Terrie's Take 916 - Not Quite the Golden Age for Japanese VC, Unless You Can Break Dance

Terrie's Take terrie at mailman.japaninc.com
Mon Oct 2 10:08:53 JST 2017

* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.

General Edition Sunday, Oct 01, 2017, Issue No. 916

- What's New -- Not Quite the Golden Age for Japanese VC, Unless You Can 
Break Dance
- News -- Nothing to do next week? Do your own IPO!
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Tomato Ramen in Shinjuku, Climbing Mt. Fuji
- News Credits

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Over the last couple of years, after an abortive fundraising effort in 
2015, I've been avoiding Venture Capitalists (VCs) or attending venture 
conferences, feeling that the venture funding industry is Japan is all 
about herd instinct and stereotypes and thus a waste of time for a 
foreign businessperson. However, I had second thoughts after a friend 
suddenly couldn't make it to the latest TechinAsia event held in Tokyo 
during September, and he kindly asked if me if I'd like to go in his 
place. I thought this would be a good chance to see if the street talk 
I'd been hearing about how we're now in the "golden age" of Japanese 
venture investing was true or not.

One of the speakers at TiA was Tim Romero, who has a very good weekly 
blog where he interviews movers and shakers in the Japanese start-up 
community. Tim has been around the track a couple of times himself, and 
in his interviews he is relentless in getting the CEO of the moment to 
share their secrets and how their industry works. Tim has been quite 
upbeat about the Japanese venture scene, and his contributions alongside 
TiA and Slush (a Finnish version of TiA) would indeed give you a feeling 
that things are starting to improve here.

And yet among start-ups in the international community, "international" 
meaning resident foreigners or regular Japanese educated in part 
overseas, I still see very little VC investment taking place. So what's 
really going on?

As a bit of background, back in 2015 and the start of 2016, I personally 
visited and presented to about 25 Japanese VCs, for Japan Travel KK. 
Given that the Inbound market was booming I thought that the timing 
couldn't be better, and our early sales results proved that there is an 
exciting business to be had. I received 24 rejections and one smallish 
offer at the time, and so wound up empty-handed but a lot wiser about my 
strategy and what we needed to do to present a better story. 
Unfortunately, I got a somewhat depressing view of the state of venture 
capital in Japan.

In the course of that one-year period, I found that I could group those 
25 VCs into 3 types: 1) Clueless kids and salarymen and not capable of 
researching or deciding anything, but with money to spend on a round led 
by someone else. This was by far the largest group, and the lack of 
smaller early stage deals shows their risk aversion - which is ironic 
given the nature of their business. Group 2) were a much smaller cohort 
of smart trans-pacific bilinguals who were obsessed with Silicon Valley 
trends, valuations, and business results, i.e., they have a 
unicorn-obsession. This group has plenty of cash and an ability to lead 
a round, but won't touch anything unless there is a vision of global 
domination, which means they are making a few over-optimistic bets on 
CEOs good at hype. Group 3) were smaller shops with sectoral expertise 
but just not enough people to manage the influx of opportunities, and 
they were the source of the most productive discussions. But, boy, are 
they conservative when it comes to dealing with a foreigner...

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[...Article continues]

With Japan Travel I was told by the clueless Group 1 types that they 
thought the Inbound travel market was too small and that the space 
wasn't validated because no one has led a funding in the space (which is 
still true today). And yet, if they bothered to do some research (or to 
read our presentation), they would have seen the tell-tale signs of a 
major boom market. Now, in 2017, the Japanese Government says that the 
Inbound market is worth about JPY3trn in on-shore spending alone. My 
guess is that total spending on travel to Japan is around JPY5trn a year.

With the Group 2 "size matters" crowd, our focusing on one country meant 
lack of scalability and therefore an inability to feed their egos.

With the Group 3 realist group, the focus was on my foreigness, my age 
(not being in my twenties and thus being easy to take advantage of), and 
the company valuation - they didn't like the fact that we'd already 
spent half a million dollars developing the systems and capabilities of 
the company, even though this is a pittance compared to U.S. companies 
doing similar types of business.

In the end, I decided to continue bootstrapping, developing the business 
beyond just a portal and into an integrated travel solution provider. To 
do so, I have done small "friends-and-family" rounds and steadily put 
the pieces in place. You will have seen the occasional ads in Terrie's 
Take for each round we've raised (a big "thank you" to our investors).

