Evolution of Japanese Venture Capital - Amazon Web Services · •1973 Japan Associated Finance...
Transcript of Evolution of Japanese Venture Capital - Amazon Web Services · •1973 Japan Associated Finance...
Evolution of JapaneseVenture Capital
April 24, 2008
Michael Korver
Managing Partner
Global Venture Capital
Some Observations
• Both “high-growth expectation” entrepreneurial activity and VC funding levels inJapan are much lower than in the US (even when adjusted for population and size ofeconomy). Also lower than in Europe.
• According to the Global Entrepreneurship Monitor (GEM), Japan ranked second fromlast among high-income countries surveyed in terms of the prevalence rate of high-growth expectation early-stage entrepreneurship during 2000 – 2006.
• Venture capital is available in Japan, but much of it comes from organizationsaffiliated with large financial institutions.
• Most VC-backed companies in Japan target domestic market exclusively. Accordingto GEM, Japan ranks last among high-income countries surveyed in terms of theprevalence rate of the international orientation of its entrepreneurial ventures.
• According to GEM, Japanese have the lowest perceptions of the positive attributesabout entrepreneurship activity in the world.
• Japanese VC’s depend heavily on a handful of Japanese stock exchanges for exits(and performance) of their domestic portfolio companies.
• Japan is a technologically sophisticated country with large domestic early-adoptermarkets and global companies generating significant amounts of technologyinnovation. What is the role of entrepreneurship and venture capital in driving thisinnovation?
International Comparisons
• U.S. venture capitalists invested $29.4B in 3,813 deals in2007 – marking the highest yearly investment since 2001(MoneyTree Report)
• According to preliminary figures released by the EVCA,European venture capitalists invested €11.5B in 2007
• Japanese VCs invested ¥2,800 hundred million in 2,773companies in the year ended Mar. 31, 2007
• Primary exit vehicle for venture-backed companies inU.S. and Europe is the trade sale; in Japan it is the IPO(although many more IPOs in U.S. than in Europe forventure-backed companies)
81Tokyo Marine Capital90Mizuho Capital
239Nikko antfactory
769Chuo Mitsui Capital
79Mitsubishi UFJ Capital80ORIX Capital
227JAIC
370NIF SMBC Ventures603JAFCO
1,170SBI Holdings
Amount Invested(100 Mil. Yen)
Most Active Japanese VCs
Source: Nihon Keizai Shimbun
How Attractive?
Size of opportunity
Availability of Venture Capital
Japanx
U.S.x
Global Venture Capital
• Tokyo-based independent venture capitalfirm investing since 1997
• Five partners
• Invested in over 35 ventures in Japan,Hawaii, California, U.K.
• Investment thesis: “source globally, investlocally”
• www.gvc.jp
“Source Globally, Invest Locally”
Investments in early-stage ventures located around the globe that have“meaningful contacts” with Japan and/or other East Asian economies .
“Meaningful contacts” include one or more of the following attributes:
① Large market potential in Japan and/or other East Asian countries and astrong commitment on the part of management to consider these markets tobe of significant importance.② Technology, product or service amenable to due diligence by applyinginternal resources or by tapping resources in Japanese and/or other Asia-based corporations or academic/research institutions.③ Strong potential for partnering with Japanese or other Asia-basedcorporations.④ Potential to undertake an IPO on Japanese capital markets.
Our Investment Strategy
• “One size doesn’t fit all” – innovation not bounded bygeography; markets are global
• Silicon Valley doesn’t need more VC money or “bridgingorganizations”
• U.S. not the appropriate first market for all innovations– Too competitive– Early adopters may be elsewhere– Infrastructure to support growth of the market may not exist in
the US– Larger potential markets may exist outside of the U.S.
• Powerful potential competitors or partners may lurk inAsia
What we look for
• Market opportunity– Large and fast-growing– Compelling value proposition– Effective “go-to-market” strategy
• Management team– All bases covered– Experienced
• Technology or other sustainable“barriers to entry”
Case Studies• Hoku Scientific (Nasdaq: HOKU)
– Alternative energy (Hawaii): achieved IPO on the strength of commercialrelationships with two large Japanese companies
• SpectraGenics– Medical equipment (California): Launched product in Japan pending FDA
approval in the U.S.
• ReallyEnglish.com– ITC (U.K.): English language online learning content developed in U.K. but
primary customers in Japan
• GeoVector– ITC (California/New Zealand): Development team in NZ and first market in
Japan’s world leading mobile telephone sector
A Little History• 1973 Japan Associated Finance Co., Ltd. (JAFCO) established in 1973 as a JV
among Nomura Securities Co., Ltd., Nippon Life Insurance Co., and Sanwa Bank, Ltd.• 1982 JAFCO established Japan’s first VC fund• 1987 JAFCO shares start trading on OTC market• 1996 Global Venture Capital established• 1998 Japanese Limited Partnership Law implemented• 1999 TSE Mothers exchange started in 1999• 2001 NASDAQ Japan exchange started in 2001• 2001 JAFCO listed on the first section of the TSE in 2001• 2002 Major revision of the Commercial Code• 2002 Japan Venture Capital Association established• 2005 NIF Ventures merged with SMBC Capital to form NIF SMBC Ventures• 2006/8 NIFSMBC VC Fund 2006 Series ($600K)• 2007/7 JAFCO Super VC Series (>$1B)• 2007/9 JAFC V2 Fund Series ($1B)
Venture Enterprise CenterVC Fund Benchmark Report
• In most recent report (for fiscal year endedMarch 31, 2007) 85 VC fund managementorganizations reporting for 451 funds
• Average fund size around $40M with 10limited partners– Japanese investors 71%, non-Japanese
investors 13%, GP 14%• Data go back to vintage year 1982
Japanese Stock Markets for Emerging Growth Cos.
