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On Worldwide VC Rankings February 28, 2007

Posted by fukumimi in Japan, VC.

The FT published a story (15th Feb) noting that the UK tops Euro VC deals, based on VC investment data for 2006.

Jason blogged about this, linking to a blog written by the people at Library House, the venture reseach company.

Library House’s blog noted that it missed signficant countries “such as South Korea, Japan, South Africa” citing their inability to find public data.

I thought I might help them out and point them to the source of Japanese data. The Venture Enterprise Center compiles the annual Japanese VC investment data. Unfortunately, the data is compiled by financial year (ending March), and it apparently takes them the better part of a year after the year close to compile the report. The latest report for the year ending March 2006, was made available on 5th February 2007. Should it really take this long to compile the report?

Anyhow, this is the best we have to work with. The report is here, but you’ll need to be able to read Japanese (and you probably need Japanese fonts for Acrobat installed too).

Given the promise to blog more about VC related issues this year, this seemed like a good an opportunity as any take some data out of the report and make it more widely available, and give the wider world a better idea of the VC scene in Japan. It is already the last day of February and I don’t think I’ve been doing many VC related topics. I think I’ll target once a month at the very minimum, and this is my February contribution. Having said that, I don’t have much time this evening so this is a teaser post outlining the headline numbers, with a promise to present more detailed analysis at a later date.

I’ll use the current Euro/Yen exchange rate rounded to an easy number (1Euro=160Yen, because I’m lazy) on all conversions to allow easier comparison with the Library House report statistics.

VC Investments by Japanese VC firms for FY2005 (April 2005-March 2006) totaled 234.5billion yen, which is 1.47 billion euro. That would put Japan below the UK but above Texas which was 4th on the list as far as investment sums were concerned.

Total number of deals was 2,834, which is more than double the number of deals done in California (1,367). The number of deals is broken down into principal investments(787) and fund investments(2,047). (But see below about overseas investments)

Historically, in Japan, it has not been uncommon for VC firms to make principal investments alongside fund investments (though not all firms do this – clearly there are potential conflict issues, and our firm no longer makes principal investments because of this), so there might be some overlap in the investments quoted above. Even if there was perfect overlap (with principal investments only ever occuring alongside fund investments – this certainly is not the case in reality) that would still mean 2,047 deals, assuming each VC fund was putting up only cash from one fund
at a time – again not a certainty by any means, but I don’t think the numbers would be impacted greatly and I don’t doubt that in terms of deal numbers, Japan is roughly on a par with the top 5 US states combined.

New investments accounted for approximately 80% of investment, with 20% being follow-on investments. A start contrast to the US scenario where new deals account for 25%(by sum) and 35%(by # of companies) according to the NVCA yearbook for 2006.

50% of invesments were made to companies within 5 years of founding, 20% made to companies within 2 years of founding.

IT related sectors accounted for 35%, bio/medical/healthcare for 18% (still down 5% from the previous year, but mainly due to the rise in  investment in other sectors), the 3rd most active sector was in consumer related goods and services.

Investment amounts showed little industry-to-industry variation, and the average was around JPY50million, or Euro310,000.

For new deals, overseas investments were 20% of the total by investment sum(total of JPY24B or Euro150M), but just 6.7% by number of deals(127). This translates to a larger deal size for overseas investments, which averaged JPY189M, or a little under Euro1.2M.

That leaves the domestic component – 1,781 new deals (for companies who responded to this survey), totalling JPY102B, or Euro0.6B.

Those are the headline numbers, more next month….


1. Jens Lapinski - March 1, 2007

Hi Shin,

Thank you very much for translating the data on Japanese investment, this is very kind of you. I have read your blog with great interest and had a few questions for you. I have to admit that I am confused about the data that the Venture Enterprise Center produced:

If there are 2,834 deals, how does that work with the 787 principal investments and 2,047 fund investments? Are these in fact not deals, but deal participations? So how many deals would that make in total? Also, when the Venture Enterprise Center adds up the numbers, are we sure that they are not double counting some of the investment/deals?

I have another question around the average deal size. If there are 1.47bn Euros invested in 2,834 deals, my calculator insists that that results in an average deal size of 5.2m Euros. Yet you quote an average deal size of 310,000 Euros. How does that work? Also, when I divide 234.5bn Yen by 2,834 deals, I get an average deal size of some 82.7m Yen, not 50m Yen.

