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Where Are the Angels in Tokyo's Internet Heaven?

Readers of this column know that Tokyo is awash in VC money, so much so that a US VC firm recently boasted to me of "spending two days in the ANA Hotel and interviewing 26 Japanese startups for a piece of our $30 million fund." A startup entrepreneur caught in this investment conveyor belt can't hope to obtain much business guidance from VCs. In contrast, the traditional role of a financial "angel" in the United States is not just to invest in startups at the earliest seed stage, but also to use experience and networking talents as a mentor to make the success rate higher and the cycle time faster.

As Keisuke Yawata points out, US angels invest to return some of their success to the community and to raise the quality of entrepreneurs competing in the marketplace. Yawata has a keen sense of new trends affecting Japanese information technology. As an NEC vice president, then as president of NEC's US subsidiary, he was a pioneer of overseas production by Japanese firms. After NEC, he set up chipmaker LSI Logic Japan, serving as its president, and later was President of Applied Materials Japan, Pacific hub of the world's largest semiconductor production equipment company. Since his days at Applied, Yawata has served as an angel to six startups.

"There are not enough qualified entrepreneurs in Japan," says Yawata. He defines a "qualified" entrepreneur as one who not only has a strong underlying desire to implement a technology or product concept into substance, but who can also talk the investment community into implementing that dream and has a clear objective target of how to measure business success. To increase the number of qualified entrepreneurs, Yawata is working with the International Angel Investors Institute (www.angelinvestors.org) to create a Japan branch that is education and training oriented. Would-be Japanese angels themselves need education, since too many Japanese investors want reciprocal business in return for their buying shares.

An initial public offering is an objective measure of business success because it requires market valuation. When going public, Yawata favors the US Nasdaq, in part because it allows as much as a 500:1 differential between the price at which early investors buy equity and the price at which key executives can obtain equity. By forcing a much lower ratio of investor: executive stock prices, Japan's markets often mean that a cash-poor entrepreneur loses control of a firm and hence the drive to make that firm succeed. Note that the US Nasdaq is much more liquid than any Japanese market. Insiders unload their holdings every day on the Nasdaq, but if a founder of Yahoo Japan were to try to unload its holdings, shares would plummet to a fraction of their current $1 million per share price. Japanese practice also discourages issuing stock to nonemployees, like outside advisors, another common practice in the United States.

Japan's hellish economy of the past few years has also created fallen angels. I attended a briefing session for "foster angels," investors in the Capital Alpha fund of K.K. Angel Venture Association, a for-profit company. These "foster angels," the same doctors and retired executives who were investing in golf course memberships during the Bubble, were urged to invest in a variety of startups sponsored by Capital Alpha.

One startup wanted to sell, to Japanese buyers, from an Internet site, blueprints for US-style houses, then help the buyers localize the blueprints, obtain Japanese government construction approval, and locate a builder.

Gives new meaning to "clicks and mortar," doesn't it?