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Report No.3
*****************************************************Japan Entrepreneur Report No. 3 January 2003
*****************************************************
- Popular perceptions of entrepreneurship in Japan
- Exit strategies East and West
- Service sector success secrets shared in Shibuya
- Entrepreneurship events February 24-28
- To Broaden Your Appeal, Narrow Your Position
*****************************************************
Popular perceptions of entrepreneurship in Japan
What does "entrepreneurship" mean to the average Japanese citizen? In quest of an
answer to this question, or at least an opinion, I made a pilgrimage to Venture Fair 2003, a
wing-ding sponsored by the Japan Small and Medium Enterprise Corporation at Tokyo Big
Sight January 16 and 17.
At first glance, the event felt like a business reseller-oriented, live-action version of a TV
shopping program: Underwater exercise treadmill! Chainless folding bicycle uses gear
drive, weighs only nine kilograms! World's first system for cleaning engine oil using
microorganisms! Automated mochi pounder! Electronic masseur delivers better
massage than professional shiatsu practitioners! Not sold in any store...order now!
But a closer look revealed some serious, thoughtful entrepreneurial activity, albeit heavily
manufacturing-oriented. Overall the fair seemed to me a sincere, if somewhat uneven,
attempt by the government to encourage more risk-taking in this country.
To start with, I counted no less than 14 different government-affiliated new business
support organizations in the first row of booths inside the exhibit hall. Checking with one
of the loan organizations affiliated with the Small and Medium Enterprise Corporation, I
confirmed that yes, they lend money to any qualified corporation in Japan, regardless of the
nationality of the founder. Moreover, the representatives were happy to talk with me.
Yet in more than two hours I saw only one other Western face on the exhibit floor, and
none at the support organization booths. Also, it was surprising to see how little overall
traffic these booths were generating; I would think that almost anywhere else in the world,
agencies offering to lend money at two percent annual interest would be swamped with
applicants.
In fact, it was surprising how few people Venture Fair 2003 attracted overall, in spite of
being completely free of charge to both attendees and exhibitors. About 28,500 people
attended over two days, but the venue could easily accommodate three times that traffic.
Although low turnout was disappointing, it was encouraging to hear the organizers report
that attendance was up more than 40 percent compared to 2002. The upside to the small
crowd size was the high level of comfort and low level of noise - in stark contrast to the
loud, overly crowded technology shows.
Venture Fair exhibitors were grouped by industry sector such as housing and construction,
medicine and nursing care, biotechnology, and manufacturing. Signage above each booth
indicated whether the company was looking for partners, resellers, investment funds or
combinations thereof. The offerings clearly reflected the hot topics of the day: the rapidly
aging population, better health, improvement of the natural environment, recycling and
waste reduction, and improved residential housing.
Manufacturers were clearly responding to the Japanese consumer's shift in focus from the
outer trappings of "lifestyle" toward the inner values of living. This was particularly
evident in the housing section of the Fair, where exhibitors offered solutions to the
problems of everyday life: moldy basements, limited space, inferior building materials,
corroding ironwork staircases and fencing, and generally shoddy construction. Exhibits
included an improved pipe system, a new welding system promising better strength and
durability, new window and tile systems, new kinds of locks and security systems, an
earthquake-resistant roof system, and an air cleaning and purification system. One vendor
demonstrated a low-noise, no-dust concrete drilling system that funnels debris directly into
a catcher system through a vacuum tube. It was remarkable to see them drilling holes
three centimeters in diameter and ten centimers deep in solid concrete in the middle of the
display floor, while generating no debris and little noise.
Business-to-business service offerings were conspicuously absent. In a nation where
services account for two-thirds of gross domestic product, the heavy emphasis on "gee
whiz" technologies and manufactured goods means Venture Fair is missing a very big boat.
One of the few professional service groups represented was a consulting firm that
specializes in helping developers and builders design pet-friendly condominiums. Only in
Japan...