I assume that domestic means Japanese VCs investing in Japan and overseas means Japanese VCs investing outside of Japan. (As opposed to domestic meaning the component of investment in Japan by Japanese and overseas meaning the component of investment in Japan by investors from outside Japan). Would that not reduce the total amount invested in Japan by a considerable sum? Apart from that: if the total amount invested is 234.5bn Yen and the overseas component is 24bn Yen, then that is some 10% of the total sum, not 20%. Also, 127 deals is not 6.7% of the total 2,834 deals, it would be 4.5%.

Can you shed some light on all of this? Is there a simple table that one could look at somewhere? As I said, none of this data appears to add up. I am sure that the mistake is on my side, any help that you can give would be much appreciated, as I would really like to add Japan to the VC Ranking.

On a more general note, it would be great to understand the differences between the Japanese and US VC models in more depth. There seem to be substantial differences here.

Best regards,

2. fukumimi - March 1, 2007


Indeed the data is rather confusing, but I’m willing to take a shot at answering your questions.

One of the problems is that the data is collected by the VEC by sending out questionnaires, which are not returned by all firms, and some firms do not respond to all the questions, so each table has a different sample size. They say that they got responses from a total of 90 firms, but this number seems to include domestic PE funds as well….

Regarding the number of deals, it is difficult to work out what definition of “deal” is being used by the VEC. Historically, many of the investment agreements between investors and investee firms are actually separate contracts, even for investors participating in the same “round”. The issue here is that the great majority of the deals done in Japan are still common stock deals, with little in terms of preferrential terms (anti-dilution is not uncommon, but often there is little else. Investment agreements are flimsy documents, as short as 2 A4 pages…..). Another characteristic which negates the requirement for a more formalised structure regarding participation is the willingness, nay, preference historically for widespread syndication of the investment opportunity, and in many cases a more relaxed attitude towards deal closing. Whilst there is of course competition for deals, much of the negotiation is done informally, and it is a fact that many firms aren’t necessarily that agressive in taking the lead. The fundraising dynamic is certainly very different in Japan compared to most overseas environments, and I think this has to do with the difference in business cultures. Some old timers tell me that many firms used to invest without even a formal investment contract, as recently as 5 years ago….

That said, here are some numbers

Regarding the average investments, my calculator says:
1,470,000,000/2,834=518,701, so the average across all (domestic+overseas) investments is 519,000euro.

For NEW domestic investments, the average figure was JPY57,800,000, or 361,250euro. (Total of JPY102,732,000,000 divided by 1,781 firms – sample size for this questionnaire was n=66)

From the same table (2-16), the number of NEW overseas investments is 127, and total amount was JPY24,051,000,000, which gives an average of JPY189,400,000- or Euro1.18M.

Which is where the 6.7%/19% numbers come from.

Again due to the difference in sample size, the various numbers cannot be easily crossreferenced….. Am I too cynical for thinking that this is deliberate? I guess it is possible that they did have incomplete data….

I guess to really understand the logic behind why the VEC announces the data in the way they do, one really needs to understand the local fundraising and VC scene, so I guess my next VC post will embark on that journey.

3. Jens Lapinski - March 1, 2007


arguably, I lost a zero somehwere…


Anyway, I guess this means that the definitions used are so different from the rest of the world that it will not be possible to use them in the ranking. That is a shame. I think Japan is an important market and it should be in. This data sounds as if Japan it is definitely in the top 20 (as one would expect).

It would be great, if VEC could re-state the data in such a way that it conforms with the MoneyTree or our definitions, that would allow me to update the ranking.

4. fukumimi - March 13, 2007


I agree that getting the VEC to compile data in a way that is compatible with Library House or MoneyTree would make a lot of sense.

The problem is that I suspect that the VEC people don’t really have much of a clue about how things are doing elsewhere.

I feel the Japanese VC (and venture business) scene suffers from the difficulty in comparing the local scene against its global peers.

The VEC is supported by most of the major VC firms in Japan (including our firm) and I think it would be possible to open a dialogue with the VEC to try to get them to try to collect data which is more easily compared to other locales.

I offer my services in bridging the communication barrier which I suspect inevitably exists, if Library House (or MoneyTree) are interested….

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