[Podcast] Inside the government program to invest $1B into Japanese startups

The Japanese government is taking a very hands-on approach to funding startups.

Yuka Hata, Senior Managing Director of the Japan Investment Corporation (JIC) explains the kinds of startups and funds they invest in, and why.

We also talk about the two  biggest challenges new Japanese VCs face, and what it’s really like for women in VC in Japan

It’s a great conversation, and I think you’ll enjoy it.

Welcome to Disrupting Japan, Straight Talk from Japan’s most innovative founders and investors.

I’m Tim Romero and thanks for joining me.

There is a lot of debate over the role that government should play in fostering innovation. From American founders loudly demanding that the government just get the hell out of their way, while quietly bidding on government contracts and accepting millions in subsidies, to Chinese entrepreneurs double and triple checking that their business plans and public postures are well aligned with the expectations of the central government.

Japan, of course, is taking her own path.

Today we sit down with Yuka Hata, Senior Managing Director of the Japan Investment Corporation, or JIC. Now Yuka will explain all of the details in just a few minutes. But briefly JIC is a government-capitalized organization that invests in VC funds, private equity funds, and also creates its own venture funds in order to make direct startup investments.

Furthermore, JIC’s mission is not just changing the economics of Japan’s startup ecosystem, but changing the culture of Japan’s startup ecosystem as well. And looking around, they seem to be having a real impact.

Yuka and I talk about the kinds of startups and funds that JIC invests in, the two biggest challenges that new Japanese VCs struggle with, and what it’s really like for female VCs in Japan right now.

But you know, Yuka tells that story much better than I can. So, let’s get right to the interview.

Tim: So, we’re sitting here with Yuka Hata, the Senior Managing Director of Japan Investment Corp, or JIC. So, thanks for sitting down with us.

Yuka: Thank you. Well, thank you so much for inviting me. Such a great opportunity.

Tim: I’m delighted to finally get you on the show. We’ve been talking about this for a long time.

Yuka: Thank you.

Tim: Well, let’s start by talking a bit about JIC. So JIC, you make a lot of investments, but JIC is not really a traditional VC fund. So briefly, what is JIC? What’s your mission? What do you do?

Yuka: So, JIC has been created as a government-backed investment fund in 2018, to strengthen global competitiveness of Japan’s industry. JIC has a kind of strong mission to support the next generation industry in two ways. One, we have created JIC Capitals, which is a private equity fund to pursue industry consolidation and restructuring. That’s more private equity play. And the other side is obviously more venture capital play to create the next strong industry out of our country. For that reason, we created a subsidiary called Venture Growth Investment, and they are providing mainly growth-stage risk capitals. And in addition to that, we recently decided to provide more early-stage risk capital to the life-size deep tech space. Those are the direct investment for the JIC group.

Tim: So, the purpose of JIC is not to promote the startup ecosystem specifically, but to enhance competitiveness of Japanese industry and the economy as a whole.

Yuka: Yes.

Tim: Then let’s talk a bit about the Venture Growth Investments, the direct investments into startups that JIC is making. What kind of startups are you investing in?

Yuka: The VGI’s strategy is to provide risk capital mainly at the growth stage. However, having said that, they are currently managing the fund 200 billion yen, which is probably equivalent to the 1.5-6 billion US dollars. And out of that pocket, it has 30 billion yen to deploy to the early stage of the startup, which are life science and deep tech. But beside that, we have also created the Opportunity Fund with a size of 40 billion yen to support listed startups and to support secondary transactions before IPO.

Tim: So, how would that work? Let’s start with the second one, the Opportunity Fund. This is supporting startups that have already listed or are about to list? What are the activities?