Note: (1) All figures as of end of December, 2006 unless otherwise indicated. (2) JASDAQ launched NEO market for emerging growth companies at end of 2007.
May 2000asNASDAQJapan
Nov. 1999
Feb. 1963
Established
2523,82415622Osaka StockExchange“HERCULES”
2338,77618541Tokyo StockExchange“MOTHERS”
44133,69297159JASDAQ
Avg. AmountRaised atIPO (¥100M)
MarketCap.(¥100M)
ListedCos.
2006IPO’s
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Note: Annual figures. Figures from 2001 to 2003-1 are for annual periods through September of indicated year. Figuresfrom 2003-2 to 2006 are for annual periods through March of following year. E.g., “2006” is for the fiscal year endingMarch 31, 2007.Source: VEC
Equity Investments by Japanese Venture Capital Funds and CompaniesUnits: ¥100M for Amounts and numberfor Companies
Investment Trends
• Nearly 80% are new investments(vs. follow-on)
• Nearly 80% of new investments are for Japanesecompanies
• Shift from start-up/early to later stage investing– <5 years from founding: 46% → 40%– 5 – 10 years from founding: 22% → 32%
• From hi-tech to medium-tech– IT related: 35% → 30%– Life Sciences/Medical: 18% → 13%– Manufactured products/services:25% → 40%– Financial services, Real estate: 5% → 17%
Source: VEC
Performance?
• For 402 funds for which performance data is availablewith vintage years from 1982 – 2007, aggregate IRR is4.55% (vs. 3.47% for weighted avg. TOPIX)
• For vintage years before 2003, three years (’89, ’90, ’01)in which aggregate IRR is negative
Source: VEC
What (or who) is responsible?
This man…..
Regulatory and Tax
• 2006 National Tax Agency imposes 20%withholding on capital gains distributions toforeigners investing through Japan domiciledventure capital funds
• 2007 Ministry of Finance regulates managementof venture capital funds
• 2007 Ministry of Finance imposes mark tomarket rules for audits of venture capital funds
VC Investments Drying Up?
Source: From Masashi Kobayashi blog(http://venturecapital.typepad.jp/blog/2008/03/post-4be3.html)
Also, Japanese IPOs
Source: From Masashi Kobayashi blog(http://venturecapital.typepad.jp/blog/2008/03/post-4be3.html)
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Note: 2008 excludes Seven Bank
52504949CEO Age at IPO
23171617Founding to IPO (Yrs.)
21.65%29.94%31.78%28.04%CEO Ownership % atIPO
16.95%17.21%16.23%13.53%VC Ownership at IPO
10 Hundred Mil.Yen
9 Hundred Mil. Yen8 Hundred Mil. Yen13 Hundred Mil. YenAmount Raised Prior toIPO
15X54X107X149XPER at Initial TradingPrice
9 Hundred Mil. Yen10 Hundred Mil. Yen10 Hundred Mil. Yen11 Hundred Mil. YenAvg. Amount Raised
79 Hundred Mil.Yen
94 Hundred Mil. Yen172 Hundred Mil. Yen231Hundred Mil.Yen
Avg. Market Cap. AtInitial Trading Price
2008[Jan. - Mar.] (17Observations)
2007(76 Observations)2006(115 Observations)2005(92 Observations)
Japanese Emerging Growth Companies
50495039CEO Age at IPO
1812159Founding to IPO (Yrs.)
29.94%31.84%26.81%28.88%CEO Ownership % atIPO
17.21%24.49%15.77%13.53%VC Ownership % at IPO
9 Hundred Mil. Yen23 Hundred Mil. Yen7 Hundred Mil. Yen8 Hundred Mil. YenAmount Raised Prior toIPO
54X44X48X16 XPER at Initial TradingPrice
10 Hundred Mil. Yen7 Hundred Mil. Yen11 Hundred Mil. Yen10 Hundred Mill. YenAvg. Amount Raised
94 Hundred Mil. Yen61 Hundred Mil. Yen107 Hundred Mil.Yen
170 Hundred Mil.Yen
Avg. Market Cap. atInitial TradingPrice
All Industries (76Cos.)
Life Sciences (8Cos.)
ICT (20 Cos.)Web2.0 (5 Cos.)
Emerging Growth Companies 2007