Terrie's Take 981 - How to Value Your Start-up Company in Japan, e-biz News from Japan

Terrie's Take terrie at mailman.japaninc.com
Mon Feb 25 15:52:20 JST 2019

* * * * * * * * * 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 Monday, Feb 25, 2019, Issue No. 981

- What's New -- How to Value Your Start-up Company in Japan
- News -- Chinese invasion prediction from ex-military chief
- Corrections/Feedback
- Travel Picks -- Naked Man Festival in Niigata, Flea Market in Oi Shinagawa
- News Credits

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+++ How to Value Your Company in Japan

Entrepreneurs the world over all at some point have to contend with a
simple question: "What is my company worth?" In the US and other developed
economies, generally this is a pretty straight forward question, answered
by a plethora of valuation calculators (e.g., the DCF and Berkus methods)
as well as by funding websites like Crunchbase and FounderSuite, which
offer comparable deal details. But here in Japan, where fundings and M&A
valuations are usually kept secret, and where smaller companies take longer
to gain traction because of cautious partners and suppliers, knowing what
you are worth now and in the near future can be tough to discover. So
today's Take is for anyone based in Japan who is thinking of starting a new
company, or who is already operating a small business and wants to bring in
outside investors.

The three most common times any founder or shareholder thinks about what
their company's worth is when: a) they are first getting started, b) they
are running out of capital, and c) they are selling the business. Of
course, as the seller of shares, you will be thinking optimistically about
your future numbers, especially given the emotional reinforcement you get
whenever you read the latest rags-to-riches start-up exit chronicled in the
media. On the opposite side of the fence are two other audiences: firstly,
potential investors who are also generally optimistic about your business,
or they wouldn't be talking to you, and secondly the pessimists who want to
hold you back or knock you down.

The pessimists here in Japan typically tend to be accountants, banks you
are trying to lend money from, big suppliers you want better terms from,
and partners who want to buy your firm cheaply - in other words, some of
the biggest "stakeholders" in your business. Generally, none of these
people could imagine paying future value for your business when they are so
used to picking up bargains calculated solely on a historical basis. The
idea that a company can be front-loaded and built for a hockey stick yield
over 5-10 years is alien to them and indeed is the antithesis of the
incremental development business model that has been espoused in Japan for
generations. However, thanks to Softbank's Son, 500 Startups Japan, and
other visionaries, this mindset is now breaking down. If you are getting a
company started here, remember that you're in a country which is famous as
the home of risk aversion, and therefore you need to ignore the pessimists
and seek out a better audience - it does exist and may only be as far away
as some of your close friends and acquaintances.

[Article continues below...]

------- International MICE Expo Japan (IME2019) -------

In 2018, 31 million visitors came to Japan, over 3,000 international
conferences were held here, and the Rugby World Cup and the Olympic and
Paralympic Games are just around the corner.

Holding an event in Japan is not difficult any more, as many new meeting
facilities and hotels open one after the other. Working with the right
partners is now the key to success in organizing a MICE in Japan. IME 2019
will be held on Thursday Feb 28 at Tokyo Int’l Forum and will help you find
your right partner.

Come and join as a buyer at IME 2019. http://bit.ly/2GOewrQ

[...Article continues]

Right now, Japan is somewhere in between the pawn shop mentality of the
city banking crowd, and the giddy optimism of backers of companies like
Uber (losing US$200m per month but still worth between US$76bn~US$120bn).
This means that we are finally seeing some companies with US-style
valuations and business plans emerging, but they are still few and far
between. Perhaps the best recent example was Soracom.io, which was acquired
by KDDI for about JPY20bn (approx. US$180m) late 2017. Soracom launched
right out of the gate in 2015 with a JPY650m Series A funding round, then
just a year later it did two more rounds in quick succession to bring the
funding total to a very respectable JPY35bn. To our knowledge, Soracom was
not profitable when it was sold, but it certainly did represent a huge
opportunity in a space that KDDI had tried many times to fill. Kudos to
KDDI for understanding that and ignoring the bean counters.

But most start-ups are not Soracom, and so here are some guidelines for the
rest of us.

It's important to preface this guide by remembering that these numbers are
for companies with in-built leverage. In other words, if you are running a
stock-standard accounting or IT firm with perhaps sales increasing at 10% a
year and with 10% profit margin (a respectable number in Japan, where more
than 70% of companies earn no profits at all), then even though you are
profitable your growth is not that really interesting to venture investors.
Instead you should be talking to a bank - who will lend you 20% or more of
your revenue at low interest (3% p.a. or less).

