"I kept telling Japanese executives that if they failed to exploit PCs through such tools, the Americans would leave them in the dust," says Nishioka. They listened, and their widespread adoption of e-mail helped boost Japan's PC market--and sales of the Intel Corp chips that go in them.
Today Nishioka, 57, is on another crusade. He's warning Japanese executives that Americans could leave them behind in another area: the Internet.
Last winter Nishioka founded Mobile Internet Capital, a venture capital firm that aims to invest in wireless and Internet technologies. Nishioka called on the likes of Sony Corp, NTT DoCoMo Inc, ad agency Dentsu Inc, and NEC Corp, hoping to raise 5 billion yen (US$47 million)--enough, he figured, to seed five or so early-stage start-ups with wireless Internet technologies. He ended up with 6.55 billion yen.
Nishioka is just one of a growing pack of entrepreneurs who are helping Japanese venture capital investing soar to its highest levels since the bubble economy peaked a decade ago. Their firms are linked with some of the top global names--from Softbank Corp, the largest VC firm in Japan, to Whitney & Co of the United States.
Venture capital firms invested some 300 billion yen in Japanese start-ups in 1999--the most since 1991, according to Koshi Okamura, senior VC analyst at Daiwa Research Institute. Last spring's global tanking of high-tech stocks hasn't slowed the pace of investments. Hong Kong-based Asia Venture Capital Journal sees VC in Japan rising 40 percent in the year ending in March, says research editor Tommy Yip. Yip won't give figures, but based on Daiwa's number, that would work out to some 420 billion yen.
Boom begins
"The real boom is really just taking off," says Schroder Ventures general partner Masayuki Noguchi, a venture capitalist since 1985.
While venture capital has peaked and tumbled before in Japan, many experts say the current boom is more sustainable. The Japanese government has given VC a boost. In the past two years, the government has lifted key obstacles that had held back the industry.
The government passed a law in November 1998 that helped create limited partnerships to shield investors from liability--something that until then had prevented pension funds from investing in VC.
The government also revised the tax code to favor angel investments in high-tech ventures.
And two new bourses--MOTHERS (market of the high-growth and emerging stocks), launched in December 1999 by the Tokyo Securities Exchange, and Nasdaq-Japan, which made its debut in June--offer investors in money-losing start-ups a viable exit for the first time. Until recently, a listing on the Tokyo Stock Exchange was the only out-something that could take as long as 25 years.
Pension fund money is poised to flow into the industry for the first time. An April 2000 Ministry of International Trade and Industry survey of 974 pension funds found that 45 planned to invest in VC funds.
US model
MITI estimates that if these funds, worth 249 trillion yen in 1998, invested 3 percent of their money under management in venture capital--what US pension funds did during their early stages in the 1980s (it was 10 percent in 1997)--then Japan's VC funds pool would soar by some 500 percent.
Daiwa's Okamura figures that VC investment in Japan could grow more than 20 percent a year for "several years at minimum".
For all of its recent growth, Japanese VC still lags way behind US VC: American venture capitalists outspent the Japanese--US$50.8 billion to US$2.8 billion--last year, according to Japan's National Venture Capital Association.
Venture investments tended to be far smaller in Japan: 45 million yen, versus nearly 10 times as much in the US. And the exit for investors was rare, in part because of tough listing requirements such as three consecutive years of profits. Only 103 ventures went public in Japan in 1997 compared with 494 in the US.
"The figures reveal a gap that is too large even when factors such as population size and [gross domestic product] are accounted for," according to Venture Enterprise Center, Japan's state-backed VC industry monitor.
The divide is also cultural. Japanese still prefer being employees rather than entrepreneurs, says Yasuhiro Takada, deputy director of MITI's new business promotion unit.
Dearth of technology
There's also a dearth of ventures with world-beating technologies; many of the most promising investments are Japanese spin-offs of American companies.
Japanese entrepreneurs are often loath to accept outside capital or to make public offerings, fearing dilution of ownership, Mizuno says. Stock options, which US entrepreneurs have used to lure talented managers, are only beginning to catch on.
Venture capitalists in Japan have traditionally taken a passive approach. That's beginning to change.
"The Silicon Valley model provides start-ups with the money and management. That's why it's called 'hands-on' VC," Takada says. "The Japanese model has been to invest in more firms at a smaller investment per venture, so it's a 'hands-off' approach. But you must be hands-on with high-tech start-ups, as they require a lot of money and managing to develop them successfully."