Eager to absorb another popular take on entrepreneurism in Japan, I read cover-to-cover the
February 2003 issue of Entre, a magazine for would-be entrepreneurs. Entre is put out by
Recruit, the powerhouse publisher of what I like to call "practical" publications: info
magazines about finding jobs, places to live, and cars to drive. The basic theme of Entre
is "dassara," an acronym for "datsu salaryman," which might fairly be rendered in English
as "getting out of the salaried employee rat race."
As put forward by Recruit, the key mechanism for successfully accomplishing "dassara" is
to buy into a convenience store, retail, restaurant or food stand franchise. In fact, almost
the entire magazine is devoted to advertorial for various franchises, plus advertisements for
Recruit's own sponsorship of entrepreneurship events and exhibits featuring those franchise
advertisers. To its credit, Entre offers prominent, explicit disclaimers about its relationship
with franchise advertisers and the potential pitfalls of becoming a franchisee. It even lists
a toll-free number that readers can call to complain about unsatisfactory interactions with
franchisors who advertise in Entre.
Also to its credit, Entre includes some real editorial about entrepreneurship unrelated to
franchise operations. In the February issue, for example, there are interviews with a
leading manga artist and with the founder of a "day spa" for working women. The
editorial is also frank about older workers having to start over in entry-level positions in
completely new sectors at low wages.
But the people at Recruit are nobody's fools, and judging by both the tone of the copy and
the overwhelming number of pages devoted to promoting franchises, I get the impression
that their in-house positioning of the magazine's message is designed to address two of the
deepest concerns of first-time entrepreneurs here in Japan. First is the desire to follow a
proven model with support from a larger entity, and to incur the least possible risk and the
closest thing to a guarantee of success possible. The second is the desire to invest in
tangible assets easily understood by ordinary consumers.
Reading Entre gives the impression that opening one's own physical "shop" of some type -
whether retail, service, or restaurant - remains the long-held dream of most disillusioned
white-collar salaried employees. If all of Entre's readers had their way, we wouldn't be
able to walk ten feet in this country without bumping into a franchised eyeglasses shop,
take-home croquette dinette or tako-yaki (grilled octopus) stand. Distinctly absent from
Entre - no doubt for lack of advertising support - is material relating to entrepreneurs
offering less tangible, business-to-business products and services.
So what's the popular perception of entrepreneurship in Japan? Based on this limited
inquiry, I came away with the feeling that in general, people here view starting their own
business as a way of creating new, relatively secure "jobs" for themselves with the
advantages of 1) independence from corporate politics and bureaucracy, 2) ability to select
a recession-proof sector, and 3) opportunity to "start over" or exercise underutilized skills
and abilities. What was striking was the overwhelming focus on selling products and food,
and the underwhelming interest in services, particularly business support and professional
services.
More on service sector entrepreneurship in later issues of JER...
*****************************************************
Exit strategies East and West
When I first heard the term "exit strategy" a few years ago it struck me as a cop-out. Why
would anyone think about "exiting" a business before it had even started? In retrospect,
my negative reaction was a response to glib, circa 1998 Internet entrepreneurs who were
talking about startup and exit strategies within the same two minute spiel, as if they were
still at MBA school practicing investment solicitation pitches.
Later I realized that exiting the company is simply part of the natural cycle of
entrepreneurship, and that thinking about the exit is important, even when you are starting
up your firm. The difference is in the span of time between startup and exit. Those
Silicon Valley kids were thinking in terms of a year or two. True entrepreneurs have a
much longer time horizon.
I like the way it was put by Carl Kay, who labored for nearly twenty years in the
localization business before becoming an "overnight" success by selling his company.
Says Carl, "Entrepreneurs 'harvest' in a single transaction value created over many years of
hard work."
Basically, to the founder of a business "exit strategy" means a positive and profitable way
to disengage from the current business and move on to other challenges. There are many
logical reasons for wanting to do this. One of the most common is that the company has
essentially "outgrown" the founder; it is growing so fast that it requires professional
management skills and financial resources far beyond those the founder can provide.