If you want to excite venture investors, then you need the following
factors to build intrinsic value:
* Technology, licenses, brands, or processes that will vault you over the
competition and disrupt an otherwise boring industry
* New business in a new business sector (such as the early entrants to the
mobile phone business or crowd-based FX transfers)
* A stellar management team with a sprinkling of PhDs or previously
successful entrepreneurs as partners
* Good timing and a compelling value proposition to customers

None of the above businesses need to be purely technology-based, although
obviously technology is the big point of leverage these days. Indeed, the
current trend is an increasing move towards investments in the personal
finance, medical, transport, food, retailing, sports, and of course travel
sectors. In fact, any sector big enough in Japan to provide you with
JPY10bn of business by taking 1% market share in 7-10 years will do. For
example, in inbound travel, a 1% market share equates to JPY40bn (US$360m)
a year - the Japan market is huge.

So how to value your business in Japan? Firstly, you need to understand how
investors think about returns and what is normal in the marketplace
currently. There are two forms of successful exits that investors look for:

1. Public Listing

As a rule of thumb in Japan, companies can go public when they hit certain
performance metrics and after doing compliance clean-up. Typically in the
technology sector, the metrics are revenues of JPY1.5bn - JPY2.5bn, pre-tax
profits of 20% or more, and at least 3 years of strong top line growth,
with at least the last year being profitable. Of course there are huge
variations in this formula, but if you look at typical IPOs on Mothers
(Japan's main start-up market) most companies fit this profile.

Providing that you can hit these numbers and you're good at telling your
corporate story, the current market will probably give you a valuation of
about 20x - 50x on your pre-tax profits, meaning that your JPY500m of
profit on JPY2.5bn of revenues will lift your IPO valuation to around
JPY10bn - JPY25bn. So now we have some end-game numbers that investors want
to see.

Although there are no rules about what returns for start-up investors
should be, in Japan most investors expect something like the following:

a) Early stage investor - 30 - 50 times return. Expected exit is 7-10
years. High risk: company will be in formative stages and not profitable.
b) Mid stage investor - 10 - 20 times return. Expected exit is 3-5 years.
Mid-level risk: company may have just become profitable, but is still
growing significantly.
c) Late stage investor - 3 - 5 times return. Expected exit is less than 3
years. Low risk: company is seeking funds for existing business lines, to
increase capacity.

So now you can see that depending on which part of your company life cycle
you are taking on investors at, you can get some idea of what valuations
you can ask for and which would be defensible. In our scenario of an
early-stage business planning to do JPY2.5bn revenue and JPY500m pre-tax
profit prior to a Mothers listing, an early-stage investor would want a 30x
return once your business lists for JPY10bn - meaning that you could ask
them for a valuation of up to JPY300m. Of course, there are many real world
considerations that modify these numbers, and in the end it's all about how
the investor views you and your company, and the quality of your vision and

2. Private Trade Sale

The other form of successful exit is when you sell the company privately,
usually to a larger player who recognizes the excellence of your
product/team/technology and who wants to bring in those assets to catalyze
its own much larger business. Usually these buyers will price the business
according to one of the following:

a) Conservative estimate of future cash flow based on historical
performance. If you have been growing the bottom line by 15% a year for the
last 12-18 months, then the buyer will probably be willing to pay for 3 - 5
years of similar growth - meaning about 2 - 3 times  your last fiscal
year's profit. Add English-speaking staff and exports to your business, and
you can probably double your buy-out to 4 times - 6 times last year's
pre-tax earnings.
b) Replacement cost for your technology or systems, whereby you are saving
the buyer several hundred million yen at their cost levels to replicate
what you have produced. This approach is of course not percentage based,
and so could represent a massive multiplier on your capital if you're
selling while still small.
c) Revenue impact - where the injection of your intellectual property (and
team and customers) will be far more valuable inside a larger company,
because they have the business network and capital to put your assets to
work properly.

