Threats and opportunities in innovation, and funding support for entrepreneurs, are factors that seem to morph constantly in many countries, but Japan’s navigation of these issues appears to have put the nation on a beneficial course.
Hiro Saijou, CEO and managing director of Yamaha Motor Ventures and Laboratory in Silicon Valley, said: “Not my quote, [it] came from Yamaha Motor’s founder, but this is what I love: ‘Action is the best way to learn, so let’s explore rather than research. In the business world today, so many people are obsessed with figures. They become fixated on the numbers of the minute and without them are too afraid to do any real work. But, in fact, every situation is in flux from moment to moment, developing with a natural flow. Unless one reads that flow, it is impossible to start out in a new field of business.’”
Japanese corporations have made successful leaps from one sector to another, such as Yamaha moving from music to bikes, and using corporate venturing to prepare for its next move. The country’s corporations have spent a considerable period preparing for the next opportunity.
That Yamaha’s new corporate venturing unit – the company’s first – is based in California, with the majority of its staff Silicon Valley insiders, indicates the sea change in approach by a number of similar businesses. In general, Japan’s corporate venture capital (CVC) culture has been characterised by a number of venture investors as Japanese executives parachuting into a region for a few years and then leaving, and management by numbers.
Yamaha’s approach is, however, more reflective of the professionalism and best practices found in other leading CVCs developed over years, or more recently – as exemplified by SoftBank, NTT Docomo, Rakuten, Gree, CyberAgent, Ricoh, Recruit. Dentsu and Hitachi – including the use of top-tier VCs, such as Translink Capital and Global Brain, to complement or outsource investment activity.
Many if not most of these leading corporate venturing groups have been more active outside Japan than in their home country.
But while some countries’ corporate venturing units expanded quickly over the past few years and increasingly found deals outside their home countries, particularly those from the US, China and Japan, relatively few foreign CVCs were investing in Japan-based startups, according to GCV Analytics. Whereas China and the US last year received tens of billions of dollars from venture syndicates, including both foreign and domestic CVCs, Japan came third for domestic corporate venturing activity but with relatively few foreign CVCs investing there, involved in just $44m of deals.
Yoshiaki Hirao, CEO of Xica, a Japan-based software-as-a-service startup, at recent event extolled the benefits of the backing received from both VC Draper Nexus and CVCs, including Dentsu, Salesforce Ventures, Itochu and Recruit Strategic Partners.
Hirao said Draper Nexus, which is affiliated with US-based top VC Draper Fisher Jurvetson, and deal partner,Akira Kurabayashi had helped him and the company think globally. He said: “I was afraid. Now, I have changed to think more globally. I challenge myself.”
It is a challenge being taken up by more of his compatriots. Yamaha has already conducted four deals, with two more ready to be completed at the time of writing, and has developed two internal projects – Motobot, a humanoid robot that can ride an unmodified motorcycle autonomously, and Vasp, an internet-of-things visualisation of micro-environmental infomation captured by vehicles.
However, the debate surrounding what is seen as high risk aversion in Japanese business today was given another twist by a government official at a roundtable – Organising for Innovation – hosted by Prof Toshiyuki Kono and visiting professor Erik Vermeulen at Kyushu University.
“Japan has spent nearly three decades looking for people [such as historical entrepreneurs Akio Morita, founder of Sony, and Soichiro Honda, founder of Honda] bringing strategic coordination and visionary leadership. Maybe, as in the Meiji era, we need to invite foreigners in with these attributes.
“In the nature-nurture discussion about risk aversion in Japan, it is worth noting that 3% of Japanese people have serotonin receptors [which receive the endorphin or so-called happiness chemical] versus 32% in the US. Maybe most of us are natural worriers and well-trained humans rather than the next Mr Honda. If so, perhaps not using competition as a basic condition for economic society but revising the Japanese concept of tenure for life is reasonable.”
These insights caught the sense of realism generated by trying to encourage growth and societal change in the country since the late-1980s property bubble burst. Growth incentives may need to be tailored to the region in which they are to be employed.
Marc Andreessen a few years ago said: “Policymakers should not be trying to copy Silicon Valley. Instead, they should be figuring out what domain is, or could be, specific to their region, and then removing the regulatory hurdles for that particular domain – because we do not want 50 Silicon Valleys, we want 50 different variations of Silicon Valley, all unique from each other and all focusing on different domains.”
The roundtable threw up some more synergistic ideas. Michael Fox, Global Corporate Venturing (GCV) emissary in Silicon Valley, said the Valley’s success had been built on its location, critical thinking and agility to ride successive waves of technology change, which were factors that others could use for “effective localisation of value”.
