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Report No.1
*****************************************************Japan Entrepreneur Report No. 1 November 2002
*****************************************************
- Japan Entrepreneur Report debuts
- Why I'm not a true entrepreneur
- Brief comparative overview of venture capital firms in Japan and the U.S.
- Size of native English speaker submarket in Japan
- Aiming for the North Star
*****************************************************
Japan Entrepreneur Report debuts
Every subscriber to Japan Internet Report (www.jir.net) is receiving this
first issue of Japan Entrepreneur Report (JER). If you would prefer not to
receive JER, please unsubscribe at <www.japanentrepreneur.com>.
If you want to scold me individually for subscribing you, please send mail
to <clark@sunbridge.com>, as I will escape the full fury of your wrath if
you simply reply to this message.
You may wonder what the heck I'm doing writing about ventures and
entrepreneurship in Japan. The popular perception in the West seems to be
that Japan has fallen off the map, that Japanese business practices have
been discredited and are irrelevant to today's service- and finance-driven
economies, and that the "venture model" itself has been dead for almost
three years. Not only that, China is the Next Big Thing, and has been for
the last twelve years, etc. etc.
Well, the last time I looked Japan was still the world's second-largest
economy with a GDP of more than four trillion U.S. dollars, and still leads
the world in a number of critical "hard" sectors. While I do believe the
Japanese economy is in decline, I also believe that decline will be long and
slow rather than precipitous (I opine about this at
<http://www.jir.net/jir5_02.html#2>). And while progress in many areas is
maddeningly slow, Japan is making real headway in dismantling legal barriers
to entrepreneurship.
As for China, the Next Big Thing, it is impressive in some ways and scary in
many. The exceedingly high proportion of workers employed by state
enterprises and the almost complete lack of any social safety net means a
complete transition to a real market economy is likely to be accompanied by
serious social disruption. Massive bad loans and rampant corruption plague
financial and political institutions. Meanwhile, complete disregard of
intellectual property rights impede the development of domestic software
and other intellectual capital industries. Who wants to develop software
when it will be pirated immediately and no significant compensation can be
expected? Where are the Nobel Prize winners?
So I continue to place my bets on Japan, my second home. And I believe a
revival in entrepreneurship is one of the keys to invigorating this "dead"
four trillion dollar economy. But my real reason for writing about ventures
and entrepreneurship follows.
*****************************************************
Why I'm not a true entrepreneur
Although I founded, grew, and ultimately sold a professional services
company in what most would call the "Internet industry," I do not consider
myself a true entrepreneur, nor do I consider the company I created a true
"venture." (Neither do I consider that there is such a thing as an
"Internet industry" per se, something I pontificated about exactly one year
ago at <http://www.jir.net/jir11_01.html#6>).
Let me explain.
First of all, what is a "venture" business in the sense that the word is
used in the venture capital industry? Let's look at each of the words in
the term "venture business."
"Venture" means in this instance that someone else is going to invest a
substantial sum of money in a new company on a nearly-speculative basis. It
means there is substantial risk involved, higher than the ordinary market
risk of investing in, for example, the portfolio of stocks in publicly-held
companies. Higher risk means that the investors expect a higher-than-market
rate of return on their investment, and the company founders are obligated
to do their best to achieve that high return.
The second word in the term "business" refers to <big> business, not small
business. By "big," venture capitalists generally mean revenues in the
hundreds of millions of dollars and commensurate earnings. Venture
capitalists don't invest in companies that are likely to wind up as
successful but small businesses that nicely support the founders, employees
and their families, but no one else. As one company founder I talked to
recently said, "That would be like asking investors to fund us so that we
could have jobs!"
To become big, the business needs to be "scalable." True scalability means
two things: First, that the ongoing viability of the business not ultimately
depend on the founder's skills, reputation, or personal charm. In short,
the founder must become dispensable at some point.
Second, true scalability means that large numbers of incremental units of
the company's product or service can be quickly and efficiently manufactured
or deployed on short notice at lower incremental cost compared to the
initial units. Packaged software, music CDs, and books are good example of
scalable products; once the "golden master" is prepared, additional units
can be created at very low cost.
Good examples of scalable businesses in the service sector include fast food
restaurants, parcel delivery services and hotel chains. These companies use
highly-standardized, thoroughly documented processes and methodologies that,
when combined with the right training, can be executed effectively by
relatively unskilled employees.
To recap, there are two requirements of a venture business: 1) Significant
outside investment in an operation with the potential to become very big,
and 2) True scalability, so that the business can indeed become big and
presumably produce extraordinary, above-market returns.
Now, how about the definition of "entrepreneur"? In my view, you don't have
to start a venture business, but you do need to build a truly scalable
business in order to deserve the title of "entrepreneur." Otherwise you are
simply a business owner.
There's nothing wrong with being a business owner. That's what I was, and
I'm pleased about it. But one of the biggest lessons I learned during my
stint as a business owner is that most businesses, and nearly all
professional services businesses, are not truly scalable.