This third scenario is the most common reason for Japanese large companies
buying out smaller ones. How to get such buyers to a valuation is usually
achieved by the two companies working together for a while, and for the
bigger one to realize the value of the assets. With the right internal
champion on the buyer side, and with some judicious assumptions to help you
guess the beneficial impact your firm is having on the buyer's business,
you can get a pretty decent price for your company - as Soracom did with
KDDI. What are these assumptions?
* For most Japanese companies 80% of their costs are personnel costs, and
thanks to the uniformity of the job market, you can pretty much guesstimate
how much money you can save them in terms of head count reduction.
* Alternatively, you can calculate how much your product or service can
magnify the buyer's existing personnel performance without increasing core
costs (other than your company's buy-out of course - and which anyway goes
on the Balance Sheet not the Profit & Loss)

>From past deals we have seen, a trade sale to a strategic partner can yield
the seller between 10 times - 50 times their pre-tax profits. This means
that the net result is not that much different from a stock listing, but it
is way easier and the founders and other shareholders get their money at
the start, not dribbled out over years as is the case with a listed company
(where of course the shareholders would panic if the founders suddenly sold
all their shares).

Valuations of technology companies in the USA are far above what is
possible in Japan. Generally speaking we see valuations in Japan of about
20%-30% of those being made for companies at the same level in the USA.
While this may sound bad, and certainly it hobbles companies from ramping
up as quickly as their transpacific counterparts, the cost of skilled
people in Japan is significantly cheaper and sometimes forcing a company to
walk before it can run is a good thing. It does nonetheless explain why
there is a recent trend for Japanese start-ups looking for better
valuations to move to the USA either by themselves or under some incubator
such as 500 Startups. The recently sold translation company, Gengo.com
(sold to Lionbridge in January this year), followed this route and did so
very successfully.

We found the following table in Forbes from last year, and have compared it
to similar stage companies here in Japan.

1. USA Valuations

Pre-seed: raising $200K - $500K at a valuation of $1M - $3M
Seed: raising $500K - $2.5M at a valuation of $2M - $6M (revenues expected
by investors are $0 - $50K per month)
Series A: raising $3- $12M at a valuation of $10M - $40M (revenues expected
by investors are $100K - $250K per month)
Series B: raising $10M - $25M at a valuation of $30 - $100M (revenues
expected by investors are $350K - $800K per month)
Series C: raising over $20M at valuations of over $100M (revenues expected
by investors are over $1M per month)

http://bit.ly/2BRbv6x [The original Forbes article.]

2. Japanese Valuations

Pre-seed: raising JPY2m - JPY5m (US$18K - US$45K) at a valuation of JPY10m
- JPY30m (US$110K - US$330K)
Seed: raising JPY10m - JPY50m at a valuation of JPY50m - JPY300m (revenues
expected by investors are JPY0m - JPY5m per month)
Series A: raising JPY80m - JPY300m at a valuation of JPY500m - JPY1.5bn
(revenues expected by investors are JPY10m - JPY30m per month)
Series B: raising JPY500m - JPY2bn at a valuation of JPY2bn - JPY5bn
(revenues expected by investors are JPY30m - JPY150m per month) [Ed:
Companies usually list after this round.]
Series C: Few Japanese companies remaining at this level, and those who
are, are getting similar valuations to the USA.

Lastly, a question that we get asked a lot by new entrepreneurs is how to
get the capital of the company up to a sufficient level that allows them to
sell shares without threatening control of the business. This question is
understandable because most start-ups in Japan are funded purely with cash
(or unpaid salaries) from the founders, and generally this first stage of
funding is small - in the region of JPY1m - JPY10m.

So how do you increase the capital of your business to, say, JPY100m, so
that you can sell 10% of it to an investor and get some serious money in to
fund the growth of your company? The simple fact is that you don't have to
increase your capital. Instead, you take 10% of the shares you already have
and construct a business plan that indicates even though the shares at face
value are only worth JPY10m (say, JPY1,000 x 10,000 shares, the business
plan shows that these shares will be worth much more in 5-10 years time,
and so they can reasonably be sold at a premium. That premium explains the
difference between actual paid in capital and the price you now want for
them. This idea that people will pay more than the paid in capital value
for shares is difficult for many Japanese start-up entrepreneurs to
understand. It looks like you're making money out of thin air and surely a
JPY1,000 share is only worth JPY1,000?

No, what we need to remember is that you are no longer selling JPY1,000
shares, but rather 10% of your company's future. It's your job to look for
investors who understand that valuation proposition, the risks involved,
and who can make their own judgements on whether you can really hit those
future targets. On your side, you should be willing to "open the kimono" to
allow them to evaluate your leveraging factors, such as your own track
record and credibility, your team, the heating up of your marketplace, your
competitors, and the quality of your business plan.

