“The nail that sticks out gets hammered down.”
I remember hearing this quote for the first time as a 17-years-old. We were a group of students, who had gone to Japan for a high school exchange year. Having just arrived from Narita airport, we entered the hotel lobby, were our coordinator welcomed us and introduced us to our host country with just those words. That was in 2011. What is the situation in Japan like today?
In January 2018 I met with James Riney, co-founder and head of ’500 Startups Japan’. Together with his co-founder Yohei Sawayama, and support from Japanese investors like Mizuho Bank, Nikon, Mitsubishi Estate, James opened the Tokyo offices in 2015. Their goal was to take the best of the Silicon Valley startup ecosystem to Japan.
To date, ’500 Startups Japan’ has raised $49m USD and invested in a wide range of Japanese startups, such as Infostellar, a satellite communications service provider, SmartHR, an HR SaaS startup, and Awakens Inc., a consumer genomics startup.
I wanted to ask James about the Japanese startup ecosystem, what changes and challenges he is experiencing. And, of course, how he became the head of a venture capital fund in Tokyo when he was only 26 years old.
“What’s happening right now is that the hammer is clawing out the nails.”
"Although many positive things have happened in Japan’s startup ecosystem." James opens our conversation. "There are in particular two changes worth mentioning. Today, there is a lot of new top-down encouragement for entrepreneurship in Japan. The government is supporting with many incentives, and I think most government-affiliated funds have a startup involvement or investment. Everyone wants to somehow engage with startups. This is a fundamental change, compared to the situation only years ago.”
Earlier this month, the Japanese research firm 'Japan Venture Research' reported that privately owned startups in Japan raised a record of $2.5bn USD in 2017, compared to $2.45bn USD in 2016 and $2.23bn USD in 2015. James explains that the reason for this growth is not just that there is more capital available, it is that the government and corporates are supporting the ecosystem. "In a society like Japan this makes a great difference" James explains.
James knows what he is talking about. Last year, the government-backed fund ‘Cool Japan’ invested $10m USD in ‘500 Startups Japan’, thus marking the first time for the government to invest in a non-Japanese venture capital firm. Japanese corporates are joining the spending spree and which reached an all-time high in 2017 by having spent more than $600m USD.
However, in comparison to the United States, there still is a long way to go. When comparing venture capital raised in Japan and the United States to their national GDP's, James declares that Japan should reach at least ten billion USD over the coming years.
Besides experiencing the change caused by top-down encouragement and capital available, there has been a significant change in how talented employees and university graduates think about startups. Graduates from Japan’s top universities are now considering it a viable option to join or start their new own startup. “Even if they go into McKinsey, we see a lot of people coming out of these consultancies, investment banks or traditional Japanese companies to start companies on their own.” James explains.
As more and more successful role-models and startups emerge, talented engineers, developers, and researchers feel frustrated about not being able to produce products on a higher level of innovation in their current occupations. The result is a brain-drain to the startup ecosystem.
Nevertheless, it is still difficult to find the right talent for a startup. Japanese employees don’t use Linkedin nor promote themselves as actively as American employees in Silicon Valley. Luckily, Japanese employees are more loyal than Americans. “Once you find them it is easy to keep them” James explains. “They don’t have a whole lot of offers coming at them, and also there is a cultural aspect; there is more loyalty in general.”
What if you want to join a startup in Japan today? Is it possible?
James explains that while it is easier than ever to work and live in Japan, it still is a challenge for foreigners. Many foreigners living in Japan struggle with feeling alienated socially and professionally, due to the language and culture differences, and their inability clearly communicate with the HR department or company management.
On the other hand, Japanese startups are always looking for bilingual talents that can help them expand outside of Japan. However, if you don’t speak Japanese, you may have to learn it. And, while James does not recommend anyone just to come and start a company, it is possible to join a startup, presupposed that you are prepared to learn the language and to localize yourself as much as possible.
Talking to James, I realise that running a venture capital fund in Japan is about much more than raising money and investing in startups successfully. It’s about bringing together different kinds of stakeholders, like the government, corporate venture capital funds, and the startup community.
The challenge is to collaborate and to create value for everyone involved, not only for investors and founders. It is about increasing size of the pie for everyone. Creating a cycle in which startup founders do not just become rich, but in turn, become experienced venture capitalists or angel investors. Steadily increasing the number of role-models and success cases that give back their knowledge and experience to in the ecosystem. And, maybe most importantly, give hope to a new generation of founders.
“I decided to step down and just become a VC for now.”
James’ own story follows the founder-investor cycle, as well. Due to his upbringing in Tokyo, James has always been able to speak some Japanese. However, it was not before returning from the US to Japan for an exchange semester at university, that he became fluent. After his graduation from Penn State University, he first interned at JP Morgan’s offices in New York before joining their Tokyo offices.
Having worked as an analyst at JP Morgan for about two years, he realised that the predictability of working at a big company wasn't for him. “When I was sure that I wanted to leave JP Morgan, I would think of my director or my director's boss and ask myself: Do I want to be that guy in 10-15 years?”, James explains. What pushed him to leave JP Morgan was the excitement of being a master of his own, paired with the ambition to maximize the impact of his work within a given time. Then, in 2012 and at the age of 23, he co-founded the startup, ResuPress
Today, ResuPress is known as the cryptocurrency exchange company Coincheck. But in 2012, it created amongst other creations, the Japanese equivalent to the online publishing platform Medium: Storys.jp. Receiving traction within the Japanese tech community it would have been possible to support 10-20 employees with advertising revenue. But, that was not the scale that James was interested in. "That wasn’t really what I was interested in. It wasn't enough." James said. "And, to be honest, I was getting burned out at this point.”
Considering his role as a founder, yet uncertain on what to do next, James decided to focus temporarily on something else. As he puts it: “I decided to step down and just become a VC for now.”
Joining DeNA, a Japanese e-commerce and mobile game developer, James ran tech investments in South East Asia and in the United States for their investment vehicle. “Through that experience,” he summarises, ”I got acquainted with Dave McClure at 500 Startups. At some point, he asked me whether I wanted to come on board and launch the Japan fund.”
So, what is the secret behind James' career? It seems that is ability to remain humble - regardless of success - and, his determination is making him succeed. “If you have an idea that you want to pursue and you see a path to doing it, I would say you should have an 80 percent conviction." James concludes. "You are never going to have a 100 percent until you actually start doing it.”
What about the future of Japan's startup ecosystem? James explains that whilst there have not been any truly global companies coming out of Japan for while; that does not mean that it can not be done. "We have startups that already have that ambition" James explains "but, I think it requires a lot of R&D at this point. That said, I believe that it is inevitable as Japan's startup ecosystem is growing bigger and stronger by the day.
You can read more about the Japanese startup ecosystem and James' experiences on this his blog.
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