Click Kansai for E-Commerce

We have reason to believe that many of Japan's hottest high-tech startups will come from this region, which includes Osaka, Kyoto, and Kobe. It's got the incubators, the universities and computer science students, and the networking communities. And a peculiar knack for online retailing.

THE PROBLEM IS LACK of media coverage, both in Japanese and English. From outside Kansai, it's nearly impossible to know what's going on here. Bit Valley stole the New Economy limelight. This magazine is guilty, too. Despite our awareness of Kansai's importance, we can count on one hand the number of times we've covered in any detail the area or companies in it. Perhaps it's laziness: like nearly all major media in Japan, we're headquartered in Tokyo, so covering Bit Valley is simply easier. Hence only a few Kansai tech startups have received any significant attention. Examples include MagMag, Digital Design, and Cybozu. The latter, a Hot Startup in our September 2000 issue, recently moved to Tokyo.

According to Saintmedia, publisher of the Japanese bimonthly Venture News, the average number of new companies being founded in Osaka is about 300 per month, compared to 1,300 a month in Tokyo. Add in the rest of Kansai and one can safely assume that Tokyo is far ahead in the new-company-creation department.

Nevertheless, ignoring the venture scene in Kansai is a massive oversight, for many reasons.

The Kansai area officially covers the prefectures of Shiga, Mie, Nara, Kyoto, Wakayama, Osaka, Hyogo, from the north to the south of Japan's midwest region. More closely, the term refers to the area around the cities of Kobe, Osaka, and Kyoto.

A VENTURE SUPPORT BOOM
One is that the area is remarkably supportive of ventures, as evidenced by the large number of incubation centers. On the private side, these include Ten6Dbox, Keihanna Plaza, Amagasaki Research Incubation Center, and the well-established and highly regarded Kyoto Research Park. Among the government-sponsored centers -- and because the area's economy has been in a funk there are a lot cropping up -- are iMedio (Incubator for Multimedia Industry Osaka), FORECS (Foundation for Osaka Research Enterprise Companies), Kobe Industrial Promotion Center, and others. Dennis Y. Sugahara, who runs a Tokyo venture called CreatorsNet but has been involved for years in Kansai's government-based incubation activities, warns that the state-sponsored centers are explained more by economic crisis than anything else. The government hopes that an infusion of venture companies -- from all industry sectors -- will help revitalize the area's overall economy, he notes.

But as far as Kansai's Internet ventures are concerned, things are hopping. Net ventures can be found in incubation centers all over the region, and in the places they've congregated the scene is alive. "The industry is quite active," says Eiji Kishimoto, president of online retailer Easy. Easy is housed in what is probably the area's best-known incubator: Kyoto Research Park. A private facility built in 1989 where the Osaka Gas factory used to be, KRP in its early years attracted mainly large companies, for whom it became a research center of sorts. After the bubble burst, the bigger companies withdrew and were followed by small software and then multimedia companies. There are about 130 firms now housed in KRP, and 60 or so are IT related. KRP is planning a new building exclusively for IT companies.

There are quite a few noteworthy tech outfits in KRP. MagMag, the well-known email magazine distributor, is one of them. MagMag lists more than 21,000 e-zines, with over 25 million readers.

Toshiyuki Kataoka, CEO of Yumemi

A firm called J-Data, which moved into KRP in April 1996, is in business "to make the Internet accessible to anyone," says president Koji Sasaki. J-Data has developed a system for numbering/bar-coding URLs (J-Code), making it possible to access a Web site without entering a long URL. The system is used in Web TVs and game consoles. To spread the word on J-Code, they publish "Homepage Guide," a quarterly introducing various Web sites with J-Code numbers (along with the regular URLs).

Among the other interesting tech companies in KRP are e-365, an online marketing service provider; Honyasan, an online bookstore; and Konova, a knowledge management system developer (and winner of the J@pan IncFusion 2000 Award).