There is really only one constructive exit strategy - sell the company - and there are
basically only two ways to sell. One is through a private equity transaction, whereby
another company or a group of employees or managers buys the company. The other is to
sell the company in small pieces to anyone who wants to buy a share (an initial public
offering, or IPO); in other words, "going public."
The fundamental purpose of an IPO, however, is to raise a substantial amount of cash to
fund further growth and development of a company. That an IPO provides an opportunity
for founders to sell their shares and eventually exit the business is a consequence, not the
purpose of the offering. It was only during the Internet bubble that the primary goal of the
IPO came to be viewed by many as an extraordinarily lucrative exit strategy for the
founders. Those days are over, but unfortunately the term "exit strategy" may carry a
negative nuance for people who first heard the term in the context of the Internet bubble.
What about exit strategy in Japan? To get some perspective, I sat down with Takaaki
Nagayama, who has experience with more than 20 new ventures, including some that have
gone public. Nagayama-san started his career with IBM Japan, then moved to Oracle
Japan, where he worked in product management and OEM sales. He later transferred to
Oracle in the United States as the head of a new business unit dealing with OEM
relationships, and eventually became Vice President of the Asia Products Division. He
joined SunBridge in 1999, where he serves as Chief Investment Officer and President of
SunBridge Technologies. Following is a summary of the conversation.
- Is there a Japanese language term for "exit strategy?"
Not really, although recently you can hear the term "deguchi," which literally means "exit."
Ordinarily the foreign loan word "exit" is used as-is for "exit strategy." But use of this
term is limited almost exclusively to entrepreneurs or those involved in the venture capital
business. It is not a term that would be understood by the ordinary citizen. In Japan,
"exit strategy" refers almost exclusively to third party investors withdrawing from the
business, not founders exiting from the business. The context in which the term "exit
strategy" is used is almost exclusive to venture capital discussions.
Entrepreneurs here in Japan will purposely say that their ultimate goal is <not> an IPO. In
Japan, even today the notion of getting rich still has a somewhat negative connotation.
Specifically stating that your purpose is to accomplish a successful exit through an IPO
would not be well received. In general, therefore, the term "exit strategy" refers to the
method by which a venture capitalist will recover funds invested in a startup, rather than to
how a company founder will exit from the business.
- In the West, it is widely recognized that the founder of a business may not be the best
manager of that business once it is up and running, and in fact the company may well
"outgrow" the founder and require that he be replaced in order to achieve continuing
success. How is this different from the typical Japanese view?
In Japan, that recognition is still lacking. Even some venture capitalists here hold the
view that the founder of a company should retain 60 percent or 70 percent of the stock,
even after an initial public offering. From a U.S. standpoint, that would be preposterous.
Yet some VCs and many underwriters in Japan feel that IPOs will not be successful unless
the founder retains a majority stake.
In December 2001 a company called Works Applications went public. It was probably
the first time in Japan that a venture capital firm held more than 50 percent of the stock of a
company that went public. It was big news. Until then, venture capital firms never held
more than 20 or 30 percent of the company. That's the way of the world in Japan. The
founder or president still routinely holds the lion's share of a company's stock, even
following the initial public offering.
- In the United States, that would be unheard of. How could one person retain such a
large stake in the company? It would be a moral hazard.
In Japan, it's exactly the opposite. The perception is that the company could become
unstable if too many people hold too many shares. They could replace the president or take
other drastic action contrary to the true interests of the corporation. That perception is
gradually changing in the direction of the Western viewpoint, but the shift is by no means
complete. It's still fair to say that the president is perceived as inseparable from - almost
identical to - the corporation itself.
That continues to change, of course. Among the new generation of entrepreneurs, there
are those who hold to the Western perspective on this issue. They believe that when their
companies grow bigger, they should replace themselves with more capable managers. Yet
I would say that this viewpoint is not predominant.
The desire for stability is mutual. In other words, investors generally want the company
president to stay in his role. And presidents still generally consider their companies to be
part of themselves. The company and the president are identical! Therefore presidents
are not generally disposed to giving away to a third party - in an M&A transaction, for
instance - something that is so much a part of them. Nevertheless, acquisition is
increasingly being recognized as a viable exit strategy for the modern entrepreneur.
