Japanese venture capitalists: a new breed. More young entrepreneurs strike out on their own with high-tech vision
Tokyo — The tale is so deeply etched in the annals of modern American forklore as to be a clich'e: Corporate engineer with bright idea quits job to start high-tech company, often with the backing of a venture-capital firm, and eventually gets rich. This isn't America. In Japan, risk-takers with bold ideas are viewed with suspicion. Venture capitalists have been nonexistent. And the ``Japanese dream,'' if it can be called such, seems to be epitomized by the notion of the sarariman: a sober-suited conformist who devotes his life to the service of one company.
But not for long. Venture capital is coming into style here. Spurred by the examples of entrepreneurship that flourish along Boston's Route 128 or in California's Silicon Valley, Japanese investors have torn a page out of the American textbook. As the old-line industries begin to stagnate, cash-rich and investment-hungry financiers are looking to embrace young high-tech companies.
At the same time, entrepreneurship has grabbed a toehold in the popular imagination here. Increasing numbers of sarariman are abandoning the shelter of tenured careers for independence.
The trend has trickled down to the younger generation as well. A recent survey of college students by the business magazine Nikkei Venture observed that an increasing number of new graduates are willing to take some risk in their careers.
``The economy is undergoing a transformation,'' says Yaichi Ayukawa, a Tokyo venture capitalist. ``It's not like America yet, but things are changing here.''
How much they are changing, and how great a role the development of venture capital is destined to play, is a matter of controversy. Champions of the current venture boom say it heralds a major realignment in the Japanese economy from old-line industries to small companies that are hothouses of innovation.
Skeptics cite a barrage of traditions and cultural idiosyncrasies in the business climate that they say will prevent Japanese venture capitalism from developing into anything resembling its American model. ``It's a myth,'' says James Abegglen, a corporate consultant in Tokyo. ``Venture capital does not mean the same thing in the United States and in Japan.''
What is certain is that entrepreneurism itself is not new to Japan, and the legends surrounding its industrial pioneers are as durable as any. The gigantic Mitsubishi conglomerate was founded by an itinerant dockworker with a little spare cash. Konosuke Matsushita, founder of the electronics giant that bears his name, is revered as Japan's greatest living industralist. And the story of Sony's founding -- how inventor Masaru Ibuka built a better hot water coil -- is still eagerly repeated here.
But venture capitalism, where investors help finance a young firm in exchange for part ownership, is something new altogether. By some estimates, there are fewer than 400 high-tech venture businesses in Japan.
Young companies here have always gotten their start by raising cash from family and friends. Another common source has been sympathetic bankers, who often traded their loans for a seat on the nascent company's ruling board -- a move that's illegal in the US.
``The idea of venture capital is foreign to Japanese businessmen,'' admits Hiromi Nakajima, director of the venture-enterprise promotion office at the Ministry of International Trade and Industry (MITI). ``Once again we are learning from the US.''
The incentive to learn has come from the shifting economic fortunes of Japan's industries. The Sonys and Hondas of the postwar era drove Japan's economy at rates never before recorded by any other nation. But those industries are seen to be reaching maturity. Some, like Nippon Steel and Mitsubishi Heavy Industries, have had to prune work forces dramatically to sustain profits as markets sagged.
So from here, analysts say that young, bright venture companies will increasingly drive the economy. A survey by Japan Associated Finance Company (Jafco), the biggest and oldest of Japan's venture-capital firms, observed that small companies with original technology and innovative products were more likely to show increases in sales and profits than the old-line industries. The same goes for employment levels, even though their hiring practices are not buttressed by the promise of lifetime employment regularly offered by big companies.
``Companies like Mitsubishi and NEC can't do it all,'' says Akio Nishizawa, an economist at Jafco. ``We need a new generation of businesses to replace the old.''
This is not a new realization. The news media here refer to the current flurry of interest in venture capital as the ``second venture boom'': The first was crushed by the recession that followed the 1973 oil crisis.
But many analysts contend that only now is the regulatory environment ripe for the proliferation of venture businesses. Before, few investors wanted to invest in risky businesses, because of regulations that made it difficult to unload an investment for a capital gain. Japan's over-the-counter market was held to about 150 companies. By comparison, more than 4,000 stocks are actively traded on the US over-the-counter market. Strict regulations here make it difficult to change things.
A revision in the laws governing OTC listing, which made it easier for small companies to get listed, put things in a different light. ``That's when venture capital became a hot item,'' recalls Mr. Abegglen. Five companies were plying the venture-capital trade before the laws took effect in November 1983. Now there are at least 50. Compared with the US, however, this activity is still fairly minute. By the beginning of this year, Japanese venture companies had put only 3 percent of what similar US companies were plowing into new businesses.
The nature of those investments is often drastically different as well. It is to these differences that skeptics of Japan's venture boom frequently point.
Consider the method by which potential recipients of venture capital are screened. In one year, a typical US venture-capital company can expect to be bombarded by 500 professionally drafted investment proposals, from which a choice of five or six might eventually be made.
Not in Japan. ``It is totally against the Japanese nature to go around asking for something like venture capital,'' says Kenichi Ohmae, managing director of McKinsey & Co.'s Tokyo office. Some venture funds have gone begging in recent years. As a result, many Japanese venture-capital firms have had to hit the streets looking for prospects.
But since there is a dearth of specialists in small-company financing, analysts say that company choices nearly always err on the conservative side. In the US, venture capital almost always means seed capital -- funds provided to bring a company from theory to reality. But in Japan, observers say the overwhelming majority of venture-capital investments are devoted to so-called mezzanine-type companies a few years away from stock market listing.
This coincides nicely with the nature of many of the venture-capital firms; many are connected with securities houses. Jafco, for example, is a wholly owned subsidiary of Nomura Securities, the large Tokyo brokerage firm. Thus, says Jafco's Mr. Nishizawa, ``Venture-capital firms are set up so that the parent company can underwrite the new firm's shares when it decides to go public.''
That type of motive doesn't sell well with many entrepreneurs, who often resent the fair-weather attitude of venture-capital firms. ``They're vultures,'' says Kazuhiro Nishii, the young cofounder of Ascii Corporation, a successful Tokyo software and publishing company. Mr. Nishii recounts how no investor would pay any attention to him when he started. Once his company got off the ground, though, he had to ``fight them off right and left.''
A few venture-capital companies have been created to match the classic American mold, but they run into their own problems. The average Japanese businessman, it appears, is simply not conditioned for the give-and-take of US-style venture capitalism.
Dr. Ayukawa, the Tokyo venture capitalist, who was educated at the Massachusetts Institute of Technology, started his Techno-Venture Ltd. to provide the sort of financing and managerial expertise he thought were lacking in Japan. Would-be venture-capital recipients come to him, in classic American fashion, rather than the other way around.
Yet all too often, Ayukawa says, Japanese small-business men aren't prepared for what is coming. ``I ask them for a business plan -- their long-term strategy, sales plans, cash-flow estimates, all the standard items. They don't want to tell me, and then, of course, we can't do business.''
None of which is to suggest that US-style venture capital will not find its way into the mainstream of the Japanese financial industry. The Japanese government has been working actively toward that end. The trade ministry is trying to egg banks on to provide loans or nascent high-technology firms by providing loan guarantees. It is also promoting ``technology plazas,'' where small-business men can meet to pool new ideas and sometimes embark on joint development of new products. The small business has a strong heritage in Japan. And Tokyo may well be the ``mom-and-pop establishment'' capital of the industrial world.