Fukuoka, under its youthful mayor Soichiro Takashima – he was elected in 2010 aged 36 – is one region in Japan continuing to explore its options to be a growth centre. Kono discussed the theoretical models applied in developing the innovation special economic zone (SEZ) in Fukuoka, a region noted for its design skills, particularly at Kyushu University, and high quality of life. He said the SEZ eased the requirements for making staff redundant. However, he noted that the issue of changing conduct, structures and performance was “complex” and few companies had taken up the lighter-touch approach.
This aversion to taking up US-style approaches to employment could be seen as part of a wider concern about whether economic growth is an absolute goal in itself or whether quality of life supported by lower costs could be a more appropriate policy target. In the latest issue of Foreign Affairs, Zachary Karabell, head of global strategy at Envestnet, looked at Japan’s experience of slow to zero growth over the past few decades and argued the country was “learning to love stagnation”, given it still had a high quality of life.
But Karabell added: “The world’s financial and political infrastructure remains dependent on the old model, in which GDP growth was all-important, and so lower costs, deflation and slower economic expansion will continue to concern policymakers and central bankers.”
Others go further. Researcher and writer Evgeny Morozov – writing a critique of The Industries of the Future by Alec Ross, a fomer US government adviser on innovation – said: “What is most interesting about Ross’s geopolitical unconscious is his treatment of the future itself. Apparently, there is just one future, with America and Silicon Valley at the helm. All that other countries can do is either adapt to it by reshaping their industries and expectations to favour more ‘openness’, or risk being labelled ‘control freaks’ and ‘closed societies’ by the likes of Ross and his army of thinktanks, NGOs [non-government organisations] and fake grassroots activists.
“It is pointless to imitate Silicon Valley, Ross warns. Instead, other countries should accept that American companies will operate the network and communications infrastructure on which the global economy functions. These countries, Ross tells us, should find ways to foster industries of the future and make money with additional services – like, say, data analytics – built on top of that infrastructure.
“This is, of course, very bad advice for any country that would like to preserve strong domestic industry and maintain a modicum of sovereignty.”
Sony founder Morita, in his book, The Japan That Can Say No, and made a similar point 25 years ago when he encouraged the Japanese to take a more independent role in business and foreign affairs and criticised US business practices.
More recently, Alexander Kuleshov, the new president of Russia’s Skolkovo Institute of Science and Technology, told Sk.ru: “Transferring the Massachusetts Insitute of Technology model on to Russian soil may not have been the right thing to do.”
China is more ambitious, as it plans to invest up to RMB1 trillion ($161bn) in its domestic semiconductor industry – developing its own integrated circuit industry is seen as a national strategic concern, as outlined in China’s 13th Five Year Plan covering the years 2016-20.
Silicon Valley itself was born out of a feeling of dissatisfaction that, in the first half of the 20th century, the western states of the US were effectively being used as a source of raw materials. A desire by leading figures, including railroad magnate Leland Stanford, founder of Stanford University in California, and Frederick Terman, dean of engineering at the university, sought to create an industry so students would not have to leave for electronics firms in the east.
In a GCV regional analysis of Silicon Valley a few years ago, I said: “From a region that felt exploited by the east coast only half a century earlier, Silicon Valley has become an imperial centre exporting its model for other countries to follow and in return importing the raw material of talent and tributes.
“The training of venture capitalists in other countries, either from working for Valley-based venture firms, such as Intel, Cisco, Sequoia or Kleiner Perkins Caufield & Byers, or from studying at Stanford, means senior figures in countries as culturally diverse as the UK, Russia and China all talk the same language as US-based venture investors even if the application reflects local requirements.
“But as Terman said: ‘Industrial activity that depends on imported brains and second-hand ideas cannot hope to be more than a vassal that pays tribute to its overlords, and is permanently condemned to an inferior competitive position.’”
Despite this backdrop from international observers, many of Japan’s leading advisers are confident that economic rejuvenation is taking place within a broader context of Prime Minister Shinzo Abe’s “new realism” in foreign policy that is trying to defend the “open, liberal system”, according to an article in Foreign Affairs by Michael Auslin, director of Japan studies at the American Enterprise Institute.
Fukuoka’s special economic zone, therefore, is the latest in a line of proposals around the country. Masato Hisatake, adviser to Japan’s Ministry of Economy, Trade and Industry (Meti), at the Kyushu roundtable noted that the first science and technology business law was introduced in 1995 and the first plan for the sector started a year later. The fifth such science and technology business plan will start this year.
And while there are remaining issues – the UN’s World Intellectual Property Organisation puts Japan in 19th position in its global innovation index – Hisatake considers whether these steps will make a difference. “If not,” he said, “we will do further regulatory and institutional reforms, such as limited liability corporations (LLCs), innovation patent boxes and corporate venture capital and financial resources required in specific sectors by their stages of development and vehicles used.”
