Unpopular but deeply held opinions about the Japanese startup "ecosystem"

This is an article I recently posted on LinkedIn "as is." I received the most views, comments, and reactions of all my posts there thus far. It's provocative in content and tone. Reader discretion is advised.

(以下最近LinkedInに投稿し過去最高の閲覧数と共に多くの方からコメントとリアクションをいただいた記事を、いささか挑発的な原文のまま掲載しています）

These are my "not popular but deeply held opinions." They are mine and mine only, and I'm being provocative by sharing them "as-is." I'm happy to be challenged or proven wrong.

Currently, domestic funds are abundant in Japan for early-stage and perhaps up to Series B. Beyond that, I think the lack of true "institutional investing" prevents large rounds from happening, and the early-stage VCs are all too happy to "IPO-exit" at 2-5x their original investment. Many smaller bets are scattered across startups and not much "doubling down" by participating in every subsequent round happens.

I don't think many Japanese VCs evaluate and structure each investment as a "Fund Returner" deal seeking 50x from one startup while most other portfolio investments lose money. That's the game the top US VCs and LPs are playing currently. VCs compete for LP dollars not only with other VCs but also with hedge funds and private equity funds so they have to play the high-risk/high-return game with highly illiquid assets.

In that kind of environment, I think the current Japanese government's idea to entice "top US VCs" to invest in Japanese startups to boost investment amounts and valuations while imparting the "Silicon Valley VC magic" (and hopefully having them train Japanese staff) is naive and wishful thinking. Sure, individual deals in Japan may have lower valuations especially coupled with the weak yen they may be bargains compared to the Silicon Valley startup investments, but the top US VCs won't find them attractive. They have the huge war chests to pay lots of money into the high valuations and the clout to wring even higher valuations out of the winners or salvage the underperformers through market influence/dealmaking/managerial interventions -- but only in the US.

I'm afraid that instead of "top investors," this might attract the not-so-great VCs who put up an "I love Japan" facade. Worse, they might ask for (and get) nonstandard fund terms like "4% fees on the committed amount (not invested) and 30% carry" and a 20-year fund life. That's not a good use of Japanese taxpayer money. I'd rather see domestic VCs run not by "salary person" investors but by former startup founders and executives who built real value through their business not just "stock market wealth" being funded by savvy and demanding domestic and Global LPs who don't care whether the local government is promoting startups or not. There are no quick fixes for this but I have some hope.

There are a few more points I'd like to add.

Japan doesn't have a robust pool of "risk capital" that can place risky bets on startups with a tiny fraction of their wealth - and be okay with having a hit 1 out of 10 times or less. I'm not talking about VC funds, I'm talking about endowments and family offices with huge intergenerational wealth who become LPs. Japan's been too obsessed with "centralized wealth redistribution through taxes and government handouts" for too long. I'm disturbed that exits are still primarily through IPOs in small-cap exchanges - startup stocks sold to unsophisticated individual buyers. This may provide an outlet for VCs to dump stock, but it's not robust enough to withstand founder and early exec sales and liquidity accompanied by healthy price fluctuations. There should be more investment by institutional investors - but I don't think it will become mainstream as long as the fund managers are "salaried corporate employees." This may be an opportunity for non-Japanese PE and Hedge funds to take advantage of - or not.

The long-held Japanese practice of "cross-shareholding" between corporations (i.e., salarymen being shareholders of other salarymen) has stunted the development of long-term stock market investing in pursuit of returns, not to mention a talent pool of professional fund managers. This has led to capital tied up within underperforming big corporations run by employees who won't reinvest in their business or distribute cash to shareholders and would rather prolong the status quo and not disturb the "tenure-rewarding lifetime employment" paradigm. The above prevents startup acquisitions because the buying big corporations' employees are both scared and resentful of making 20+ year-olds rich overnight when they've invested 20 years of their lives as salaried employees. But that's too harsh and cynical of a view.

With all the talk about globalization and opening up the Japanese entrepreneurial market, the default Japanese attitude is "All Japan - by the Japanese, for Japan, in Japanese." And the definition of "Japanese" is much narrower than one would like to believe. Last but not the least. Too many people in Japan want to "support" entrepreneurship as investors, consultants, service providers, salaried employees, etc. There aren't enough entrepreneurs - founders and early-stage professional management. No "entrepreneurship education" is going to change that.

That's it, thanks for reading!