Navigating Startup Investments in Japan

The Japanese government is taking a very hands-on approach to funding startups. Yuka Hata, Senior Managing Director of the Japan Investment Corporation (JIC) explains the kinds of startups and funds they invest in, and why. We also talk about the two  biggest challenges new Japanese VCs face, and what it’s really like for women in VC in Japan It's a great conversation, and I think you'll enjoy it.   Show Notes Why JIC runs private equity and venture capital funds. Why Japanese companies struggle with secondary offerings How Japan's low-valuation IPS  hurt deep tech startups in Japan How JIC's makes investment decisions Why JIC is investing in foreign VC funds The two big challenges that new Japanese VCs struggle with How JIC is using LP investments to change Japanese VC culture The changing role of women in Japanese VC and how JIC is supporting that change Two reasons it’s important to attract foreign investors into Japan What foreigners most misunderstand about Japan's startup ecosystem A new way for Japanese founders to Go Global Links from our Guest Everything you ever wanted to know about Japan Investment Corporation (JIC) JIC's award for their work on female empowerment Connect with Yuka on LinkedIn Transcript Welcome to Disrupting Japan, Straight Talk from Japan's most innovative founders and investors. I'm Tim Romero and thanks for joining me. There is a lot of debate over the role that government should play in fostering innovation. From American founders loudly demanding that the government just get the hell out of their way, while quietly bidding on government contracts and accepting millions in subsidies, to Chinese entrepreneurs double and triple checking that their business plans and public postures are well aligned with the expectations of the central government. Japan, of course, is taking her own path. Today we sit down with Yuka Hata, Senior Managing Director of the Japan Investment Corporation, or JIC. Now Yuka will explain all of the details in just a few minutes. But briefly JIC is a government-capitalized organization that invests in VC funds, private equity funds, and also creates its own venture funds in order to make direct startup investments. Furthermore, JIC's mission is not just changing the economics of Japan's startup ecosystem, but changing the culture of Japan's startup ecosystem as well. And looking around, they seem to be having a real impact. Yuka and I talk about the kinds of startups and funds that JIC invests in, the two biggest challenges that new Japanese VCs struggle with, and what it's really like for female VCs in Japan right now. But you know, Yuka tells that story much better than I can. So, let's get right to the interview. Interview Tim: So, we're sitting here with Yuka Hata, the Senior Managing Director of Japan Investment Corp, or JIC. So, thanks for sitting down with us. Yuka: Thank you. Well, thank you so much for inviting me. Such a great opportunity. Tim: I'm delighted to finally get you on the show. We've been talking about this for a long time. Yuka: Thank you. Tim: Well, let's start by talking a bit about JIC. So JIC, you make a lot of investments, but JIC is not really a traditional VC fund. So briefly, what is JIC? What's your mission? What do you do? Yuka: So, JIC has been created as a government-backed investment fund in 2018, to strengthen global competitiveness of Japan's industry. JIC has a kind of strong mission to support the next generation industry in two ways. One, we have created JIC Capitals, which is a private equity fund to pursue industry consolidation and restructuring. That's more private equity play. And the other side is obviously more venture capital play to create the next strong industry out of our country. For that reason, we created a subsidiary called Venture Growth Investment, and they are providing mainly growth-stage risk capitals. And in addition to that, we recently decided to provide more early-stage risk capital to the life-size deep tech space. Those are the direct investment for the JIC group. Tim: So, the purpose of JIC is not to promote the startup ecosystem specifically, but to enhance competitiveness of Japanese industry and the economy as a whole. Yuka: Yes. Tim: Then let's talk a bit about the Venture Growth Investments, the direct investments into startups that JIC is making. What kind of startups are you investing in? Yuka: The VGI's strategy is to provide risk capital mainly at the growth stage. However, having said that, they are currently managing the fund 200 billion yen, which is probably equivalent to the 1.5-6 billion US dollars. And out of that pocket, it has 30 billion yen to deploy to the early stage of the startup, which are life science and deep tech. But beside that, we have also created the Opportunity Fund with a size of 40 billion yen to support listed startups and to support secondary transactions