So, back to TiA, I was interested to see if Tim was right that the VC 
scene has changed, and whether, as the TiA organizers were spruiking, 
we're in a Golden Age.

The TiA event took place over two days, held at the La Belle Salle 
Shibuya Garden building at the top of Dogenzaka in Shibuya - a suitably 
fashionable location. I showed up on Wednesday morning, registered and 
made my way in to listen to Dave Corbin, TiA's Japan CEO, give the 
opening address. There were about 400 people in the audience (my 
estimate), a pretty good number considering the tickets cost JPY15,000 
for the public and JPY60,000 for investors. The attendees were a 30/70 
mix of foreigners to Japanese, with most of the foreigners coming from 

You could see that the representation matched Japan's influence around 
the region, with the biggest delegations being from Indonesia, Malaysia, 
Vietnam, and Thailand. Certainly I'm aware of an expanding number of 
Japanese VC funds who are targeting their investments in these countries 
because of the lack of U.S. and European competition and also because of 
the rapidly expanding economies there.

I personally found the TiA lineup of speakers to be disappointing, 
revealing little about how to get things done, and over-focusing on 
validating the VC market in Japan. This is unfortunate, because from my 
many discussions with attendees, most people where there for two things 
only: networking and funding. Yes, there was a "Speed Dating" section 
for pre-reserved meetings with Japanese VCs, but it was obvious that 
demand (by start-ups) outstripped supply and that the quality of supply 
of VCs was poor enough that TiA should seriously re-think its approach 
to Japan. In particular, it needs to help educate VC firms here how to 
prospect and build relationships with non-Japanese start-ups.

In spending some time hanging around the Speed Dating area, listening in 
on some of the conversations and getting a feel for whether Japanese VC 
has improved, I got the impression that things are still pretty 
pathetic. What I saw is kids from the VC departments of larger Japanese 
wannabee VC companies interviewing other kids who want to fund their 
start-ups. There was a definite lack of expertise, experience, and 
structure on both sides. For foreign start-ups, the interactions were 
made worse by major language and knowledge gaps. I came away thinking 
the following three things:

1. Low-grade human resources. Why are Japanese VCs willing to put their 
least experienced people into an environment where they are picking 
winners from losers? Having someone with little practical business 
experience and inability to evaluate technology isn't going to result in 
competent screening of prospects from a single meeting.

2. Poor screening process. One assumes that to be meaningful, most 
Japanese VCs are at least investing JPY20-JPY30m per firm, and this 
money doesn't grow on trees. For sure after the initial screening the 
investment will go in front of a committee, but when you are having a 
low-experience person with no screening structure or understanding of 
what the other party does, this significantly reduces the quality of 
deals for committee review, and a higher chance of loss of the investing 
company's assets. We can see the results of this in the poor returns 
that most Japanese VCs have (and perhaps why companies don't put their 
best people in those teams).

3. Low ability to think out of the box. I approached the Fujitsu booth 
on the behalf of a friend's software company, and found out that the 
staff really weren't interested in a business that was outside their 
frame of reference, even if the investee agreed to use their cloud 
platform and technology stack - which surely is the reason why Fujitsu 
even has a venture fund in the first place. Instead, they were there to 
hand out flyers and pens, and seem to have another more obscure process 
for making decisions on investment.

So, yeah, I didn't get a very favorable impression of the quality of VCs 
present, and it was disappointing to see foreign startups attracted by 
the TiA hype, try to figure out what the speed dating investor was 
really saying to them. Pretty much it was in the "We'll keep you hanging 
on until you stop calling us," ilk. I did also talk to several other 
more seasoned Japanese entrepreneurs there, whom I know, and they 
candidly shared that they were just going through the motions rather 
than expecting anything concrete to come out of the meetings.

To be fair, the TiA event was a good place to meet other start-ups, and 
there were several in the tourism sector who were very interesting. They 
may not find a source of funding in Japan, but hopefully other business 
opportunities will help justify the cost of attending the show.

I realize that TiA does not represent the whole universe of Japanese 
venture capital, and there were many active players in the market who 
didn't show up. But nonetheless, what I did see reminded me that the 
Japanese VC community is still immature and prone to risk-aversion - 
meaning that there will be precious few unicorns or even tech IPOs 
coming out of this market. While Softbank with its super fund is shaking 
things up and is making the overall sector numbers look pretty juicy, 
the reality is that Softbank is targeting much bigger investments in 
much later-stage companies, and current industry data is very skewed. 
The fact is that VCs are still not doing much for real startups here. 
Especially if you are not in your 20's, Japanese, and have a talent for 
PR and breakdancing (yes, a security firm CEO started his pitch this way).