Yuka: VGI set up a 40 billion yen Opportunity Fund with a strategy with a secondary investment and aftermarket strategies. What I mean by aftermarket is we support the listed companies’ fundraising. The issue is in Japan, many of the listed startups have an issue to raise the money after IPO. They’ve been raising money quite a bit before IPO. Then once they list it, all of a sudden, they actually have nowhere to really raise equity capitals. They could, to some extent, raise the money through the debt financing because obviously they increase the kind of credibility’s after the listing. However, Japan’s kind of problem is not many startups have successfully raised the capital after.

Tim: I see. That is a real problem right now, particularly in life sciences and that. But actually across the board where Japan has traditionally been very easy to IPO as a small company, and a lot of VCs have really pushed their startups to do pretty safe, low valuation IPOs where they’re still growing. They still need capital.

Yuka: They need capital, but then the reality is if you cannot raise the capital for the growth, it will be difficult to look for the further growth after the IPO. So, that is really the serious kind of issues in Japan’s IPO market.

Tim: Have you seen a change in Japanese VC behavior around this? Because I mean, I agree, pushing a startup to IPO too early does not help the startup. It’s good for the startup to stay private as long as possible. You get a lot more forgiveness and flexibility from VCs than you get from public markets. A lot more patience from VCs than you get from public markets. So, are you seeing a change in Japanese investor behavior in wanting their portfolio to stay private longer?

Yuka: We can see the trend that startup choose to be private to make it IPO big enough. Because in the past, well still now, there are so many small IPOs. But that also affecting Japan’s VC fund return itself. That kind of risk capital ecosystem we really have to create. But the issue is small IPO, small return, small fund return. Obviously, wide LP borders to deploy the money to the VC fund. They could choose for the private equity fund where we can seek that the decent return out of the contract transaction.

Tim: Is the goal of this to seed the market and hopefully get enough private VC money as well following the strategy and allowing life sciences to grow privately longer?

Yuka: Yes, but the difficulty here is we don’t have enough risk capital to continue to support the life science or even deep tech, especially the growth stage. On the other hand, issue is, surprisingly, most of the VC fund wind up their fund as a 10th anniversary, or even with a two year extension. That’s all. So, it’s not like US VC fund or European VC fund, you kind of continue to extend your fund, I don’t know, forever. So, that’s the reason that in a startup got kind of pressure from the VC fund or some of the shareholder push to the small IPO. So, that’s the reason that we feel like we have to build the secondary market in this country.

Tim: Okay, that totally makes sense about the need to support and nurture that part of the ecosystem to build it out. But in terms of startup selection, so CVCs have a reputation of being slow and complex investment committee structures. But a government sponsored fund must have even more oversight, and even more accountability and related overhead. So, what’s the process of selecting which startups get this investment?

Yuka: It’s very good questions. Because when we are doing the investment activity, through the INCJ, INCJ deploys the money out of the balance sheet. For that reason, each direct investment together with the LP investment, always needed to see METI’s approval. Obviously, we don’t have flexibility and speed up for the direct investment. So, that’s why we have decided to create subsidiary structure that JIC itself is a LP investment. In this case, when the VGI make investment decision, it’s their own decision.

Tim: So, in addition to venture growth investments, I should say the main part of JIC’s investments is investments in other funds. And it’s a huge range of funds. There’s Japan funds, like WiL and Globis. There’s global funds, NEA, Sozo, Atomico, I mean, really high quality funds. What’s the strategy? What are you trying to achieve with these fund investments?

Yuka: So, our main purpose to support VC ecosystem is we wish to provide risk capital to the local fund managers. And we always kind of make sure that where is the space that risk capital is not enough and needed support from the government fund like us. So, we identify the space, mainly more like deep tech space is definitely they’re looking for that risky capitals. And growth stage is a one that we don’t see many player or that space. We have been supporting many deep tech focus fund, including University fund, like Kyoto University Fund, Miyako Capitals, and Waseda University Fund. In addition to that, recently, we realized many generalist fund, such as Globis, or Spiral, or the Dimension, they are willing to deploy the money to the deep tech space. So, if these generalist manager wishing more to deploy to the deep tech space, JIC is also backing those kind generalist fund.

