Japan Becomes Mecca For Venture Capitalists
Bill SpindleStaff Reporter of The Wall Street Journal
Updated Feb. 24, 2000 1:48 pm ET
TOKYO -- Japan isn't exactly known as a land of entrepreneurs. But the country has suddenly become a hot spot for venture capitalists who have high hopes that it's on the way to becoming one.
In recent months, major players in the U.S. private-equity and venture-capital market have arrived in Tokyo in droves, some of them making substantial investments. They include:
GE Capital Corp. teaming up with Daiwa Securities Group Inc. to launch a 20 billion yen ($180.4 million) fund, which could eventually grow as large as 100 billion yen, aimed at investing in unlisted companies.
A $200 million investment by U.S. venture-capital firm J.H. Whitney & Co. and PSINet Inc., the U.S. Internet-access provider, in a local "incubator" aiming to nurture Internet venture businesses in Japan.
A 30 billion yen fund, run jointly by Goldman Sachs Group Inc. and Kyocera Corp. aimed at high-tech companies.
The new funds show foreigners are more optimistic than they've been in years, not only over prospects for entrepreneurship in Japan, but also for foreign capital playing a role in developing it. "There's a new Japanese economy ... that gives foreign investors much more hope than ever before," said Goldman Sachs Japan President Mark Schwartz upon launching his company's fund. Warburg Pincus and Patricof & Co. have also opened operations in Japan in the past year.
Home-grown companies such as Hikari Tsushin Inc. and Softbank Corp., however, are also rapidly expanding their activities in funding and nourishing venture businesses in Japan, particularly those related to the Internet.
Softbank, for example, recently decided to launch a 50 billion yen fund. Demand from investors was so strong, however, that it grew into a 150 billion yen fund, the largest Internet fund on record. Softbank, which is putting in about onethird of the money, plans to invest in about 1,500 companies. And even old-line investment funds such as Jafco Co., which has generally steered clear of outright start-ups, is beginning to invest more in younger companies.
Foreign or domestic, these venture capitalists see more Japanese economic and social trends moving in their direction than has been the case in decades. Labor mobility is increasing. Regulations are loosening. Capital markets are beginning to welcome start-up companies. Even the government has jumped on the venture-capital bandwagon, after waking up a few years ago to the fact that Japan's existing companies simply won't be able to employ enough workers to keep the economy humming.
Overall, money available in Japan for private-equity investment climbed to at least $25.5 billion last year, compared with about $17.8 billion in 1995, according to Asia Private Equity Review, an industry newsletter. But those figures underestimate the explosive growth in the past several months because they don't include firms such as Warburg Pincus, which are actively looking for investments in Japan although the company doesn't have a dedicated Japan fund. "Now the growth is much faster," says Kathleen Ng, publisher of the newsletter.
Venture capitalists with experience in the U.S. say they are starting to see tangible signs that entrepreneurship is gaining a foothold in Japan. Some relish, for example, the steady exodus of talent that prestigious consulting and financial firms are experiencing as top Japanese talent opts for the Internet. McKinsey & Co., for example, lost a senior consultant who now runs an Internet auction site called Bidders.co.jp, and Japan's largest Internet shopping mall is run by a former executive from the Industrial Bank of Japan Inc. In the U.S., such defections were one of the first signs that venture businesses were becoming accepted places for the nation's best and brightest to seek their fortunes.
Challenges remain. Investors say there still aren't enough good business ideas backed by strong executives. The two new stock markets aimed at listing venture companies are still question marks: The just-launched Mothers exchange, which is part of the Tokyo Stock Exchange, has listed only three companies, and Nasdaq Japan doesn't open until later this year.
Still, investors say the Internet and other changes in Japan's economy are bringing a younger group of managers to the fore, and they are eager to please shareholders-an attitude that has long been missing in Japan. Karl Fooks, vice president of J.P. Morgan's International Capital Corp. in Asia, is cautious yet bullish. He says J.P. Morgan could invest between $50 million and $100 million in Japan this year, most likely in $3 million to $5 million chunks, to spread out the risk.
"It's so new that we would never want to concentrate our investment," he says. "You're better off investing in a network of related companies."
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TOKYO -- Japan isn't exactly known as a land of entrepreneurs.