...The information janitors/


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+++ NEWS

- Japan decides regulation is best Bitcoin strategy
- Bicycle insurance is a hot commodity
- Unusual merger in sushi sector
- Nothing to do next week? Do your own IPO!
- Unintended consequences in the waste paper sector

=> Japan decides regulation is best Bitcoin strategy

While China and other countries around the world are banning Bitcoin and 
the exchanges that handle them, Japan has seen an opportunity to expand 
it's influence in the virtual currency markets, by deciding instead to 
regulate Bitcoin and other crytocurrency players. The Financial Services 
Agency (FSA) has said it will issue licenses for 11 Bitcoin exchanges, 
meaning that the exchanges will be following security and accountability 
guidelines and be audited by the FSA. Another 17 applications are under 
review and 12 other firms had to shut down their operations after being 
denied licenses. ***Ed: Actually, it's remarkable that there will be 
this many Bitcoin exchanges in Japan, and it clearly shows that the 
Japanese, as a major trading nation, expect huge advantages out of 
potentially becoming the financial center for digital currencies. This 
could be how Tokyo returns to relevance as a financial hub.** (Source: 
TT commentary from coindesk.com, Sep 29, 2017)


=> Bicycle insurance is a hot commodity

A recent legal decision which awarded a massive (for Japan) JPY95m 
payment to an injured pedestrian after she was bowled over by a 5th 
grader school boy, has set the scene for a dramatic increase in the take 
up of 3rd party insurance coverage by cyclists and their families. Sompo 
Japan Nippon Koa Insurance says that it has signed 25% more insurance 
contracts in the first 6 months of this year than for the whole of last 
year. That is: 400k contracts already versus the 300k from last year. 
Other insurance companies are reporting similar results. The trend has 
been further accelerated by Hyogo Prefecture passing a local ordinance 
requiring ALL cyclists there to possess insurance. Kyoto and other 
prefectures are expected to follow suit. ***Ed: This a text book case of 
a collective phobia (about personal risk) fueling knee jerk reaction and 
in the process a whole new business sector (bicycle insurance wasn't 
even available 10 years ago). Cancer insurance policies was another good 
example. This must surely offer some good market positioning clues to 
western firms looking to expand their market in Japan.** (Source: TT 
commentary from the-japan-news.com, Sep 24, 2017)


=> Unusual merger in sushi sector

Interesting move by three major players in a normally very conservative 
sector. Rice wholesaler Shinmei will buy control of two of Japan's top 
5  sushi chains, Akindo Sushiro and Genki Sushi, to create a massive 
dominant player in the local market - especially in conveyor belt sushi. 
The new arrangement will allow Shinmei to control about 30% of the 
domestic market, worth about JPY600bn in 2016. Furthermore, although the 
sushi market is projected to decrease in volume with the aging society, 
one of the partners, Genki Sushi, has more than half of its stores 
abroad, so Shinmei thinks it can use this as a springboard to create a 
dominant global brand. ***Ed: It will be interesting to see if they can 
pull this off. Interesting, also, to see that Shinmei is buying its 
shares from a UK fund - Permira. We would love to know Permira's 
strategy a few years ago when they acquired those stakes in the first 
place.** (Source: TT commentary from asia.nikkei.com, Sep 29, 2017)


=> Nothing to do next week? Do your own IPO!

A new securities marketplace, Valu, allows anyone, including private 
individuals, to create their own securities and pseudo-IPO. Valu's 
securities mechanism is tokens, similar to ICO blockchain tokens being 
issued overseas, and investors can buy and sell the tokens on Valu's 
marketplace. Just like ICOs, the tokens are typically used as purchasing 
rights for products and services of the issuer, and thus do not fall 
under the auspices of the FSA. This is smart, because if those tokens 
also represented actual shares or debt instruments, as is allowed in 
some countries for ICO's, then Valu and its issuers would be quickly 
pulled up by the FSA. ***Ed: Actually ICOs are not yet illegal in Japan, 
they are just so bleeding edge that the authorities haven't issued any 
rules about how they may be offered, if at all. The uncertainty is what 
is keeping most would-be ICO issuers from doing so here, and instead 
they are typically doing their raises elsewhere in Asia (HK for 
example). BTW, Valu already has 60,000 users and has already been 
baptized by fire in one insider trading scandal so far - ICOs are truly 
the Wild West in the funding world.** (Source: TT commentary from 
bloomberg.com, Sep 21, 2017)