Once the first investor is in at that premium price, following investors
will feel much more comfortable with the new pricing floor. Then you are on
your way.

...The information janitors/


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German desk for inbound travelers to Japan, and we are looking for a
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For more details: jerome.lee at japantravel.com

+++ NEWS

- Mitsubishi-UFJ Group gets knuckles rapped
- India's OYO comes to Japan
- Recruit is Japan's largest internet content player
- Chinese invasion prediction from ex-military chief
- Delivery robots likely to be first self-driving vehicles

=> Mitsubishi-UFJ Group gets knuckles rapped

By virtue of the fact that it owns a bank in the USA, Japan's largest
commercial bank, Mitsubishi-UFJ, has had its knuckles rapped by the U.S.
federal banking regulator over defective internal money laundering systems
and violations of international sanctions. This is the latest in an ongoing
series of warnings that the bank has received and which it doesn't seem to
be able to resolve. The problem seems to be with the bank's international
operations, where one employee said the anti-money laundering program was
like “a dumpster fire.” So far, in the last 5 years MUFG has been fined
more than US$565m for firstly doing business illegally with North Korea,
then later with Iran and Myanmar. ***Ed: Bank compliance is hard to do at
the best of times, and this coupled with the bank's penchant of doing
business wherever its large Japanese trading house customers are found,
means that they are often outliers when it comes to observing US-led
sanctions.** (Source: TT commentary from nytimes.co.jp, Feb 22, 2019)


=> India's OYO comes to Japan

The Indian rental housing company OYO is about to launch its wildly popular
share house and hotel rooms business in Japan, as part of a tie-up with
Yahoo Japan. The new entity, to be named OYO Life, will build and rent
upmarket facilities targeting young people who don't have the savings or
the will to buy their own place, but who have disposable monthly income and
who want a comfortable life. OYO says that they will go full speed into the
Japanese JPY12trn rental property market. Their service will offer renters
a quality environment without the need for deposits, spending on
appliances, or even on furniture [Ed: Wonder if this includes a house
cat?]. OYO will also manage properties for existing home owners, providing
a one-stop simplified service to get and manage tenants. ***Ed: It will be
interesting to see if through its service standardization OYO can influence
the rental market away from deposits and race discrimination. If they
become big enough, we may be witnessing the birth of a genuine rental
revolution. Certainly other players will pile in with even better offers if
they are successful.** (Source: TT commentary from thenewsminute.com, Feb
22, 2019)


=> Recruit is Japan's largest internet content player

Very good article by Bloomberg, analyzing the business of Recruit Holdings,
which Bloomberg says is Japan's largest internet content company. The
company operates 200 websites and 350 apps, making it a daily content
provider for most of Japan's internet-using public. The plethora of sites
gives Recruit a market valuation of about JPY5.22trn (as of Feb 25, 2019),
3 times the market cap of Yahoo! Japan and 4 times that of Rakuten. Recruit
is internationally a quiet player but in fact owns some major foreign
brands, such as Indeed.com and Glassdoor.com. Almost every month the
company announces a new foreign investment or acquisition funded from its
JPY300bn war chest. ***Ed: Especially interesting in the article is
Recruit's internal incubation program, which allows staff to run with their
own ideas, feeding profits back into the main business. One such operation
has been Study Sapri, which got kicked off with 200 staff and JPY2bn in
funding. The business already has about 500,000 students paying JPY900 per
month for study materials.** (Source: TT commentary from businessmirror.com,
Feb 23, 2019)


=> Chinese invasion prediction from ex-military chief

The Stars & Stripes is carrying an interesting story about retired Japan
Air Self-Defense Force Lt. Gen. Kunio Orita, who has controversially
predicted that the Chinese will invade and annex Taiwan by 2025 then follow
suit by trying the same strategy with Okinawa by 2045. Orita apparently
subscribes to the Asia-Pacific island dominoes effect, whereby Japan should
stand by Taiwan or else become the next target after Taiwan disappears.
Orita has laid out a fairly credible process by which the Chinese would
take over Taiwan, saying that it would start with a no fly zone imposed on
the island, then baiting of the Taiwanese military, and finally a full
naval blockade. ***Ed: Interesting to see that not just Orita but also
other generals are also going on record that they think Okinawa's anti-US
stance is being stoked by China.** (Source: TT commentary from stripes.com,
Feb 18, 2019)