- What percentage of listed companies in Japan actually have a structure whereby the
founders or president still hold a majority stake in the company?
I'm not sure of the actual statistics, but for JASDAQ or NASDAQ JAPAN (now Hercules),
I believe it is a substantial number. Probably more than half.
- In the United States, exiting may have as much to do with having completed the mission
as it does with getting rich. At a certain point, it truly is more logical for someone else to
take over at a certain life stage of the company.
In Japan, the investor's view with respect to the president of a company would be "We are
investing in your firm, so you should be responsible for our money. Why are you selling
out? Why are you helping to lower the stock price?" That's the general feeling. Selling
stock, especially on the part of a president or founder, is viewed very negatively. Even
with an unlisted company, the investor community will eventually find out if a founder has
sold his shares, and the finger-pointing will start.
At some point this "exit" issue will probably be resolved by striking a good balance
between the current Japanese and U.S. approaches. In Japan, it will become more
acceptable for founders to sell at least a portion of their shares in order to be rewarded for
their hard work. And in the U.S., particularly after the Enron-related events of last year,
decent and praiseworthy presidents of companies like Colgate, who have dramatically
increased shareholder value without enriching themselves unreasonably, will become the
new role models. I think this is already happening. And I think Japanese companies are
looking more toward that kind of middle ground behavior. One of the problems is that
Japanese entrepreneurs in 2000 and 2001 were looking toward U.S. Internet bubble
entrepreneurs as their role models.
In a future issue of Japan Entrepreneur Report, we'll take a closer look at private equity
acquisitions, which in our view comprises the most practical exit strategy for both investors
and entrepreneurs. Stay tuned...
*****************************************************
Service sector success secrets shared in Shibuya
"Service Sector Entrepreneurship in Japan: Successfully Leveraging Overseas Business
Practices and 'Outsider' Insight" is the title of our first-ever JER reader event. Come hear
foreign entrepreneurs share their Japan success secrets, and meet like-minded
businesspeople amid breathtaking views of Shibuya on Wednesday evening February 26
from 6:30 to 9:30 pm at Mark City West.
An hour of socializing assisted by draft beer will be followed by a panel discussion
featuring CEOs Joichi Ito (www.neoteny.com), Neeraj Jhanji (www.imahima.com) and
Allen Miner (www.sunbridge.com). These fine fellows and other experienced
entrepreneurs will discuss current challenges and opportunities in the market, share ways
they successfully leverage overseas business practices and "out of the box" thinking, and
offer their insights into the most promising sectors for future entrepreneurial activity in
Japan.
The event, sponsored by SunBridge (www.sunbridge.com), Tama University Extension
(http://renaissance.tama.ac.jp), and ETIC (www.etic.or.jp), a nonprofit organization that
specializes in finding qualified, motivated interns for venture firms, will be held at the
Tama University Renaissance Center on the 17th floor of the Mark City West office tower
adjoining Shibuya Station. The participation fee of 1,500 yen includes one draft beer or
soft drink and dry snacks. The space easily accommodates 200 people, so we are looking
forward to a good crowd. Preregistration at
<http://www.japanentrepreneur.com/event20030226-form.html> is required.
Directions for getting to the Renaissance Center at Mark City West
Mark City West adjoins Shibuya Station, but finding it for the first time can be a challenge.
>From the second floor of Shibuya Station, walk toward the Inogashira Line entrance, but
don't enter the hallway leading to the ticket machine and turnstiles. Rather, look for the
escalator and stairs leading up to a third-floor hallway that leads to a group of eateries
including Starbucks. Follow that hallway (including going up another short
escalator/flight of stairs) until it intersects with another large hallway. Turn left here, then
turn right and go up the escalator and through sliding glass doors to an elevator bank on
your left. Take the elevator to the 17th floor and go all the way down the hallway to your
left to reach the Renaissance Center. Japanese language maps can be seen at
<http://renaissance.tama.ac.jp/site_map/access.html> and
<http://www.s-markcity.co.jp/map/index.html>.