=> Unintended consequences in the waste paper sector

In a significant blow for trading in garbage, particularly waste paper 
to be recycled by low-cost Chinese factories, the Chinese government has 
banned imports of 24 types of garbage, in the name of reducing pollution 
levels in that country. This is a low-value but high volume sector worth 
about US$10m a month (at wholesale prices), and now more than 10,000 
tons of waste paper a month are building up in warehouses in HK, the 
USA, and Japan. An unintended side effect of the ban is that there is 
now also a shortage of packing boxes and wrapping for e-commerce 
companies, and cardboard prices have more than doubled. ***Ed: Waste 
paper exporters here in Japan are placing hope in a November decision by 
the Chinese government as to whether they will make the ban permanent or 
not.** (Source: TT commentary from reuters.com, Sep 28, 2017)


NOTE: Broken links
Some online news sources remove their articles after just a few days of 
posting them, thus breaking our links -- we apologize for the inconvenience.



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Speaker: Brent Reichow - CEO & Co-founder, Blueshift Data Protection
Title: "Rise of Ransomware is Stopping Businesses. How can your 
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Details: Complete event details at http://www.icajapan.jp/

Date: Thursday 1st November, 2017
Time: 6:30pm Doors open
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RSVP: By 6pm on Monday 27th October 2017
Venue: TMT Bldg.,4-2-22 Shibuya, Shibuya-ku,Tokyo,150-0002


None this week.



=> Taiyou no Tomato-men, Shinjuku
Tweet Italian-inspired Ramen

Setting itself apart from the ramen crowd, 'Taiyou no Tomato men' serves 
up visually distinct bowls of tomato-based ramen at its many locations 
around Japan - as many as 21 stores, since launching in Kinshicho back 
in 2006.

The signature offering here is the Tomato Cheese Ramen (¥830 ex. tax) - 
which serves up their tomato soup-based ramen bowl topped with masses of 
powdered cheese and some basil. It comes recommended as part of a set 
including crispy cheese gyoza and 'Chibi-riso' - the latter a small 
serving of rice that serves as a way to finish any remaining soup, by 
creating a mini risotto ('Ra-riso') at the end. Neat!

The main tomato soup combines a rich, tomato sauce with a low-fat 
chicken (paitan) soup - which also explains the numerous chicken ramen 
options dotted around the menu e.g. Cheese Chicken Ramen and Camembert 
Cheese Paitan Noodles. The latter is an exclusive bowl to the Shinjuku 
Toho branch visited, along with Gorgonzola cheese fondue-style tomato 
noodles and Camembert Neapolitan style cheese tomato noodles.


=> Reminiscing the Climb up Mount Fuji
Tweet Up and down the mountain in 13 hours

For next summer why not plan a trip to climb Mount Fuji? Ever since I 
first set foot on Japan soil, I have always wanted to climb the 
legendary mountain. The most popular period for people to hike up is 
from July to the end of August, when the official climbing season ends 
and local support of people on the trails and mountain facilities end.

Located just outside of Tokyo, Japan's highest mountain peak is 3,775.63 
meters above sea level. Yes, there is a sign that gives a more detailed 
height instead of the 3776 meters that we all learn about! An active 
strato-volcano that last erupted in 1708, Mount Fuji straddles the 
boundary of Shizuoka and Yamanashi prefectures. It has an exceptionally 
symmetrical cone, which is snow-capped several months a year, and of 
course is a well-known symbol of Japan, frequently depicted in art and 
photographs, as well as being visited by sightseers and climbers like me.

Since I wasn't that fit before the climb, I took the most popular (and 
maybe easiest) route. After a full dinner, I took the last bus from 
Kawaguchiko station and reached Fuji Subaru Line 5th Station (start of 
Yoshida Trail) at about 9pm. There were many signs along the trail, and 
the hike was not technically difficult. A strong headlight is 
recommended as it was almost pitch black at the lower stations where 
hikers are more spread out. From the eighth station, many hikers from 
the various paths converged and at times we had to wait, as the trail 
was jammed with people. It got colder and colder as I ascended, and I 
piled on more and more shirts. Somehow I managed to survive with 4 
shirts and 1 jacket.




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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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