KRP has set up several incubation services, including the Business Accelerator Office, which evaluates business plans and finds VCs. There's also a "jack-of-all-trades" center made exclusively for KRP's many content providers, acting primarily as a sales department for them, collecting client jobs and filtering them to tenants. KRP also has an alliance with Yokosuka Research Park (just outside Tokyo). "In YRP, there are a lot of companies related to developing cellphone hardware, such as DoCoMo, Ericsson, and Nokia," says KRP spokesman Motonobu Aida. "We have many content providers here at KRP, so we're hoping to get orders from YRP with this alliance."

iMedio in Osaka

One of the more notable government-sponsored incubation centers is iMedio in Osaka. Built by the city government in March 1998, iMedio -- "Incubator for Multimedia Industry Osaka" -- offers tenants business consulting and coordination, high-end multimedia computers for a fee, and a small open-to-the-public library with Net-enabled computers. Twenty-nine small to mid-sized companies occupy iMedio. All are IT related. Digital Design, which went public last year on Nasdaq Japan, is one, and Gaijins, a well-known "gaijin" company that produces Web and CD-ROM content, is another. Nathan Bryan, the president of Gaijins (he speaks good Kansai dialect!), says he likes being in iMedio. "There are many high-tech companies here, so if I have some questions about Linux, for example, I can just visit the neighbor over there and ask." He points in the direction of Digital Design's office, which is about 10 meters away from his.

Nathan Bryan, president of Gaijins

Another one of Osaka's government-run projects is a business-support service called Akinai Aid, started in February 2000. (Akinai means business.) What's interesting here is that while the government provides the platform, all the actual support and consultation services are provided by delegates from the private sector. "Government officials usually can't help people who want to start up a business, so the city has hired specialists in their own area to do the support," says Sugahara, who also serves as a coordinator at Akinai Aid. Most of the support is conducted online via Q&A-type consultation; the participating specialists are required to answer questions within 48 hours. There are experts in management, accounting, law, and engineering, among other fields. According to Sugahara, about 5 percent of the 4,500-plus members have started businesses since the service began, and "that's not a bad number," he says.

Kobe City has Kobe Fashion Mart. The building is about 10 years old, and houses offices for both fashion- and IT-related companies, such as system developer Kobe Digital Lab, Web consulting firm Pineapple Company, Internet travel agency TravelNet, and others. KFM started Venture Village in July 2000 and offers a system whereby qualified companies can use unlisted shares of stock to pay part of the rent.

Around the Kobe Fashion Mart

THE STUDENTS AND UNIVERSITIES
The answer may lie in Kansai's youth, and its universities. Although the number of venture companies in Kansai may not be growing as quickly as in Tokyo, students here are actively seeking chances to start their own business, or at least get involved in venture activities.

Kyoto Research Park

Further evidence of student entrepreneurialism is found in the Kansai Student Conference, run by a group of startup-minded students from various universities in the area. At the group's first event, held in Kyoto last December, about 70 attendees enjoyed presentations of student-run Web sites and services, followed by a networking party. Participants included many companies targeting the customer base they know best: students. Among these were Gakuseigai.com ("student street" -- a student portal site); ShukudaiHelp ("homework help" -- assisting students with everyday school needs, from homework and checking reports to finding tutoring jobs); and Gakusei@Kyoto ("Student@Kyoto" -- town information and discount coupons in Kyoto). OK, these aren't exactly the next Microsofts, but they indicate that the spirit is present. "There are many students who want to start their own business," says Hideyuki Fujita, a student coordinator of the event, "but most of them still don't know how to make profitable business models. If you have a good technology at hand, that's good, but we now know that a good idea alone won't sell." Fujita, a senior at Kwansei Gakuin University in Nishinomiya (near Kobe), hopes to start up his own business after he graduates.

Also important on the university side is the growing TLO scene in Kansai. The technology licensing office is a concept just beginning to take off in Japan. The idea is to help students and professors share their high-tech ideas and innovations with private companies -- and then share in the profits when the ideas become successful products and services (see "University-Industry Cooperation in High Technology," July 2000, page 26). The Kansai Technology Licensing Organization counts 30-plus area universities among its members, and it's helped get about 100 patents granted so far; among these, at least four patents have been transferred to private enterprises, and about 10 have been partially transferred, according to KRP's Aida. (The Kansai TLO was spun off and is located in KRP.)