=> Delivery robots likely to be first self-driving vehicles

While Uber and Waymo in the USA are focused on passenger transport by
self-driving cars, the Japanese see last mile package delivery as a more
relevant application of robotic vehicles. The Nikkei says that both Japan
Post and Yamato Holdings are testing driverless vehicles in public spaces.
Anticipating the significance of autonomous parcel deliveries, the
government is readying some new road safety guidelines for release in
March. These guidelines will move oversight/control of roads being used by
testers from local jurisdictions at present to national jurisdiction in the
future. This means that testers will be able to avoid having to completely
close down a public road while their robotic vehicle is traveling on it.
***Ed: In other words, bureaucratic intervention at a national level to
remove bureaucratic control at a local level. Ain't bureaucracy great?**
(Source: TT commentary from asia.nikkei.com, Feb 21, 2019)


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.

---------- Dealgateway.com sign-up opportunity ------------

If you are a company owner, investor, biz dev person looking for
international market entry, or someone on the other side of the table, you
should be a member of International Deal Gateway (IDG - www.dealgateway.com).
This free introduction-only investor/investee business network is built by
the same team that helped create the global 12,690-member Entpreneur's
Organization (EO) and the global 27,000-strong Young President's
Organization (YPO). In just six months, IDG has accepted almost 1,000
members and expects to be at 5,000 by the end of 2019. These numbers mean
serious deal flow for your fund and a qualified audience for your deals.

What's different about IDG is that while the network is built on a
blockchain base, the actual participants are all proven business people who
already know each other and/or who are familiar with and abide by the
ethics promoted by both the EO and YPO. This means members can have
confidence putting up real deal information, and while the secretariat
quality-controls the participants. Personal reputation and community
visibility are cornerstones of the membership acceptance process.

To apply to become a member, complete the application form at
http://bit.ly/2tCM44o [IDG signup form - *Referral Code: 37BDEC*]. Your
application will be evaluated by a panel of founders and local (Japan)
members, and you will be advised of acceptance within 2 weeks. Thereafter,
you are free to register your interests, post deals, offer services, and
otherwise participate.

How does IDG make money? It is volunteer at the country level, with
currently no membership fees (this may change in the future). Actual deals
are free to look at and respond to, and if any are processed they will
attract a small service fee from the operators in Canada. More details

For more information, visit: http://bit.ly/2U6VK2C [IDG website.]



No upcoming events this week.


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=> No corrections or feedback this week.



=> Bishamondo Naked Man Festival, Urasa, Niigata
One of Japan's most bizarre winter festivals

March 3rd each year sees the Naked Man Festival take place at Urasa's
Bishamondo, in Niigata. It is known as one of the top three bizarre
festivals in Japan and dates back hundreds of years. Semi-naked men parade
through the streets leading to the local temple, accompanied by people
carrying giant candles. Once they arrive, they jump into an icy pool of
spring water. From there they dash into the main hall of the temple where
there is a steaming mob of other men all pushing and shoving to try to
squeeze through a small gap into the inner area. It is a writhing mass of
men, all chanting in unison, and lit by candles in an all-wooden building
on a winter night - quite an impressive sight! The streets outside the
temple are lined with stalls serving food and drinks, with a BBQ fish in
warm sake being a local favorite. Venue: Bishamondo When: Mar 2nd - Mar 3rd
2019 ,  6:00pm - 8:00pm.


=> Tokyo Shinagawa Shopping
Oi Keibajo Flea Market

On weekends, when Oi Keibajo, or Tokyo City Keiba, are not holding horse
races, they also hold flea markets. The large-scale markets are held in the
car park of the race course and the recommended time to visit is from
morning to early afternoon. The markets to not specialize in anything in
particular, meaning that you can discover almost anything movable for sale
there. Japanese antique shopping or second-hand kimono shopping is probably
one of the best market activities, with the kimonos selling for only a
fraction of what they usually would in stores. There is also a food
van/food stall area for you to enjoy lunch after a hard morning of
shopping. The flea market typically starts at 8:30am and ends at 2:30pm.
You can expect around 300 - 600 vendors, depending on the day. Entrance is
free and the event is only cancelled if there is heavy rain. It's only a
3-minute walk from Oi Keibajo-mae Station on the Tokyo Monorail, and
10-minute walk from Tachiaigawa Station on the Keikyu Line.




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

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