product but I think if we could pivot it a little bit this way, it will be much more desirable for corporations to take up.
How do you approach corporate development with a portfolio company?
It depends on the company. Some companies have hiring deficits, so we try to bring in head-hunters that we have known very well from one area to different areas. We try to deploy them and help them on those issues. If there are business planning issues, we have really smart people on our team that can help out. Our goal is to be flexible to their needs but to be pragmatic and sensible as well.
So you are part VC and a part network?
Whatever they need us to be. It really comes down to where the company wants to go to and if you, as an investor, have the necessary contact and knowledge base to support them.