Like me, most business owners are technicians rather than true
entrepreneurs. They start businesses in order to exercise their skills in a
particular area of market need, and perhaps to enjoy freedom from the
control of higher-ranking but less knowledgeable corporate colleagues. But
rarely do these technicians create, from the beginning, systems and
methodologies that support a truly scalable business. That's a very, very
difficult thing to do.
The definition of "true entrepreneur" adopted here is admittedly harsh.
Many brilliant, wildly successful business owners wouldn't qualify as "true
entrepreneurs" under these criteria. So as we go forward with Japan
Entrepreneur Report we will apply the term to all founders of new
businesses, and use "entrepreneur" in an aspirational sense (see "Aiming for
the North Star" below).
Readings that have informed my thinking on this subject include the "E-Myth"
series of books by Michael Gerber (the "E" refers to entrepreneurship).
Here's a quote:
"The Entrepreneurial Perspective starts with a picture of a well-defined
future, and then comes back to the present with the intention of changing it
to match the vision. The Technician's Perspective starts with the present,
and then looks forward to an uncertain future with the hope of keeping it
much like the present."
You may wonder why, if I am not a true entrepreneur myself, I am writing a
newsletter called Japan Entrepreneur Report. The answer is that I want to
learn more about true entrepreneurship. I hope you'll join me, and find the
journey as worthwhile and entertaining as I do.
*****************************************************
Brief comparative overview of venture capital firms in Japan and the U.S.
What do Ikuo Nishioka (former President of Intel Japan), Masaru Murai
(former President of Compaq Computer Japan), Takatoshi Matsumoto (former
President of both Sun Microsystems and Cisco Systems Japan) and Allen Miner
(former President of Oracle Japan) have in common?
They are the first of a new breed of Japan-based "hands on" venture
capitalists - in other words, venture capitalists who come primarily from
technical and operational rather than financial backgrounds, and who offer
strategic and operational assistance, not simply financing, to the
entrepreneurs they support. They are the founders of a new wave of "hands
on" venture capital firms: Mobile Internet Capital, General Atlantic
Partners, Academy Capital Investments, and SunBridge Corp., respectively.
Japan has been waiting to 30 years for these guys to show up. The first
"hands on" venture capital (VC) firm in the United States was Kleiner
Perkins Caufield & Byers (KPCB), which started in Silicon Valley in 1972.
That was a year before JAFCO, Japan's first-ever venture capital firm, a
decidedly "hands off" financing-oriented VC, was founded.
JAFCO was founded on the U.S. financier model of venture capital, which
began on the East Coast in the 1940s. KPCB was founded by Eugene Kleiner, a
co-founder of Fairchild Semiconductor, and Tom Perkins, one of the guys who
started Hewlett-Packard's computer division. Thus it took the U.S. venture
capital industry 30 years - from the 1940s to the early 1970s - to go from
the finance-centric model to the hands-on model. It took Japan's venture
capital industry almost exactly the same amount of time - from JAFCO in 1972
to Mobile Internet Capital et al in 2000 - to go through the same evolution.
In this sense, Japan's venture capital industry lags the U.S. by about three
decades.
Nevertheless, the new "hands on" VCs in Japan still account for only a tiny
portion of total venture capital funding. Most VC money provided to new
businesses in Japan is from venture capital firms that are still firmly
rooted in the "finance" model, the most important elements of which are 1)
lending to stable businesses rather than purchasing stock in dynamic,
high-growth potential ventures, and 2) adopting an "asset management"
approach venture capital. The Japanese VCs tend to hedge risk by making
numerous small loans and investments in a broad, balanced portfolio, then
managing the financial assets. In contrast, U.S. VCs tend to hedge risk by
investing large amounts in a few companies, then actively managing the
people. The basic differences between Japanese and U.S. venture capital
firms can be summarized as follows:
- Portfolio range/depth
Japan: Broad portfolio of small investments
U.S.: Narrow portfolio of deep investments
- Risk management style
Japan: Hands off
U.S.: Hands on
- Preferred stage of investment
Japan: Middle/late
U.S.: Early
- Risk preference
Japan: Low/medium
U.S.: High
- Funding sources
Japan: Financial institutions, corporations
U.S.: Pension funds, foundations
- Basis for employee compensation
Japan: Salary based on length of service
U.S.: Performance-based salary
Only about a quarter of Japan's venture capital firms have consulting units
designed to help entrepreneurs with non-financial strategic and operating
issues, and in general few employees of Japanese VCs have the technical or
operational backgrounds that qualify them to consult with entrepreneurs
about issues other than finance. Moreover, VC employees here are often on
"rotation" from other divisions of a large financial institution, and they
don't stay in the VC unit long enough to accumulate much venture experience.
The result, say industry insiders, is that VCs are often highly dependent on
outsiders when making critical judgments, including which companies to
select for investment.
Source of funds is another key difference. U.S. venture capital firms have
been procuring monies from pension funds since 1979, and these proceeds have
generally appeared to account for 40-45% of annual venture funding since.