Tim: So, does the investment come with a commitment to invest in deep tech to or to invest in particular stages?

Yuka: So, they have their own strategies. But if they have intention to allocate to the deep tech space, more than 10% roughly, and JIC is happy to support their fund, let’s say if you have a strategy for 20 to 30% deploying the money to the deep tech, 70 to 80 is really outside of the deep tech space, which is fine for JIC.

Tim: Okay, the investment funds themselves aren’t earmarked for particular investment, but you’re just looking for funds that support the overall ecosystem development within deep tech and growth stage investing.

Yuka: Yes, exactly. Again, deep tech, they really need the capital. And secondly, deep tech space shouldn’t be only supported by deep tech focus fund. If the generalist fund has a strong background to support management team, or the business expansions, deep tech startup makes sense, not just a university fund or deep tech focus fund. It’s very important that diversified shareholders are supporting to the deep tech stuff that obviously creating more successful deep tech startup in the future.

Tim: The monetary investments obviously help, they give the funds more money to deploy towards these startups. But one of the things I found most interesting from our previous discussion was that JIC also views these investments as a way of influencing venture capital culture and behavior and startup culture and behavior in Japan.

Yuka: Yeah, thank you for asking. That’s something always I got a feedback from the outside of Japan, because if I explained to the JIC’s connectivity, people really said, wow, that government fund is such supportive to the VC ecosystem. Because we’re not just only providing risk capital, we are trying to foster or support the local manager, be more sophisticated managers in the future to accept the money from the institutional investors in and outside of Japan. And for that reason, JIC’s been engaged with all investing fund managers to give some guidance how to deal with governance issues, conflict issues, or how you can build a team. And interestingly enough, I think we’ve been deploying the money to roughly 25% of our portfolios is first time managers. So, when it comes to the first time managers, they still have not really much clue to how to build a team. Or sometimes we give some advice to maybe you need some other strong partners. So, in that case, we actually involved in the hiring process or give some advice to the fund managers. And then probably, you may need this kind of background of people to really support your platform. So, we are pretty much hands on LP, but to make sure that we want to bring this kind of managers to be successful in the future.

Tim: So, you’re actually helping them with like recruiting and staffing or what form does this help?

Yuka: So, we don’t obviously support recruiting itself. It’s more like if they seek the guidance from us, we are happy to see the candidate together. And also, if we see that, let’s say maybe these managers, they need the person who are more stronger capability to build a platform. Many of the cases, VC fund top managers, they are, how do you say, visionary person and strong network creators. Maybe he or she be good at deal sourcing or executions or the investment but to be successful VC fund, it’s not just only the investment. You actually have to understand the strong accountabilities. Fiducial duties to really build the VC fund itself. So, you’re not one venture capitalist of the fund. So, he or she used to be the star player of the XYZ Corporation or VC fund. Once you are spin out, you are at the top of the VC fund, mean that you yourself have to manage the platform. That’s very different capability.

Tim: I think a lot of founders find themselves in the same situation when they’re first starting their startup after working it.

Yuka: Exactly. So, it’s very interesting that VC people is the one to support the startup entrepreneur to build the company. But sometimes venture capitalists have to think about how to build your own platform as a corporation.

Tim: What form does this support take? Do you introduce them to like VC mentors who can give them advice? Do you just give them casual guidance on what to do next? How do you support them?

Yuka: We try to actually see what’s really missing on this kind of platform. And when we decided to commit to the XYZ fund, we already identified what are the issues that need to be improved. Obviously, we get a consensus with the manager. Okay, this is something you need to be improved, XYZ. Obviously, something sometimes happens after the investment. That also happens. Let’s say operational issues we could not identify before the investment. But that obviously also we fix issues together with the managers.

Tim: I’m sure every case is different, but what are some typical challenges that new VCs have that you work with them to fix as part of your investment? What would be some typical challenges they face?

