"Going Global": The Int'l Syndicate Investing In & Powering Late-Stage Japanese Startups Abroad
Summary
The market for late-stage growth capital in Japan is nascent, though now emerging
The Japanese startup ecosystem lags global peers re: building + investing "best practices"
Match the know-how & $ of int'l tech operators & investors w/late-stage Japanese startups
A hybrid fund + syndicate approach allows for size, diversity, adaptability & curation
A simple way to unlock + maximize latent & incremental value across borders & at scale
A common "knock" against Japanese tech startups is that too few successfully expand outside of Japan. As a result, the argument goes, it is thus very difficult to find & back the next Atlassian, Slack or Datadog in Japan - global companies worth tens of billions of dollars. That being the case, Japan is therefore an unattractive market to hunt for valuable startup investments.
There is a lot we could unpack here to discuss, though let's focus on the "top of the funnel" in the above assertion. More specifically, that Japanese startups struggle to expand abroad.
On the surface, we broadly agree. However, it is instructive to go a step further to assess why this is the case, what are the underlying realities that make it such and what opportunities exist to drive change in this regard.
Before running down this path though, it is important to initially note that sizable technology companies have been & will continue to be built in Japan with a predominately Japan-only focus. Successful examples include:
MonotaRO - B2B e-commerce ~$10.3Bn market cap
GMO Payment Gateway - digital payment solutions ~$8.0Bn market cap
ZOZO - fashion e-commerce ~$7.5Bn market cap
CyberAgent - diversified internet services ~$7.2Bn market cap
freee - cloud accounting software ~$2.4Bn market cap
Market cap data as of July 24, 2020
So, let it be known that big companies can be built & very attractive returns can be earned by solely investing & building in Japan. With that said, even bigger companies & far more attractive returns are possible if Japan's most innovative, leading startups can truly "go global".
Continuing in that vein, one could argue that most Japanese internet tech companies who have meaningfully ventured abroad up until today have either i) faced strong headwinds with little to show for it so far (i.e. Mercari pulling out of the UK market in 2019) or ii) taken a more acquisitive approach to building out their global presence (i.e. Rakuten & Recruit Holdings).
Okay, so, why exactly do Japanese startups struggle so much to organically expand abroad?
We think there are several core reasons for this:
The language & cultural barriers are significant & difficult to side-step. No way around it
Risk & reward are judged & perceived differently in Japan vs., say, in the U.S.
The Japanese market is sizable...still the 3rd largest economy. Don't need to go global
Late-stage growth capital in Japan has been effectively non-existent until more recently
The Japanese startup "playbook" - broadly defined - lags other developed markets
Some of the above realities, beliefs & perceptions are things that no one person or group can likely change, let alone any time some. Others, however, can be "improved" to great effect in relatively short-order. Namely, the last two bullets - the existence of growth stage risk capital & a more "up-to-date", globally informed, more comprehensive "execution playbook" among Japanese tech startup companies.
Now before proceeding further, let's be clear on a few things. While we would agree that Japan is unlikely to produce the same number & type of globally dominate technology companies that American, Chinese, Indian & European entrepreneurs have & will build - basic demographic & long-standing cultural realities make it statistically difficult to do so - we do strongly believe that top Japanese startups will increasingly compete on the global stage & today represent a relatively overlooked, undervalued & highly attractive investment opportunity.
We would further argue that what is most needed to accelerate & maximize the latent global potential of top Japanese startups is direct access to more sophisticated, value-add growth capital from international investors. Importantly, we aren't primarily referring to the traditional set of institutional LPs, but rather the thousands of successful individual operators & investors with direct experience in building & growing later-stage & more mature technology companies from around the globe.
To dive a bit deeper into the weeds...regarding today's relative absence of a meaningful late stage investment market in Japan, some may suggest there simply aren't enough Japanese startups today to merit the existence of such a market segment. We'd increasingly beg to differ:
Moreover, comparing the valuations of the top ten largest Japanese SaaS companies in December 2015 to those in March 2020 further supports the claim that a late-stage growth market is needed and is, in fact, already emerging:
For reference, left column is December 2015, right is March 2020. The numbers represent the companies' valuations (e.x. SmartHR's "307.2" figure is equivalent to ¥30.7Bn, or ~$287M)
That being said, IPOs still remain the dominate form of "late-stage" financing for Japanese startups, with the median amount generally raised on the tech heavy JASDAQ & MOTHERS exchanges falling between $5M to $15M (see below graphic for 2018 data). Such early IPOs are partly driven by a desire to improve the public awareness & credibility of the company, which significantly supports sales, recruiting & bank relationships in Japan. However, the other compelling impetus for IPO'ing at what is effectively the Series B stage is that there just isn't anywhere else to raise that amount of "risk-capital" for most startup companies today.
Source: Deloitte
Also important to note, once listed, many of these tech startup companies begin to prioritize profitability at the expense of growth, thereby severely limiting their overall upside & greatly diminishing their ability to rapidly scale, let alone fund expansion activities outside of Japan.
Moving on now to the 2nd "obstacle" we highlighted above, which we've rephrased some below:
The powerful "business building" know-how developed in the more mature global startup ecosystems currently seeps - instead of freely flows - into, among & throughout the Japanese tech startup community
Unfortunately, we don't have much in the way of hard data to substantiate this claim, but anecdotal evidence from our own experiences & conversations, coupled with those of Japanese VCs far more well-versed in the matter, lends credence to this reality:
So, let's pause briefly & further clarify a few things...