before IPO. Tim: So, how would that work? Let's start with the second one, the Opportunity Fund. This is supporting startups that have already listed or are about to list? What are the activities? Yuka: VGI set up a 40 billion yen Opportunity Fund with a strategy with a secondary investment and aftermarket strategies. What I mean by aftermarket is we support the listed companies' fundraising. The issue is in Japan, many of the listed startups have an issue to raise the money after IPO. They've been raising money quite a bit before IPO. Then once they list it, all of a sudden, they actually have nowhere to really raise equity capitals. They could, to some extent, raise the money through the debt financing because obviously they increase the kind of credibility’s after the listing. However, Japan's kind of problem is not many startups have successfully raised the capital after. Tim: I see. That is a real problem right now, particularly in life sciences and that. But actually across the board where Japan has traditionally been very easy to IPO as a small company, and a lot of VCs have really pushed their startups to do pretty safe, low valuation IPOs where they're still growing. They still need capital. Yuka: They need capital, but then the reality is if you cannot raise the capital for the growth, it will be difficult to look for the further growth after the IPO. So, that is really the serious kind of issues in Japan's IPO market. Tim: Have you seen a change in Japanese VC behavior around this? Because I mean, I agree, pushing a startup to IPO too early does not help the startup. It's good for the startup to stay private as long as possible. You get a lot more forgiveness and flexibility from VCs than you get from public markets. A lot more patience from VCs than you get from public markets. So, are you seeing a change in Japanese investor behavior in wanting their portfolio to stay private longer? Yuka: We can see the trend that startup choose to be private to make it IPO big enough. Because in the past, well still now, there are so many small IPOs. But that also affecting Japan's VC fund return itself. That kind of risk capital ecosystem we really have to create. But the issue is small IPO, small return, small fund return. Obviously, wide LP borders to deploy the money to the VC fund. They could choose for the private equity fund where we can seek that the decent return out of the contract transaction. Tim: Is the goal of this to seed the market and hopefully get enough private VC money as well following the strategy and allowing life sciences to grow privately longer? Yuka: Yes, but the difficulty here is we don't have enough risk capital to continue to support the life science or even deep tech, especially the growth stage. On the other hand, issue is, surprisingly, most of the VC fund wind up their fund as a 10th anniversary, or even with a two year extension. That's all. So, it's not like US VC fund or European VC fund, you kind of continue to extend your fund, I don't know, forever. So, that's the reason that in a startup got kind of pressure from the VC fund or some of the shareholder push to the small IPO. So, that's the reason that we feel like we have to build the secondary market in this country. Tim: Okay, that totally makes sense about the need to support and nurture that part of the ecosystem to build it out. But in terms of startup selection, so CVCs have a reputation of being slow and complex investment committee structures. But a government sponsored fund must have even more oversight, and even more accountability and related overhead. So, what's the process of selecting which startups get this investment? Yuka: It's very good questions. Because when we are doing the investment activity, through the INCJ, INCJ deploys the money out of the balance sheet. For that reason, each direct investment together with the LP investment, always needed to see METI’s approval. Obviously, we don't have flexibility and speed up for the direct investment. So, that's why we have decided to create subsidiary structure that JIC itself is a LP investment. In this case, when the VGI make investment decision, it's their own decision. Tim: So, in addition to venture growth investments, I should say the main part of JIC's investments is investments in other funds. And it's a huge range of funds. There's Japan funds, like WiL and Globis. There's global funds, NEA, Sozo, Atomico, I mean, really high quality funds. What's the strategy? What are you trying to achieve with these fund investments? Yuka: So, our main purpose to support VC ecosystem is we wish to provide risk capital to the local fund managers. And we always kind of make sure that where is the space that risk capital is not enough and needed support from the government fund like us. So, we identify the space, mainly more like deep tech space is definitely they're looking for that risky capitals.