Evolution of a Venture Capital Firm and Challenges in the Japanese Market

Japan has far fewer unicorns than one expects - or than venture capitalists desire. That fact, however, hides a fascinating story. Today James Riney, founding partner of Coral Capital explains the danger of unicorn counting. We dive deep into which startup sectors Japan is likely to lead in globally in the coming decade, how to identify unique startup value in Japan. We also talk about how Japan has become more like Silicon Valley in the past ten years and why they are about to become very different. It's a great conversation, and I think you'll enjoy it. Show Notes Coral Capital’s portfolio strategy How to find Japanese startups that can make a global impact Three categories of Japanese startups with unique opportunities for growth Sectors where Japan has a global advantage in startups Why “niche” startups in Japan can become hugely profitable What’s in Store for Carpal Capital Fund 4 Proof Japanese investors are long-term patent long-term investors The importance of VC portfolio services is growing in Japan How to get a job at a startup Starting a VC fund as a foreigner in Japan Japan’s “Just who does he think he is?! “ problem The error in the government's plan to attract foreign investors Why foreign VC struggle in Japan This biggest misconceptions foreign VCs have about the Japanese market Japan’s hidden unicorns Links from our Guest Everything you ever wanted to know about Coral Capital Get in touch as a startup Get in touch as normal person  (lol) Coral Capital on YouTube The Coral Capital podcast Follow James on Twitter @james_riney Connect with him on LinkedIn Japan's Hidden Unicorns James' Article on Japan's 41 Hidden Unicorns My panel discussion on the same topic : Live from Stanford: Where are Japan’s Unicorns? Coral Capital Fund IV announcement Get a job at Coral Capital Transcript Welcome to Disrupting Japan, Straight Talk from Japan's most innovative startups and VCs. I'm Tim Romero, and thanks for joining me. Venture capital in Japan is changing, but not in the way that most people think it is. Today, we sit down and talk with longtime friend of the show and founding partner of Coral Capital, James Riney. Now, James first came on the show about eight years ago, back when he was at 500 startups and before he even started Coral Capital. Over those eight years, James and Coral has probably done more than anyone to bring Silicon Valley style VC investment and VC founder support to Japan. And we're going to talk about some of those successes and failures. James also shares exactly what he and the team at Coral Capital are looking for in the startups they invest in and how they identify unique startup value in Japan. We also dive into the recent push to attract more foreign VC investment into Japan, what foreigners misunderstand about investing in Japanese startups, the challenges of establishing a VC fund here in Japan, and what Japanese and Silicon Valley VCs still need to learn from each other. But you know, James tells that story much better than I can. So, let's get right to the interview. Interview Tim: So, I'm sitting here with longtime friend of the show. James Rainey, who's CEO, founder of Coral Capital. So, thanks for sitting down with us again. James: Thank you. I guess it's my third time. Tim: Third time in almost 10 years. James: It's crazy. Time flies. Tim: It does. Man, so much has changed. It's just incredible. But we will go down memory lane some other time. And today let's talk  Coral. So, tell me about your fund. Who are you investing in and why? James: Yeah, so we are basically looking for what we call Power Law companies in Japan. So, as you know, venture capital is very much driven by Power Law, which means that there's only a handful of companies in the industry or at a firm level that are really going to drive most of the returns. And so we're just laser focused on finding those companies in Japan. The way that we like to frame it these days is we're looking for the next Toyotas or the Sonys in Japan. And we've been doing this since 2016. And one of our big early investments was Smart HR. A lot of people might know Smart HR if you're living in Japan, but for those that are not in Japan, basically Smart HR is an all in one HR SaaS solution for the Japan market. So, in other markets, you might know Rippling, for example, Smart HR was I believe around before rippling even existed, we bet on that company quite early. And then we also went really, really heavy into that company. So, at this point we've invested about 20 million and we're the largest outage shareholder in that company. Tim: Well, actually, let me ask you about that. Because looking at the portfolio you were mentioning, you're looking for the next Sonys, the next Toyotas, but a lot of your portfolio has been kind of Power Law in Japan. I think HR, Smart HR is a great example of that. James: We can get into that. Yeah, yeah. Tim: Let's get into that. James: Yeah. We can get into it. So, as I was saying, Smart HR is one of our big hits in our first fund. And in our second fund it looks like it's Kyoto Fusioneering. And so that's a fusion company. And that's kind of like way the opposite side of the spectrum from what you compare to like Smart HR. Smart HR is HR SaaS only focused on Japan. And then you look at Kyoto Fusioneering, which is obviously a fusion company. And so that's a deep tech startup that is focused on the global market. So, completely different. And so what Kyoto Fusioneering does is they are basically providing their components that go into building a fusion reactor. Tim: It's a brilliant strategy. We had them on the show two months ago. James: You did, right? Yeah, I saw that. Thank you for that. So, it's a picks and shovels play. And what we like about it is we are bullish on fusion. We think fusion will come, but we're not really sure what TAM horizon. And I don't think anyone really knows what TAM horizon, including Kyoto Fusioneering. However, we do think that there's going to be billions invested in fusion as an industry. And so selling to that industry is enough. The turn is big enough, at least in the short term. And then in the long term, once fusion is cracked, obviously that opens up the market completely. So, one thing when we think about investments in Japan, we also think about why Japan, like why this company would come out of Japan and why this is an interesting opportunity within the Japan context. If you think about Kyoto Fusioneering, okay, so why would a global fusion giant come out of Japan? Well, Japan historically has been very energy dependent. And so because of that, they've invested a lot into nuclear fission. And some of the most important companies within the nuclear fission space, you know Hitachi, Toshiba, Mitsubishi are actually Japanese. And so you have some of the best nuclear engineers in the world are Japanese. And then you think about what Kyoto Fusioneering is doing, they're providing the components that go into the reactor. And so you need advanced manufacturing capabilities, which Japan is also good at. Tim: I thought that was a brilliant play from them. They're staying right on that edge. Right, where research crosses over into engineering and productizing, it's brilliant. James: Exactly. So, they're combining both of those things in order to sell to a global market. And so Japan is good at both of those things. They can leverage those things and all of the sort of language and culture barriers, which we can kind of go into maybe later are not relevant from our perspective when it comes to like deep tech. Tim: So, do you think the change in focus from a lot of Japanese focused businesses to a global market, is that something that you've changed your own perspective on? Or do you think that's a result of just kind of maturation of the Japanese startup ecosystem over the last six, seven years? James: I think it's more of a maturation of us as a firm and understanding our sort of swim lanes and what we like and what we're looking for, and also articulating it better. I would say probably 80 to 90% of the investments that we make kind of fall into this overarching why Japan theme. And there are basically three sort of subcategories here. There's one, or we call it Japan category leader. And that's where Smart HR plays in. Basically what this is, is looking at concepts that seem to be working in other markets and then trying to understand why that might work in Japan. And then if the answer is yes, then we also want to understand why the local player would capture the value in Japan. So, for example, in neighboring China, the local startups are basically protected by the government, and so they don't really have to think about global competition. But Japan, for better or for worse, it's a global market. And so when we're looking at investments here, we have to consider the possibility that a global player might come into the Japan market. In the case of Smart HR, we like that there are sort of inherent entry barriers there. So, employment law is different, the insurance system is different, the government APIs are different. And so it's not as easy as just translating the website. Tim: There's a subset of business SaaS around HR, accounting, legal, that that really fits into that. James: Accounting's great. So, there's JGAAP, like there's other accounting factors that you have to consider, right? Integrations, the legal framework, that kind of stuff. And so we look for like regulatory or like structural barriers that would make it hard for the global player to come into Japan. And obviously the other sort of bullet point would be that it has to be big enough to create multi-billion dollar company. So, Smart HR very neatly kind of fits that bill where HR SaaS is ubiquitous as a pain point. So,