Isao Shirakawa of Osaka University

THE NETWORKING COMMUNITIES
Perhaps the most intense tech venture energy in Kansai is generated by the networking communities, which tend to be smaller than Bit Valley and thus more nimble, manageable, and effective.

One of the oldest, started in 1997, is Kansai Webmasters Off (line), started by Toshiaki Kanda of Kanda News Network. Held a few times a year, it's a seminar and networking event for webmasters. Since founding it, Kanda (see People item on page 12) has become the center of most of the Web communities in Kansai. The Kanto (Tokyo) version of the community began in 1998.

The most active e-biz community in Kansai right now is Beta Valley, which was voluntarily formed by the Kansai participants of the now-deceased Bit Valley mailing list. (The name Beta came from the combination of two meanings -- beta as in test version, and the onomatopoetic sound "beta beta," literally "sticky," with the figurative meaning of companionship. Of course, it's also a word play with Bit Valley.) It started as a small meeting and networking party in the summer of 1999 and formed its own mailing list (now quite active) that November. Companies counting themselves as Beta Valley members include Capion, an e-payment services venture; Style-e, an ecommerce consulting firm that produced the top shop at online mall Rakuten ("Losing Weight With Kimchi"); a one-to-one email marketing firm IndexDigital (whose president, Hitoshi Tanii, sold his previous company, InfoCast, to Rakuten).

Beta Valley members take turns organizing the meetings so that "everyone feels they are actively participating in the community," says Ryoichi Fujimoto, one of the original members. Fujimoto has been watching the Net venture scene in another capacity: as a VC at Nippon Venture Capital.

Youko Koyama, the executive of Net consultant Dos Tigres, is another early member of the community. She says one reason Beta Valley is lasting is that there's virtually no leader: "Of course, there needs to be somebody to plan, but if one person has too much leadership, the community won't work. Here, every participant is a star."

The Osaka skyline

THE DOWN SIDE
Despite all the venture-related activity in Kansai, many feel that the area is simply not the best place for tech startups to be doing business, especially when it comes to sales and services. Cybozu closed its Osaka office at the end of last year and moved its entire team to Tokyo. "We wanted to hire more people -- that's the main reason we moved our office," explains Takamitsu Iriyama, in Cybozu's international business development department. "And most of our clients were Tokyo-based, so it was natural that we moved."

Shinichi Naka, president of Kyoto-based MallService, has also found that clients tend to be based in Tokyo. His company, which offers e-commerce solutions, consists of several engineers but no sales people, and gets all of its orders through the Net. Naka says most orders come from Tokyo, and almost none from Kyoto. VCs have approached him, but he says he told them, "We don't need money -- we want clients." MallService had the first booth at Internet World in Makuhari (a convention center just outside Tokyo) last November, and Naka was surprised at the number of companies interested in MallService. "Tokyo is very different," he says. "There seems to be more chance for business."

Takuya Matsumoto, president of Action Click

Sugahara says most of his business is still done in Tokyo, and he feels the need for companies to be located there. "Companies in Kansai don't have much budget for extra services," he says. "There's less cash-flow, and then they try to save money -- it's a vicious circle."

NTT's Tanaka notes that client headquarters are typically in Tokyo. "When there's a business deal going on, the final decision is made in headquarters -- which is usually in Tokyo. That's the weakness of venture companies located in Kansai."

Is a move to Tokyo a must for Kansai startups? Not at all. J-Data, for example, successfully operates out of Kyoto by outsourcing part of its sales force in Tokyo. Also, some feel that high-tech business deals are increasing in Kansai -- it's just been developing slower than in Tokyo. Masahiro Ikuta, president of Tokyo-based Web consulting and production company Kinotrope, says he's started to get orders from Kansai and feels that the area is heading in the same direction as Tokyo. Shinzo Maruo, president of Kobe-based Web consultant Pineapple Company, agrees. He says that Tokyo, where he has a branch office, is five or even 10 times better for doing the kind of business he does now, but he adds, "I'm sure the need will increase in Kansai, even though it may take a while."