Alternatively, if you know where Yamaha Music is on Dogenzaka, just go up the hill a
little further on the same side of the street, and you'll see an entrance to Mark City on your
left. You can't miss the long walkway with its overhanging, mirror-like sculptures.
Enter the building, walk straight down the hallway, and take the first escalator on your right
up to the office tower elevator banks.
Hope to see you there!
*****************************************************
Entrepreneurship events February 24 through 28
There will be a series of entrepreneurship-related events taking place at the Renaissance
Center during "Habitat Week" February 24 through 28. Here's a sampling:
February 24-28 (daytime)
Venture Community Fair
Venture firms, vendors and support organizations will be exhibiting throughout the day all
week. Admission is free and open to the public. Exhibitor tables are available for 5,000
yen per day to qualifying organizations. Please contact Minako Marushima at 5459.0539
or <marushima@sunbridge.com> for more information.
February 24 (evening)
Evening Venture Community seminar and reception (donation 1,500 yen). Check
<www.sunbridge.com> in early February for details and signup information.
February 25
Effective e-Business Project Management
Evening lecture in Japanese. Admission free, followed by Venture Community reception
(donation 1,500 yen). Check <www.sunbridge.com> in early February for details and
signup information.
February 26
Service Sector Entrepreneurship in Japan: Successfully Leveraging Overseas Business
Practices and 'Outsider' Insight
Evening social hour and panel discussion in English featuring Joichi Ito, Neeraj Jhanji and
Allen Miner (donation 1,500 yen). See "Service sector success secrets shared in Shibuya"
above and sign up at <http://www.japanentrepreneur.com/event20030226-form.html>.
February 27
Philosophy of Corporate Management
Evening lecture by Professor Teruhiko Mochizuki of Tama University, a popular speaker on civic
planning and the role of business in the community, in Japanese. Admission free,
followed by Venture Community reception (donation 1,500 yen). Check
<www.sunbridge.com> in early February for details and signup information.
February 28
Strategies for White Collar Professionals
Evening lecture by Professor Hiroshi Tasaka of Tama University, a widely published
specialist in corporate strategy, in Japanese. Admission free, followed by Venture
Community reception (donation 1,500 yen). Check <www.sunbridge.com> in early
February for details and signup information.
*****************************************************
To Broaden Your Appeal, Narrow Your Position
In his wonderful book "Selling the Invisible," Henry Beckworth makes this seemingly
contradictory statement and JER's Quote of the Month. The story is as follows:
In 1980, overriding internal debate over the wisdom of ignoring economy class travelers,
executives at money-losing Scandinavian Airlines (SAS) decided to position the airline as
"the business traveler's airline" with a new, upscale service called EuroClass. After
launching EuroClass, SAS successfully filled its high-margin business cabins and started
making so much money that it could afford to lower its economy seat rates. As a result, it
soon had the highest percentage of full-fare travelers and the lowest tourist fares in all of
Europe. By narrowing its focus and "sacrificing" economy travelers, it actually turned
itself into the most attractive airline to <both> business travelers and tourists, and racked up
earnings of $80 million in EuroClass's first year. The move spectacularly disproved the
arguments of those who opposed a sharp focus on business travelers at the "expense" of
ignoring economy class travelers.
"To broaden your appeal, narrow your position," says Beckworth.
*****************************************************
Your input on the Iraq issue
The only thing that annoys me more than having to put a political blurb into my newsletter
is watching the leaders of my permanent home, the United States of America, act in ways I
consider irresponsible. If you believe, as I do, that more can be done on the diplomatic
front to avoid a military confrontation in Iraq, please review and consider signing the
petition at <http://www.moveon.org/winwithoutwar/>. I have been satisfied with this
organization's privacy policy and actual handling of my e-mail address.
*****************************************************
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*****************************************************
Tim Clark
Senior Fellow
SunBridge Corp.
Voice 813.5459.0765
Fax 813.5459.0629
clark@sunbridge.com
*****************************************************
Copyright 2003 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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