Yuka: If it’s internal issues perspective, always kind of new managers, they really need to identify very good number two partner. Number two partner is very important. I believe, JIC believe, that yes, one top, he or she is always good vision, strong passion. But these persons sometimes they only think about investment. It’s very typical. Most of the cases, they are definitely good investors, but not good management of the firm. So, that’s something we always identify. You probably need someone who can support you. Very different character from yourself. Typically, you tend to pick up similar type of the characteristics. But you definitely need someone who have the capability that you don’t have.

Tim: That is actually incredibly valuable. Are you focused mainly on operational issues, or are you also looking to address some of the cultural issues in Japan’s VC ecosystem, like female representation or more community involvement?

Yuka: Yes, we’ve been starting to having a dialogue with the investment fund managers. Or at the time when we’re conducting due diligence, we always ask such kind of question, what’s your policy to accommodate female professionals? So, that gives them a kind of hint that, oh, they should actually have more female in their platform. Most of the cases, they said, oh, we have female professional, let’s say 50%. But if we look into carefully, they’re typically middle back office people or support position, let’s say PR or the HR. If you look into the investment professional capitalist position, almost none. But that’s changing. That’s really starting to change. And I think one of the cases we give some advice that if you hire one female in institution, because some of the people say that, oh, it’s so difficult to hire a female professional. There’s not many candidates. And you hire just one in a boys club. You can imagine how difficult. So, that’s something I interacted with the GP that, look, you think about if you are only one male capitalist in female institution, how you feel? Do you think you can perform well? You can always think about the situation to the other side. So, that’s why we recommend that you should hire possibly not one female in the platform, two, three female, so that don’t put the female professional in a really minor…

Tim: So, much pressure on one person. That makes a lot of sense.

Yuka: Exactly. So, that’s kind of the dialogue we believe start to let the GPs to open eye and hiring more female in the platform. That’s really happening.

Tim: And to be clear, these aren’t requirements for JIC investment. It’s just guidance and questions and advice along the way.

Yuka: That’s something we’ve been debating recently. Our CEO, Yoko-san, he strongly committed to the diversity and equity and inclusion to push through to the ecosystem. So, we have our own project team within the JIC. And even inside the JIC, we are debating how we can actually create a diversified culture in the JIC firm itself. And also, obviously, from the investment, we are also discussing what extent we should actually require a GP — because we have to be a little bit careful. Obviously, there’s an ideal KPI, but we have to a little bit think about what is the very realistic solution to start with, then gradually to bring it to the ideal.

Tim: But this is a very Japanese approach. I think if we’re looking at Japanese regulations in general, they always seem to start with general information sharing and setting vague objectives and lots of conversation and slowly, slowly becoming requirements.

Yuka: Becoming a requirement, yes. But I’m definitely sure that we will come with a requirement within this year.

Tim: Okay, so coming soon.

Yuka: But then what kind of requirement we should start with? That’s something we have to carefully think about. So for that reason, we recently have done interviewing all the female professionals of our investee fund, all the e-capitalists. So tomorrow, we are going to report back to our executive team what would be the outcome, what the concern we have identified through this interview.

Tim: Could we be sharing that information? I would love to see that.

Yuka: Yeah, so we should think about, obviously, no, we cannot see…

Tim: I mean, not the people, but summaries.

Yuka: Yes, we should think about — we will probably be debating tomorrow after reporting to our executive.

Tim: For whatever feedback, I would love to see the summary of those opinions.

Yuka: Because I think we should play such an important role on how we realize DEI in this kind of ecosystem. If this is not the JIC, who else can do it? So, that’s something we feel that we should definitely take a strong initiative.