The changes under way at Japan's oldest VC firm, JAFCO Co--founded in 1973 by Nomura Securities Co, Nippon Life Insurance Co, and Sanwa Bank Ltd--are typical.
JAFCO started with just US$1 million in capital, and it had to turn to bank borrowing to raise enough capital to fund ventures. Its own shareholders wouldn't even guarantee the loans; they considered venture capital too risky. To make ends meet, JAFCO peddled insurance policies to the companies it invested in.
Insurance sideline
In the early days, JAFCO focused on profitable, middle-tier companies that were five to seven years away from an initial public offering, investing no more than 50 million yen in each.
The strategy paid off: JAFCO's average internal rate of return of 15 percent over the past 10 years is one of the best in Japan, says Schroder Ventures' Noguchi. He adds, though, that that's 5-10 points below what's par for the US.
JAFCO now operates 10 funds worth 161 billion yen and is backed by powerful investors like Cie FinanciSre Edmond de Rothschild and Tokyo Marine & Fire Insurance Co.
Publicly traded since 1987, JAFCO holds stakes in some 2,000 firms, including 500 that have made public offerings. These include Softbank, Internet service provider Internet Initiative Japan, and game software developer Systemsoft Corp in Japan and PSINet and Lightspan Partnership in the US, where it set up a subsidiary, JAFCO America Ventures, in 1984.
Under Mitsumasa Murase, a 60-year-old Nomura executive who became CEO in 1997, JAFCO has begun investing in companies when they are younger and smaller. Last year only 27.3 percent of JAFCO's money went to firms with sales of more than 3 billion yen compared with 49.4 percent from 1993 to 1995. Some 60.6 percent went to information technology companies like software developer Alpha Systems and OBIC Business Consultants.
Faster decisions
Murase reorganized the investment staff into 20 five-member teams, each with the power to decide whether to invest in a company. That has halved JAFCO's decision-making time to three months, says Toru Tanimoto, general manager of the team that focuses on IT investment. Each team member focuses on no more than three ventures to allow for greater hands-on management.
That change has appealed to ventures like Valueclick Japan, whose CEO, Jonathan Hendriksen, enthuses, "JAFCO is fantastic". Hendriksen was pleased because JAFCO gave him a list of 50 potential clients before it had even worked out terms of its investment. Some 20 of the companies have since agreed to place their advertisements on Internet banners through his firm, which charges rates based on the number of people who click on the ads.
JAFCO also set up meetings for Hendriksen to get advice from other CEOs whose firms JAFCO had invested in and had recently done IPOs.
"It was 'smart money,' and you'd be stupid to turn it down," says Hendriksen, a 30-year-old New Zealander who is fluent in Japanese and was a Sheraton Hotel doorman when he first came to Japan 12 years ago.
JAFCO invested 64 million yen in January 1999, just three months after Tanimoto made first contact with Valueclick Japan, a subsidiary of Los Angeles-based Valueclick Inc. When the start-up, which sends out 12 million ads a day to more than 6,500 Web sites, went public in May 2000, JAFCO netted a capital gain of 5 billion yen. Tanimoto's team will receive several percentage points of that to split among members.
Joichi "Joey" Ito is combining elements of venture capital with incubator services and angel investing. The 34-year-old, who was raised in the US and Canada and who started three Web ventures--including Japan's Digital Garage--is now turning his attention to a new incubator firm called Neoteny Co.
Whitney partner
Started in January, Neoteny raised US$20 million in seed money, US$18 million of it from its US partner, Whitney & Co and the remainder from PSINet, a Herndon, Va., Internet service provider. Ito owns the majority but won't disclose how much.
Whitney CEO Michael Stone flew to Tokyo to meet Ito in October 1999, when the US VC firm had just opened shop in Japan. The two sides talked some, and then Stone asked for a huddle with his partners, recalls Paul Slawson, Whitney's chief Japan representative.
"We saw a guy who, for his young age, had a tremendous track record in Japan, who had tremendous talent. And here he was; what he was asking for was small potatoes to us."
Ito, who expects his Digital Garage stock to be worth more than US$1 billion when the company goes public later this year, plans to incubate 90 start-ups by 2003. "The opportunity is huge for Net ventures three, four years down the line," he says. "There's so much work that needs to be done."