However, Yoshi Ishii of Meti, in a panel at another seminar, gave an update on a planned tax breaks to encourage corporate venturing when he said three organisations had met the required standards. However, the Industrial Competitiveness Enhancement Act, which came into force in January 2014 and made 80% of corporate venture investment through funds deductible from taxable income, had been expected to attract about 30 corporate venturing operations in pursuit of the tax break. Ishii said Meti was considering changes.
At the Kyushu roundtable, Jun Saito, a manager at Nikon who has helped its shift from cameras to high-specification medical imaging, cited the example of film producer Dreamworks SKG to show how such vehicles as LLCs could “beget something out of nothing” by allocating profits to “talent” – the SKG acronym refers to Hollywood royalty Steven Spielberg, Jeffrey Katzenberg and David Geffen – who can reap a majority of returns without having contributed a majority of the $1bn set-up costs.
Entrepreneurs are understandably concerned about VCs receiving enhanced preferences while founders or earlier angels may only have options, convertible debt or ordinary equity. The roundtable discussion suggested that “talent-first” LLC-style structures could shift the rewards balance back to the creators of value.
Dreamworks SKG, while hardly a typical startup, did bring together a core constituency of what Shinto Teramoto, a professor at Kyushu University, described at the roundtable as people with a high “eigenvector centrality” – a method of computing the approximate importance of each node in a graph.
Teramoto said Japan’s government under Abe had refocused the so-called Impact programme of the country’s Cabinet Office from 100 programmes trying to “impulse paradigm change in technology” to 12. However, the issue of selection remained regardless of concentration or diversification, as such selection remained driven from the top. The roundtable discussion cited the case of Italy, where there was a “shocking” level of connections between company directors and four-time former prime minister Silvio Berlusconi.
The general issue in Japan, as well as in most countries outside the US, is that even if there were a ready pool of entrepreneurs able to scale their work into meaningful business, there often remains a financing gap.
Joseph McCahery, professor of international economic law and of financial market regulation at Tilburg University, presented results at the roundtable from his co-authored study published last year showing employment was “resilient” at small and medium-sized enterprises (SMEs, those with fewer than 255 employees) through a financial downturn. The countries under scrutiny – France, Germany, the Netherlands, Poland and Romania – however, suffered a shortfall of available loans and equity. McCahery said: “The majority of SMEs do not think equity is available.”
He added that despite hopes that alternative financing platforms, such as crowdfunding, could complement VCs, “the issue is they will be [over]regulated before they can grow to fill the gap”.
State backs university moves into venturing
Thierry Heles, editor, Global University Venturing
In 2014, the Japanese government unveiled its Industrial Competitiveness Enhancement Act, legislation aimed at revitalising the domestic economy and improving the country’s industrial competitiveness. Within the act was a $1bn investment program targeting Kyoto, Osaka, Tokyo and Tohoku universities with a view to increasing their spinout and startup rates.
The universities were each asked to submit a proposal for a wholly-owned venture capital fund that would be granted a portion of that $1bn.
The change was more significant for some. Both Tokyo and Kyoto are already experienced actors in the venture capital space, thanks to regulatory changes in 2004 that enabled them to incorporate companies. However, Osaka and Tohoku took the opportunity to revise their policies and submit proposals.
Osaka University gained approval for its first VC fund in June last year and set up a ¥10bn ($91m) fund the following month. Meanwhile, the estbalishment of Tohoku University Venture Partners, with funds of ¥60m, was approved in February last year, and in November, Jack Motoyama, management professor in the university’s office of innovation and business, said it made its first investment in founding a joint venture in materials science – the Tohoku Magnet Institute. Alps Electric, NEC Tokin, JFE Steel, Panasonic and Murata Manufacturing also invested ¥300m in this company.
Kyoto University gained approval in October 2015 for its Kyoto University Innovation Capital fund, led by CEO Shuji Higuchi. Two years previously it recruited Miyako Capital to manage a $60m fund, which has been making investments.
Shigeo Kagami, a professor and head of the office of collaborative research development at Tokyo University, told the Kyushu roundtable about the country’s plan to invest more than $1bn through four of its universities’ venture funds. He said Tokyo, which receives the largest share of the four at ¥50bn, had in February set up the UT Innovation Platform as a fund of funds able to commit to an expected five or six venture capital firms. Tokyo University already operates a separate venture capital vehicle aimed at its spinouts, University of Tokyo Edge Capital, which has more than $300m under management and a track record of exits – such as Shaft, acquired by Google, and Phyzios, floated on the local stock exchange.
Part of the funding, ¥8.3bn, was tagged to support the infrastructure translating research into innovation, often called gap funding, according to Kagami. He said: “Tokyo University’s tech transfer office patents 600 inventions each year and can take equity in startups formed out of this research in lieu of licence fees. However, two-thirds of patents are in conjunction with industry partners, 2,500 in total, but “few lead to tangible results”.