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Report No.2
*****************************************************Japan Entrepreneur Report No. 2 December 2002
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- Ventures don't need much capital
- Japan's ranking in an entrepreneurial world
- Lunch with the $40 million man
- Personality is the Ultimate Strategy
- Lessons from the Seven Dwarfs
- Happy Holidays!
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Ventures don't need much capital
Last month I wrote about "venture businesses" as the term is
used in the venture capital industry. In so doing, I didn't mean
to imply that "ventures" are inseparable from "capital." Quite
to the contrary: The overwhelming majority of
entrepreneurial activity worldwide has absolutely nothing to
do with venture capital or venture capitalists.
In the United States, for example, fewer than one in 10,000
new companies start out with venture capital. Everywhere in
the world, individual entrepreneurs and their families are the
key funders of new enterprises, putting six times as much
money into businesses as do venture capitalists (U.S. $298
billion vs. U.S. $59 billion in 2001).
These figures come from the 2002 Executive Report of the
Global Entrepreneurship Monitor (GEM), a consortium
dedicated to the most comprehensive and rigorous ongoing
international comparative study of entrepreneurial activity
ever undertaken. The report sheds light on the nature of the
very real ventures undertaken by ordinary people every day
around the globe. Here are some findings from the GEM
2002 Executive Report and Inc magazine studies:
- More than nine of ten new businesses target existing markets
or industry sectors and compete with established rivals, while
only a handful (seven percent) are focused on entirely new
markets or never-before-released products and services.
- The amount of initial funding has little to do with the success
of the business. Companies founded with less than U.S.
$1,000 are about as likely to be profitable as those started with
more than U.S. $100,000, according to a study of 500 leading
companies ranked in terms of revenue growth over a five-year
period.
- Nearly three in five of the fastest-growing companies in the
U.S. in 2000 were founded with less than U.S. $20,000.
- "Necessity-based" ventures, where the entrepreneur feels
compelled to start a new business due to lack of other
opportunities, account for about one-third of total worldwide
entrepreneurial activity. "Opportunity-based" ventures, where
the entrepreneur pursues a new business opportunity
regardless of access to other employment options, account for
about two-thirds of worldwide entrepreneurial activity.
The findings of the GEM report support long-standing,
common sense notions about entrepreneurship, and
underscore the extent to which the Internet-driven venture
business boom of the mid- to late 1990s was an anomaly
rather than the result of a new set of business rules. I
sometimes get the impression that many young people who
came of age during the late 1990s think that most companies
start out as "venture businesses" using money invested by
outside parties. The truth is much more ordinary: Most
people start businesses with their own money, and not much
money at that.
Next, let's see what the GEM report has to say about
entrepreneurial activity in Japan.
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Japan's ranking in an entrepreneurial world
First, some basic terminology. GEM computes a "total
entrepreneurial activity" (TEA) index designed to measure
differences in the overall level of entrepreneurial activity
between countries. The TEA measures both necessity-based
and opportunity-based activity.
The GEM findings are unambiguous: Japan has the lowest
total entrepreneurial activity index of all the 37 nations
surveyed. Only one percent of the working population of
Japan is currently pursuing opportunity-based entrepreneurial
endeavors, compared to 12 percent and 15 percent in India
and Thailand, respectively.
The report found that "there are no countries with high levels
of entrepreneurial activity and low levels of national
economic growth." It also uncovered a very low correlation
between government support programs and total
entrepreneurial activity. While correlation is not equivalent
to causality, the findings suggest that it may be difficult to
stimulate entrepreneurial activity through
government-sponsored programs. This should be cause for
concern in the halls of Japan's Diet.
What factors are positively correlated with entrepreneurial
activity? What GEM calls "high-potential" entrepreneurial
activity - ventures with potential to create new markets - is
positively correlated at a statistically significant level with the
number of Internet users and the number of computer users
per capita. Interestingly, there was <not> a statistically
significant correlation between high-potential entrepreneurial
activity and the number of mobile phones per capita. In other
words, mobile phone usage is a poor predictor of general
entrepreneurial activity worldwide. This seems
counterintuitive with respect to Japan, the world's most
vibrant Internet-enabled mobile telephone market and hotbed
for mobile startups. My take is that non-mobile sector activity
is so low that mobile sector activity alone simply isn't large
enough to significantly affect TEA.
