[PODCAST] The hidden danger of unicorn counting in Japan — Interview with James Riney at Coral Capital (Part 3)

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.

Tim: Before we talk more about the future of Coral, I’m going to go way back to the beginning because I think one of the things that you did early on, I think you were one of the very first funds to really focus on providing value to the founders.

James: Thank you.

Tim: I mean, well, you know what I mean? Besides just writing a check from day one, you guys have been creating educational content and trying to connect founders to possible co-founders and staff. And tell me a bit about that decision. Was that something you brought with you from 500? Was that something just your own thinking?

James: Yeah, I mean it’s a combination of things. One is simply that as you know, I was also an entrepreneur, so I was just kind of making a product that I would’ve wanted as an entrepreneur. The other part is at that time there were not Silicon Valley like VCs really in Japan. Like there’s no Y Combinator of Japan, there’s no Andreessen Horowitz of Japan, no Founders Fund of Japan. Like there’s no firms that share those characteristics. And each of those are very, very different firms. But my point is that a lot of the capital was basically coming from banks that have venture arms or corporate venture capital firms that not necessarily have that sort of venture mindset. To put it lightly.

Tim: No, I agree. It was just having been on both sides of this table, most of the VCs at that time really viewed themselves more in terms of compliance. We write the check, we check in quarterly or God help the founders sometimes monthly.

James: Yes, yes.

Tim: To make sure they’re not wasting their money.

James: Monthly is in fact like considered standard in Japan which I think is crazy.

Tim: It is. So, when you were raising, when you went to your LPs, did you go to them with this story? We want to create a new type of VC?

James: Yeah, basically. I mean, we’re in our eighth year now, so we’ve had some time to build, but basically it was just an unmet need in the market. No one was really doing it. And in some ways we had the advantage of being in a time machine where we could see what others were doing in other markets. And we didn’t copy and paste it for Japan, but we did sort of pick and choose what worked for us. And so now we’ve basically come to, I wouldn’t want to say final form, but just a more formed version of ourselves.

Tim: Yeah. I think now, I mean, you can point to successes, you can point to not only the returns, but the ecosystem you’ve built and say, look, this is delivering value. The LPs can see that. But when you were raising the first fund, this was a new idea in Japan. And so is it something that you pitched as a feature to the LPs or was it something you just kind of kept to yourself and figured you were going to execute this way once you got the funds raised?

James: You know, just like a startup, you kind of figure out your stepping stones, and so you can’t boil the ocean. You can’t do everything at once. But the first fund was okay we did it with 500 startups. And so it was, okay, we’re going to be a Silicon Valley style firm in Japan and we’re going to leverage the brand and we’re going to do things like a Silicon Valley capitalist would. And that was a story and that was enough, actually. But on that first fund, we built a track record, and then from our second fund and third fund, we were starting to build the sort of architecture of what we have now. And so now we call ourselves, we’re the ecosystem VC, we invested over a hundred companies at this point. And everyone has their sort of like, own challenges, but the commonalities are, they need access to more capital, usually a lot more capital in some cases, they need access to great talent. And then they also need insights like, best practices on how to build their companies, how to scale their companies. And so fundamentally, we just don’t believe that VCs are going to really like, we can’t give you success. But what I do think VCs can do is what increase the speed and the scale of that success. And so that’s basically what we focus on by figuring out, okay, these are the common issues that they face. And so we’ve built a platform and a demo day for fundraising that makes it much, much faster to meet all the key players all at once. And then there’s also, we tell you the secrets in some cases it’s to our detriment because we’ve invested in a company and we want to get into that company at a cheaper price at the next round. But once we’re on the cap table, we’re getting those companies in tip top shape in order to convince other investors to invest. And then we also have the hiring part. And the hiring part is actually, I would say it’s probably what we’re best at. And so we’re hiring almost 200 people for portfolio companies per year.

The reason that we’re able to do this is because early on we went really, really big on content. And so we run the largest sort of media outlet amongst startups and VCs in Japan. And that has over a hundred thousand people reading our stuff every month. And we’ve been able to channel that traffic into something called Coral Careers, which is basically like a portal for like a career in startups. And so you can apply there and basically what happens on the backend is you go into a database and then anyone from our portfolio companies that’s working on recruiting can access that and contact you directly. So, just through this we’re hiring about 10 people per month, and that database has 15,000 people now. I mean, it’s huge.

Tim: In the US certainly part of the VC’s job is helping their portfolio raise the next round, that’s just almost definitionally. Japanese VCs don’t tend to think that way, or at least they haven’t in the past. Is that something you see changing?

James: Depends on the VC, I mean, so normally the way that it works is that VCs are, they’re frenemies. And so in some cases they compete, in some cases they’re friends and they will introduce deals to like the drinking buddies. And the way that we’ve approached, not just fundraising, but also hiring, is that we systematize it, we make it a platform. And so we run a program, we have everyone make sure that they’re running a tight process. We get them to meet all the partners, the key decision makers at the investment groups, whether that be VCs or corporate investors all at once. And then we also like follow up to see how that fundraising is going. And so we just make it a more structured process, which sounds very simple, but the other VCs in Japan are not doing that.