In contrast, Japan legalized pension fund investment in venture funds in
1998, and the following year pension fund proceeds accounted for less than
six percent of all money provided to VC funds.
Venture funding as a percent of gross domestic product (the GDP) is also
quite different between Japan and the U.S. Taking 1995 as a benchmark year
(to avoid the anomaly of Internet Bubble year figures), total venture
funding in the U.S. was a little over 1/1000 (0.001) of GDP. In Japan the
figure is approximately 1/2170 (0.00046) of GDP, less than half that level.
Another crucial difference involves information disclosure. In the U.S.,
significant data on how the proceeds of venture funds are invested can be
viewed by anyone at Web sites such as <www.ventureeconomics.com>, sponsored
by the National Venture Capital Association (NVCA), or <www.ventureone.com>,
a private corporation. In contrast, counterpart information in Japan is
scarce and closely held, a factor keeping the credibility of the VC industry
from reaching its full potential.
A welcome new development is the launch this December of the Japan Venture
Capital Association (JVCA), the first such organization of its kind in this
country. The JVCA debuts almost exactly 30 years after the NVCA, its U.S.
counterpart. SunBridge welcomes the JVCA and has high hopes for the key
role it could play in coordinating greater information disclosure among
venture capital firms, enhancing the overall credibility of the VC sector,
and speeding the positive evolution of the venture capital industry in
Japan.
Interested parties can contact the new JVCA office at 03.5201.1515.
*****************************************************
Size of native English speaker submarket in Japan
Fun Facts to Know and Tell Department: Recently I became curious as to the
number of native English speakers living in Japan, and after hearing from
entrepreneurs interested in this particular submarket, I decided to find
some authoritative statistics.
The quick answer: 89,095. This is the total number of registered foreign
residents of Japan who are citizens of the U.S., the U.K., Australia, Canada
or New Zealand. Keep in mind that this number excludes those foreigners
with temporary or tourist visas who do not carry a Certificate of Alien
Registration ("gaikokujin torokushomeisho"). Of course the number ignores
the substantial number of native and near-native English speakers who hail
from the Philippines, Singapore, Hong Kong, India, Europe and elsewhere.
Nevertheless, the figures provide a good guideline and are certainly
reliable; they are based on actual certificate registration data and are
published by the Japan Immigration Association. I paid 2,850 yen for the
booklet, entitled "Statistics on Foreigners Registered in Japan," which can
be ordered online at <http://kanpo.net/NewBook/0208c30.htm>.
This 119 page book is quite thorough. Here are some of the highlights:
There were 1,778,462 registered foreigners residing in Japan as of
12/31/2001, comprising 1.4% of Japan's entire population. The figure is up
25.7% compared to five years ago and an increase of 45.9% over the last ten
years.
Asians account for the overwhelming number of registered aliens residing in
Japan. Here's a breakdown by geographic area of citizenship:
| Asia (primarily Korea and China): | 73.7 | % |
| South America (primarily Brazil): | 18.6 | |
| North America: | 3.4 | |
| Europe: | 2.9 | |
| Oceania: | 0.8 | |
| Africa: | 0.5 | |
| Stateless: | 0.1 |
A statistic of more value to those interested in this submarket would be the
number of non-native speakers of English skillful enough to use English
software, operating systems, or read English language books. Unfortunately
this number is impossible to estimate from government statistics. Anyone
have some data or an intelligent guess?
*****************************************************
Aiming for the North Star
This issue our JER Quote of the Month Section offers entrepreneurial words
of wisdom from Oki Matsumoto, President of Monex, a leader in Japan's retail
online securities sector:
"Aim for the North Star, not the North Pole."
Matsumoto says that vision is what sustains an organization, and that the
"North Star" is the organization's vision, the guiding force that aligns
everyone's efforts. If everybody heads for the North Pole, when they
finally get there and "plant their flags," so to speak, they'll be facing in
opposite directions (they may also be likely to split up and go their own
separate ways once they've "arrived").
In contrast, a distant destination such as the North Star will be more
effective in aligning the respective paths of all those who choose to join
the journey. Perhaps another way of putting it is that an organization's
vision should be aspirational rather than attainable.
I used to think the almost ludicrously forward-looking visions set forth by
Japanese companies were preposterous and bombastic (an impression reinforced
by English versions of those statements that weren't well-localized). But
Matsumoto puts forth a compelling, and poetic, argument for "shooting for
the stars." Thanks to Allen Miner for a fine English language rendition
Matsumoto's Japanese "North Star" maxim was offered at the Style 2002 Social
Venture Competition earlier this year. The event is written up in Japanese
at <http://www.nikkei.co.jp/money1/20020423c154n000_23.html>.
Keep aiming for that North Star!
*****************************************************
Tim Clark
Senior Fellow
SunBridge Corp.
Voice 813.5459.0765
Fax 813.5459.0629
clark@sunbridge.com
Copyright 2002 Tim Clark
Reproduction in whole or in part without express written permission is
prohibited, but feel free to pass along or quote with URL
(www.japanentrepreneur.com).
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