If TEA is so low in Japan, what can be done to improve it? As
an academic consortium with only three years of global data
behind it, GEM is understandably hesitant to draw
cause-and-effect conclusions and made prescriptive
recommendations to governments. But it is not difficult to
guess that future research will demonstrate that
government-sponsored, organization-to-organization grants
and programs are generally ineffective. The GEM report
states what seems to be an obvious truth: Individual persons
are the primary agents of entrepreneurial activity. Yet the
significance to government of applying this simple insight
could be considerable. In my view, it points to replacing
"push"-type programs such as grants and facilities provision
with "pull" incentives such as deregulation and tax breaks.
In any case, the national experts who conducted the GEM
survey do not consider government actions and policies the
most important strength of the entrepreneurship support
structure in their respective countries. Rather, "cultural and
social norms" were emphasized as the leading strength - and
the second most important weakness - in the face-to-face
interview portions of the GEM research data.
Now let's take a look at some of the cultural factors holding
back entrepreneurial activity in Japan.
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Lunch with the $40 million man
Earlier this month I had lunch with a Japanese friend who sold
his first company here for the equivalent of approximately
U.S. $40 million. Not bad for an entrepreneur who still hasn't
reached the age of 30! After studying the GEM report, I was
particularly curious to hear his thoughts as to the cultural
reasons why entrepreneurial activity is so low here in Japan.
Excerpts from our conversation follow:
- Can you provide any insight into the cultural reasons why
total entrepreneurial activity (TEA) is so low in Japan?
There are a number of reasons why entrepreneurial activity is
so low here. One is the relative lack of "success stories."
When people are exposed to examples of success, they're
encouraged to give it a try themselves. There are relatively
few such success stories in Japan today. Moreover, Japanese
culture is such that people tend to envy success rather than
respect it.
For example, the purpose of the Bit Valley movement in
which I participated was to let people know that here in Japan,
too, there were venture firms and Internet-driven
entrepreneurial activity. Most people didn't even know about
these companies or understand the concept of a venture. For
example, families oppose breadwinners who want to leave
secure jobs at large companies to start their own businesses.
And banks don't want to lend money to small, unconventional
businesses. Bit Valley was an effort to mobilize people who
understood this and create a movement to increase the
visibility and understanding of ventures in Japan.
As you know, the Bit Valley movement was very "hot" for a
while, attracting a lot of people and getting a lot of publicity.
But at a certain point, the media turned negative, blaming the
Bit Valley organization for the problems that came to
surround the movement.
- What about entrepreneurship in the more traditional sense?
Japan certainly has a tradition of entrepreneurship in people
such as Konnosuke Matsushita or Akio Morita.
Japan's business infrastructure was completely undermined
following the Second World War. It was a time when people
had to rely on themselves to get ahead. There was a
breakdown of previously accepted social values and little
work was available. People were hungry, both literally and
figuratively. Ventures thrived as a result. Today Japan is too
prosperous; people can get by without having to do much.
Today's world is one in which you won't fail even if you don't
create much of a success. That's why people aren't motivated
to start their own businesses.
Another reason is the vast size of the domestic market here. If
you go to Southeast Asia or Singapore, you'll find many of the
entrepreneurs focused on exports or foreign markets.
Relatively few concentrate solely on their domestic markets.
They can't make money at home, so they have to go overseas.
But almost all Japanese venture firms are focused exclusively
on the Japan market.
Another reason for the low entrepreneurial activity here is the
lack of cooperative interaction between businesses and
academic institutions. Students in Japan, like students
everywhere else in the world, are generally more willing to
take risks compared to working adults. Yet there aren't that
many students here who start venture firms. In the U.S., joint
academic-business ventures are doing very well. There are
many professors and other instructors who are willing to serve
on the board or even become presidents of these companies.
There is an "infrastructure" for linking technology with
dynamic, motivated students. That creates success stories in
universities to which other students can aspire. In Japan, a
student who gets involved in a venture is considered unusual
or even "strange." Instructors, too, are highly risk-averse.
Basically, Japanese people are very conservative at heart.
Most are not inclined to try something new. The majority do
not want to try something that appears dangerous, difficult to
understand, or for which there is no precedent.