Tim: So, you mentioned the two of the key things are raising the next round, finding the teams. These are incredibly important for any founder of a growing startup. What’s missing? What needs to be added?

James: The other final piece is, okay, so once you’ve raised the money, and a lot of times that money is raised to hire people, but now what, like, how do you scale the company? And there are all kinds of things that are just like from the banal, like, okay, what HR SaaS we should use? Of course, my HR to like, hey, I’m thinking about setting up a stock option plan, and how do I communicate?

Tim: So, shades of Y Combinator here.

James: Yeah, exactly. That’s what it is. And so basically we’ve built like a Y Combinator like community in Japan without the accelerator. So I mean, that’s what we’re trying to do. We have built an ecosystem here. We have this co-working space where founders and employees can come in. And so we want the CFOs to talk to each other. We want the marketers to talk to each other. We want them to exchange information. We might have high level information, but we don’t have the real time information. So, they’re the practitioners. Like they know what’s the most relevant at this moment in time. And so getting that across our portfolio as quickly as possible is important for us.

Tim: So, when you were raising fund one, this was a new concept in Japan, is it becoming more common? Do you see more and more VCs trying to add value to the portfolios in this way?

James: Yes. There’s many folks that have copied us or at least tried. But I mean, structurally it can be very hard. So for example, if you are a VC that takes a very traditional model, and when you invest, you’re a lead investor and you sit on boards, then their calendar does not have time to basically like hacking together like a talent database and like in figuring out how to increase like applications to that database.

Tim: Even taking a step back from the actual execution of doing something like this, do you get a sense that the VC’s perception of what a VC should be is changing? Do you think Japanese VCs are coming around to the idea that hey, VCs should be playing this role?

James: Yeah, I do. I would say there’s a handful of firms that have woken up. So, but still a handful. Still a handful. So, definitely the market has changed. I’m not going to say that it’s thank thanks to us, but I certainly think that we put a jolt to the system.

Tim: No, I think you really have had a much bigger impact on the Japanese VC ecosystem than your assets under management would imply.

James: Yeah. Well, thank you. Yeah.

Tim: Why do you think so many VCs still are focusing on check writing? Is it just inertia or they’re big enough, they don’t have to sweat it?

James: Well, most VCs in Japan or finance backgrounds, consulting backgrounds. And that’s not to say that that’s a bad thing. I mean, like there are many, many very successful VCs that have those backgrounds. But if you are more like an operator or you have like an entrepreneur background, you just kind of see the world differently. The solutions that you come up with to the same problems are different. And so we’ve always looked at venture capital as a product, and that’s why we’ve built our own tools and we’ve come up with our own sort of creative ways and to solve similar problems. Whereas if everyone has the same background, it’s likely that they’re all going to come up with similar solutions? And we just happen to be the black sheep here.

Tim: Well actually, let’s get back to that. So, founding a VC in Japan as a foreigner, did that work to your advantage? Did it work to your disadvantage? A little of each?

James: A little of each. A little of each. So, for context for the audience, I did halfway grow up in Japan. So, I was in Japan on and off until I was 12. So, I do speak Japanese quite well. Now, with that said, no matter how long I’ve lived in Japan, my face doesn’t change. So, I’m still very much a Gaijin. Yeah, I mean, there’s some ways that it benefits me in some ways that it doesn’t. So, in ways that it does even though I speak native level Japanese, there are some cultural FAPAs that I cannot worry about too much. And so I can go to the decision maker directly, or I can be a little bit more direct about like, hey, we really want to invest your company and we’re going to support you, this kind of thing. In cases where it doesn’t benefit, there are some founders that are very globally minded, and I tend to sort of connect with them much better, whereas there are others that are very much domestically minded. But we have other members on the team that connect and I think every firm is going to have that sort of different chemistry with different type of teammates. But that’s probably one. And then when we first got started, no one in the VC industry took it seriously, we were able to raise our fund. And so there were LPs clearly that believed in us. But I would say that the old guard, the VCs, which I’m very cool with now, like I’ve been accepted into the community, I think now, but at that time, yeah, I mean, it was like, who’s this guy? And then we launched the JKISS, which is basically like the SAFE of Japan and like who’s this guy coming in and creating, like what he says is the standard or should be the standard for financing documents in Japan. Like, who does he think he is?

Tim: No, I mean, that attitude, the who does this guy think he is attitude, I think holds Japan back in so many ways. Anytime someone stands up and say, hey, this would be cool, I’m going to do it. 50 people around, it’s like, well, who does this guy think he is?

James: Right. Yeah. I mean, to be fair, I was 26 at the time, like maybe that would’ve happened in Silicon Valley too. But for the record, the JKISS is very much widely used now, and literally it’s in government papers and publications like, hey, we support the JKISS and the tax benefits also, you can use the JKISS, by the way, I just want to make sure that’s in there.

Tim: I mean, obviously you found LPs who believed in you and saw the vision, but was there a lot of skepticism about, I mean, and not just skepticism, like any new fund faces skepticism.

The fourth session will cover the challenges foreign venture capitalists face in the Japanese market and Japan's unique perspective on the number of unicorn companies.

Click here for the Japanese version of the article