Tim: And I think this points to a larger difference between U.S. and Japanese innovation culture, where both in the U.S. startup ecosystem and the Japanese startup ecosystem, the government is hugely involved, hugely influential. But they play very different roles, where in the U.S., it seems that everything should happen behind the scenes. The funding is provided, but the entrepreneurs always get out in front and say, we did this ourselves, and the government just needs to get out of our way. And in Japan, it seems like the opposite happens, where it seems very important for the government to show how much they’re supporting and show their leadership, not from behind the scenes, but actively involved in the kind of guidance that JIC is doing. Why do you suppose that is? Because it’s so different.

Yuka: Not sure about the U.S., because the U.S. has a history long enough. So, I believe government no longer needs to take a strong initiative to really support an ecosystem, right? So that’s something probably different. It’s more like private market driven. It’s been really developed. Many players there, many investors are there. And I think probably we are more following kind of European ecosystem. Europe is more driven by the government fund to build kind of ecosystem, like BPIFrance in France, or KFW in Germany. There are government investment fund to really support this ecosystem.

Tim: Well, I think the financial support is always welcome. And the U.S. is very clear on its financial support. But I think it’s interesting in looking at, let’s call it cultural leadership, where in Japan, the Tokyo government’s been very active, the national government’s active. You mentioned if JIC doesn’t provide the leadership on women in VC, who will? And so it just seems that the cultural aspect of it, the Japanese government at varying levels seems to be very much out in front.

Yuka: Do you think maybe this is quite recent? Maybe because the Kishida cabinet really set the goal that I believe that all the government division really tried to take initiative, how we can achieve such kind of target. So, but that’s something whole country tried to really build a startup ecosystem.

Tim: As part of that effort, a lot of efforts being made to attract foreign VCs and foreign entrepreneurs into Japan. Why is that important?

Yuka: Again, to make Japan’s VC market 10 times bigger, we need more capital. Only Japan’s investors’ money can fill up this market need? I don’t think so, right? If we look into the European ecosystem, we are 10 years back of the European VC ecosystem. And why such a huge growth seen in the European ecosystem? Because the global fund managers come in to support startup. So, majority of the monies come from the outside of Europe. So, money is one, capital is one. And also to create a strong startup, JIC believes that we definitely need to create very diversified shareholder environment. Let’s say if the startup only supported one VC fund, obviously, they can only rely on this fund manager’s support. But if you have a different type of the VC fund, they can actually utilize all that resources. So, many of the local managers, they don’t really have a strong background of the overseas business or overseas expansion port. So, that’s something come with overseas managers to work together to support startup global expansion.

Tim: That makes sense. And also the foreign startup funds will be more likely to be experienced in kind of that growth stage investment that JIC is trying to foster and develop as well.

Yuka: Exactly. So, that was the reason we have invested in NEA and followed by Vertex in Asia and Atomico in Europe. We tried to create the corridor in between Japan and the US, Japan and Southeast Asia such as India, or Japan and Europe. If the case at the startup, the business model-wise makes sense to expand to Europe, why not to work with Atomico? Or if it’s more global expansion for the US, definitely for NEA is the one. So, we started to create more the bridge in between Japan and overseas.

Tim: I think it is great that there is so much interest in Japanese startups overseas. In talking with both the foreign founders and foreign funds that are interested in Japan, what is the biggest misconception that foreign investors have about Japanese startups or about the Japanese startup ecosystem?

Yuka: Many times I often ask by overseas investors, does entrepreneurship exist in Japan, first of all?

Tim: Yes. Yes it does.

Yuka: First of all, some people really don’t really think about Japan is a place to create a new business. They almost forgot we’ve been creating such a strong global companies like definitely Sony or Panasonic or even Toyota day one, they business startup. So, that something they really feel, but then also people always ask me, most of Japan’s young smart people tend to work for Mitsubishi or Mitsui or the Japanese bank. Do you really think that the smart people can come to the startup ecosystem? So, that’s some misconception. I’m actually try to take the opportunity to speak out in a conference kind of overseas and then…

Tim: It’s like they’re imagining Japan from 20 years ago.

Yuka: Yeah. Exactly. Yes.

Click here for the Japanese version of the article