Matsumoto of Action Click points out that Kansai is a manufacturing area, so people tend to pay for what they can see (manufactured goods), but not for what they can't see (services, for example). Having done business in Tokyo, however, Matsumoto's strategy is to explain to clients in Kansai that, "We get this much for this kind of service in Tokyo." After that, he says, the clients in Kansai understand and pay for it. "They're just not used to paying for services, and don't have a feel for how much a certain service would cost. Once they know that, they feel more comfortable paying for it."

Ryoichi Fujimoto of Nippon Venture Capital

Looking at online retailers operating out of Kansai, it's easy to forget all the negatives. Tokyo and Kansai, it seems, just focus on different businesses. "If I were in Tokyo, I might have thought about doing a B2B business," says Kishimoto of online retailer Easy. Tokyo, he says, is the town of The Huge Company, where lots of B2B is going on. "Customer in Tokyo usually means a company, but customer in our industry usually means individuals," he explains. "Being in Kyoto helps us to be closely related to the individual customer's side. We, as Kansai merchants, can build up a system to please individuals."

As mentioned at the beginning of this article, How are you? in Kansai is said to be How's your business?, and traditionally it's store owners who have greeted each other that way. Kansai is an area of store owners, of merchants. Such are its roots, and such is its strength.

The "P Danna" at Iwaki Pearl

Interestingly enough, many of the e-tailers that are in good shape -- and well-known across the country -- are based in Kansai. @interior (or Aoki Furniture, a furniture shop in Kyoto), Kasaya.com (an online reincarnation of a long-established umbrella shop that, after a century of operation in Osaka, went out of business), Easy (mentioned earlier), and other Kansai e-tailers have been regular finalists in competitions such as the Japan Online Shopping Awards by the Japan EC Society, or the EC Grand Prize by Nikkei. And then there's Naturum, one of the most famous outdoor goods stores in Japan, with its online sales exceeding those in the actual shops. (Yahoo Japan bought a 10 percent stake last December.)

Eiji Kishimoto of Easy

Hisamitsu Mizushima, director of the Service Planning Department at Infoseek Japan, analyzes the reason why Kansai e-shops are doing well while many in Japan overall are not. Many Japanese e-commerce sites, he says, tried to imitate the US model too much. "The US is a big country and needs rationalization, and e-commerce has filled that need," he says. "Japanese e-shops tried the same thing, but our land is small and we have a good transportation system -- there's no need for rationalization here." According to Mizushima, what e-shop owners in Kansai are doing right is going for frequency in a limited field. "Unlike big companies, which usually try to go toward bigger in scale, small business owners have the motivation to prosper in their own domain. I think many e-shops in Kansai were born out of this idea, and that's how they've become successful."

VENTURING FORWARD
Looking at it from a historical perspective, Kansai is where many venture companies started and grew large -- Matsushita Electric, Kyocera, Omron, Nintendo, et cetera. All were tiny Kansai ventures at one time. According to Sugahara, only one post-war venture company has been successful in Tokyo: Sony. "In Tokyo, everyone tries to do the same thing, and there's a tendency for a nail sticking out to get pounded," he says. "Maybe venture companies grow better where there's no concept of doing what everyone else is doing." Takuya Matsumoto of Action Click agrees: "In Tokyo, you can't do what seems unusual. The ideas that you can't think up may come out of a more unique area, like Kansai."

The economy in Kansai has for a long time been quieter than the one in Tokyo. Bit Valley may have received all the media and VC attention, but it was of the premature and overhyped variety, with ventures that didn't merit it being flattered. That all died down before the boom reached Kansai, and as a result its Net ventures tended to be calm, realistic, and focused on making steady progress. The market is still small here, but there's a good chance that more success stories will come out of Kansai.