from the inside, looking in

Thank you to everyone who came to the PCC meetup March 16, 2007

A big thank you to everyone who attended the PCC event on Wednesday.

The speaker was my colleague Rei Uno, who gave a talk about the Japanese VC scene and how to engage with Japanese VCs, including tips for writing a business plan which will be well received by Japanese VCs.

Another colleague and I who are regular punters at the Pink Cow decided to go along to see how he would fare, and we were pleasantly surprised at the turnout.

It is great that so many people are giving thought to doing their own thing, and I hope that the talk (and the mixer afterwards) was of some value to the attendees.

I ended up making an unscheduled appearance when Rei somehow got me involved in answering the questions from the floor in the Q&A session. I hope people weren’t too disappointed that they got my opinions on the questions posed rather than those of my colleague….

There were some pretty interesting questions being asked at the Q&A:

What is the difference between the Japanese and US VC models?

[Ans: If you look at the history of the Japanese VC model and the background of the major VC players, you soon realise that the traditional Japanese VC is something quite different from the US (SV) VC model. But things are changing as business practices and competition become more global. Japanese VC is changing, or at least diversifying, in the business models it employs.]

There seems to be a lack of Japanese VCs who really understand technology?

[Ans: Again, traditionally, that was indeed the case, with most of the major VC firms being affiliates (to one degree or another) of stock brokerages, commercial banks and goverment agencies, and the human resources at their disposal were limited, given the traditional lack of liquidity in the human resources market. But again this is changing, with VCs recruiting from industry (people like me), and with boutique VCs also springing up. Most of the top Japanese VC firms are large organisations, and as with any organisation, there are many different types of professionals within the organisation. The key is to find the right person to take your idea to. Stop thinking about the VC firm, and think about the individual VC.] [I thought about this question a bit more afterwards, and I think that the questioner may have some misconceptions about how we evaluate businesses. I wouldn’t say technology is not important, but I think many entrepreneurs overestimate the importance and superiority of their technology or technological skills, and the correlation between focus on technology and business success. I know that some entrepreneurs complain about the fact that VCs focus on issues which they feel to be peripheral, but we do that with justification. Our experience tells us, especially in Japan, that many businesses fail due to issues other than technology. Lack of financial planning, lack of sales/marketing ability, lack of corporate discipline in other areas, etc. It is our duty to point those out and inject some reality into many a technological daydream. The aim of a VC is to invest in a COMPANY, and help make that company successful so we can cash out and return money to our investors. I certainly only invest in businesses where their goals are aligned with ours.]

Don’t VCs stack the odds in their favour with preferred stock structures?

[Ans: That is indeed the US VC model, and although it does happen in Japan too, the reality of the Japanese VC model is that currently the vast majority are common stock investments. (certain investment heavy sectors are more likely to feature preferred structures) There are signs that preferred structures are on the increase, but it is still a small minority of deals which see such structures in place. I personally think that barring a severe downturn, there will be VCs willing to continue using an ordinary stock model, and it is up to the entrepreneur to decide which set of terms and which VCs they want to work with. After all, no one is forcing them to take our money. But this ordinary vs preferred issue has to be understood in context, such as the fact that historically structuring preferred stock was subject to various limitations which made it difficult in practice to use the structure effectively. The small average size of investments is also probably a factor which has prevented VCs pushing for preferred stock and the associated liquidation preference, as is the lack of much M&A activity.]

It was nice to meet several readers of my blog too. The entire Tokyo based readership of my blog was probably there, lol.

Anyway it was nice to see so many enthusiastic people, and it prompted me to think seriously about various initiatives I have been thinking about. Creating a venue for entrepreneurs to meet with each other and with investment professionals in a casual environment is something I’ve wondered out loud before, and the event just reinforced my feeling that Tokyo is ready for such an initiative.

In the meantime, I’m working on what I think will be another very interesting meetup (meetups?) in May. Stay tuned.