Nevertheless, entrepreneurial activity is growing among
people of my generation. I think this is because of changing
values. When we were in high school, we were told that
banks and securities companies were great places to work,
and that we would do well to find jobs there. But as soon as
we got to college, banks and securities firms started going out
of business. Then the banks started merging and their stock
prices slid. Now we see finance as the risky sector! In fact,
the whole world has become a lot riskier, and no single sector
is perceived as a career "risk hedge." The result is that more
of us feel that, as long as the world is risky, we might as well
do what we want to do. If you have to take on risk, you might
as well exercise some control over it.
This feeling isn't limited to university students. Faced with
potential restructuring, employees of large companies are
starting to adopt the same attitude.
- How much of the $40 million did you actually end up with?
Very little. It was a 100% equity swap deal - all stock. Our
venture capital firm ended up with most of the proceeds, and
following that the stock price crashed!
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Personality is the Ultimate Strategy
Hiroshi Tasaka, CEO of venture supporter Sophia Bank,
provides entrepreneurial words of wisdom for our Quote of
the Month: "Personality is the Ultimate Strategy." Following
are paraphrases of Tasaka's clarifying remarks:
"I always thought that strategy was essential to the success of
a new business. But after watching these...(new venture
business)...presentations, it struck me that the personality and
character of the founder of the business is in fact more
important than the strategy itself. The founder's personality is
what garners support, attracts co-workers, and creates the
atmosphere of the organization. Ultimately, what other than
personality can be the foundation for management, indeed the
company itself? Regardless of the strategy adopted, it will
fail if it is at odds with the founder's character."
"It seems to me that most of the Internet ventures that failed
did so because they were companies that were incompatible
with the founder's personality. They started with market
analyses such as those that might be prepared by a consultant,
and then built 'business plans' around a competitive analysis.
Typically the conclusion was something like 'no one is in this
space now, so if we get in immediately, we won't have any
competition. We can expect annual growth of 65%, a market
size of $800 million three years from now, and revenues and
earnings of $400 million and $80 million, respectively'."
"Of course I don't mean to discount the importance of
numbers and strategy, but this kind of planning and
forecasting will not, in and of itself, lead a venture to success.
That's because it is people, not plans, who drive a business
forward. It's impossible to create a successful venture
organization without a founder who inspires those around him
to think, "this is someone I can get behind." It is in this sense
that I believe it is ultimately personality that forms the
strategy of the business. A personality compatible with the
paper business plan creates the most powerful combination.
But if the founder's character is incompatible with the plan,
and he tries to force the execution of a logical plan on a
'standalone' basis, the inconsistencies are bound to show up
(as failure) sooner or later."
As one Tokyo-based entrepreneur/investor recently put it, "I
invest in people, not in companies or ideas." 'Nuff said.
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Lessons from the Seven Dwarfs
I love the art and business of Japanese-to-English translation.
It was the first "white collar" work I truly enjoyed, and it led
to deep and enjoyable involvement in translation, localization,
and related work for ten years.
It was therefore a great pleasure to be invited by the Japan
Association of Translators (www.jat.org) to give a talk this
coming January 18, 2003. The topic is "What the Seven
Dwarfs Can Teach Us About Translation." The presentation
should be entertaining if not enlightening; I will discuss a
neatly solved entertainment industry translation challenge and
propose a tool that may be helpful to professional
Japanese-to-English translators. JER readers who are
interested in translation are welcome to attend. The meeting
will be held starting at 2:00 pm in Room 570 of Surugadai
Memorial Hall at Chuo University, just a few minutes by foot
from Ochanomizu Station (see map at
<http://www.chuo-u.ac.jp/chuo-u/access/accessS.html>).
There is a 1,000-yen fee for participants who are not JAT
members.
Speaking of events, we are planning a party in Tokyo for JER
subscribers this coming March (2003). We haven't fixed a
date yet, but the place will definitely be SunBridge on the
17th floor of the Mark City Office Tower adjacent to Shibuya
Station. Stay tuned for details.
Coming up in the January 2003 Japan Entrepreneur Report:
- Exit strategies East and West
- Japan entrepreneur success secrets in Shibuya
- To Broaden Your Appeal, Narrow Your Focus
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Happy Holidays!
Wishing you the greatest joy and happiness this holiday
season, I remain, as ever
Tim Clark
Senior Fellow
SunBridge Corp., Tokyo
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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