Range of services
Neoteny both invests in some firms, as a traditional venture capitalist does, and provides marketing, sales, and research and development expertise like an incubator. The company also will provide legal services, public relations, recruiting, and other backup services. The main draw, though, is Ito's own personal experience starting Web-based companies.
Ito describes most of the Internet entrepreneurs in Japan as starry-eyed "kids": "In the beginning, these kids go in thinking that it's going to be great; these [VC] guys are going to give me money," he says. "Then they get the contract."
He says a lot of deals fall apart when the entrepreneurs see the VC's terms. Since Ito has been through the process himself, "I can call a spade a spade."
An added advantage Ito can offer the firms Neoteny incubates: Whitney's deep pockets can keep the firms going as they grow. Whitney raised US$2 billion in the US, and Slawson says US$500 million of it will be invested in Japanese ventures.
Alan Miner is also hoping to draw on his past success to help start-ups. Miner, 39, came to Japan 20 years ago as a Mormon missionary, then returned in 1987 as CEO of Oracle Corp Japan. He earned a fortune when the company went public last year.
Miner used his new wealth--how much he won't say--to found Sunbridge, one of Japan's rare angel investing outfits. Angels are investors who use their own money.
Warren Buffett model
Unlike Ito, who invests with one eye on the exit, Miner says he will eventually sell some but not all of the companies he is investing in. He says he's following the Warren Buffett Berkshire Hathaway model of buying stakes in companies and holding them.
Miner, who oversaw an 18-fold rise in Oracle sales, says his experience at the Japanese unit of Redwood City, California-based Oracle Corp will be invaluable for the firms he invests in. "What exists in the States that doesn't in Japan is the ability to bring together a collection of specialized skills, to take an idea and grow it into a big business," he says. "We know how to do that."
Sunbridge offers some of the firms office space in its half-acre "venture habitat" in Tokyo's hip-hop Shibuya district. More important, Sunbridge has set up separate units to take care of sales and marketing for start-ups and to help them develop their Web operations. Miner says new Web ventures usually lack expertise in at least one of those two areas.
"They speed up the natural evolutionary development of that company's business," Miner says. Consider salesforce.com Japan, the local subsidiary of another hot US application service provider.
Whereas Japanese blue chips like Fujitsu may take years to deploy a full-blown sales team to sell newly developed software, salesforce.com Japan CEO Akira Kitamura says it took his start-up just 30 days to recruit 250 clients.
Interesting rolodex
How? Sunbridge's eBridge sales and marketing unit bypassed traditional software vendors and linked the start-up to a customer base the marketing outsourcer had on Rolodex.
Salesforce.com Japan is one of seven firms at the Shibuya site Miner has invested in, taking stakes of 5-35 percent. Several others pay for office space and services from Sunbridge.
Thanks to his long experience in Japan, Miner can tap into a rich network of business contacts who introduce him to hot dotcoms, invest in his ventures, and set them up with clients or larger companies for strategic alliances.
The contacts also bring Miner a second source of revenue. Old-line electronics manufacturers like Fujitsu Ltd have contracted Sunbridge to review their real-world marketing strategies and develop marketing plans for them on the Internet. Says Shigeru Tsubouchi, marketing director of eBridge, "It's a huge potential market because Japanese multinationals may need to set up 5,000 of such Internet services to catch up with the US."
Japanese institutions are trying to nurture more of the kind of expertise offered by Miner and Ito. Some 83 universities are now offering courses in entrepreneurship. Globis, a Japanese VC provider, has started a management school for venture executives. And International Angelinvestors Institute Japan, a California transplant, hopes to launch this fall with a pool of 150 angels-people that Keisuke Yawata, who heads the nonprofit group, says "will invest sweat, not money"-versed in skills such as accounting and software development.
Deep pool of money
With the recent changes in Japanese laws, the new venture capitalists will have a deep pool to draw from. Daiwa's Okamura projects 250 IPOs this year--versus 200 in 1999--about half the US average.
"We may never become bigger or better than American venture capitalists," says JAFCO's director of strategic planning Norihisa Yonezawa. "But our investments will be vital in boosting Japanese competitiveness over the next 5, 10 years."
Referring to the government's repeated attempts to spend the economy out of recession, he adds, "What we're doing now may be more important than all the trillions of yen being spent to jump- start the economy."
Still, as Tokyo Marine Capital director Satoru Yamamoto argues, "The money's there; what's missing are the operational people." If the likes of Ito, Miner, and Murase can repeat their past successes, though, that problem will soon be surmounted, too.
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