We are not suggesting here that the key to building the next Slack in Japan - which, by the way, already effectively exists as publicly listed Chatwork - is to blindly copy the strategies employed by U.S. or Chinese startups. In many instances, this is a terrible idea, as Japan is a very unique market that requires a particular approach to doing business & "getting things done". However, to increasingly play at the global level, we strongly believe that a deeper, more comprehensive understanding of the underlying strategic concepts of, say, scale economies, cross-side network effects & product-led-growth, for example, is required among Japanese tech entrepreneurs & management teams. Leveraging and building upon such "best practices" across product development, go-to-market strategies and the like is fast becoming table stakes when attempting to take on international competitors, be it abroad or, increasingly so, right at home in Japan.
The above point is even more pronounced as we think about the different strategies & management skills required to scale a startup from $0 to $1M, from $1M to $10M & from $10M to $100M in revenue. In large part due to it still being a relatively "less developed" startup ecosystem - the Japanese VC market remains an almost exclusively Seed & Series A dominated one - Japanese entrepreneurs, startup management teams & VC investors are least experienced & knowledgeable about scaling businesses from SMBs (~$10M) into sizable companies (~$100M). This know-how, though, is precisely what is needed in order to better compete globally with U.S. or European tech companies, who are almost certainly leveraging these valuable insights & tactics at the earliest possible opportunities.
Of course, not to be overlooked, the constraint imposed upon Japanese startups by the relatively stark, innate language & cultural uniqueness of Japan is also a very real "bottleneck" in allowing a more fluid "knowledge flow" from developed tech ecosystems abroad into Japan. Let us stress, however, that we are not suggesting that Japanese entrepreneurs & VCs are today impervious to learning about the successful strategies of Okta, Shopify or Salesforce - not at all, this is indeed happening. Our point is rather that the flow of such valuable know-how and the subsequent understanding & ultimate implementation of these learnings is more stunted than it otherwise should be if a more "sophisticated mechanism" were in place that were specifically designed to facilitate a fluid transmission of relevant know-how alongside otherwise "hard-to-find", sophisticated late-stage risk capital...
So, where are we going with all of this? What "mechanism" are we even talking about?
We believe there is a very timely, significant & unique opportunity to build a powerful community of interested, international investor-operators from across the broader tech space, whereby we can pool their expertise, experience, energy & capital to support leading mid to late-stage Japanese startups in becoming more formidable, competitive global companies.
Our initial thoughts in how this "community investment vehicle" may look is perhaps something akin to AngelLists' syndicate structure. For those less familiar, key features of these syndicates include:
A Special Purpose Vehicle is created to make a single investment
The syndicate lead sources investments, conducts due diligence & secures allocations
Approved investors gain access to deal flow & can pick investments on a deal-by-deal basis
Minimum investment size is general $10K per deal
Notably, we'd likely rely on a more traditional VC fund "side-car" or a partner co-investor(s) to help "back-stop" & fill out any holes in our syndicate allocations.
In support of this approach, we'd point to "super-angel" late-stage rounds such as that of Front's - the collaborative email inbox company - $59M Series C in January 2020 as a scenario where traditional VCs did not, in fact, lead the round. According to the co-Founder of Front, Mathilde Collin:
"The most interesting part about this funding is that it is led by a group of individual investors, as opposed to a traditional venture fund, which is an uncommon feat for a round of this size. They’re some of the biggest leaders in technology: Atlassian co-CEO and co-founder Mike Cannon-Brookes; Atlassian President Jay Simons; Okta executive vice chairman, COO and co-founder Frederic Kerrest; Qualtrics co-founder and CEO Ryan Smith and Qualtrics co-founder and CTO Jared Smith; and Zoom CEO Eric Yuan" - Mathilde Collin
Now, I'm sure you're asking yourself: "self, this sounds interesting, but why would these U.S. or European startup operators want to invest in Japanese startups? They have enough opportunity before them in their home markets & are busy as can be with their own work." Fair question, though we'd argue the following:
This won't be appealing to everyone. That's okay, we don't need everyone
This will represent a very small portion of their portfolios + time, so, prudent diversification
Get advantaged access into relatively inefficiently priced, top-tier late-stage opportunities
In some cases, there could be real strategic benefits for their own companies + know-how
An ability to share their knowledge & experience, a simple, yet powerful "drive" for many
The pitch to Japanese entrepreneurs is arguably very simple & extremely appealing: immediate access to an invaluable "brain trust" of experienced, highly relevant international late-stage startup operators & investors with the added benefit of patient, sophisticated, "hard-to-find" late-stage risk-capital. Compared to existing "offerings", nothing remotely like this exists for Japanese entrepreneurs.
All of the above said, building such an investment outfit will take time - on both sides of the Pacific - & of course will not be easy. But that is all part of the fun!
In sum, the Japanese startup market is fast coming into its own. While innovative Japanese startups may never fully rival the likes of American, Indian & Chinese tech companies in terms of absolute size & number, we do strongly believe they'll carve out an increasingly visible place on the global stage. As investors, our ultimate aim is to directly support & participate in this "renaissance of Japanese global entrepreneurialism" in a way where we can help create & capture value from the "point of inflection" as a mid to late-stage private company through & ideally well beyond the IPO, becoming truly long-term investor-partners with successful, global Japanese technology companies!