Five Hot Startups

Because these are private companies (except for Cybozu, which just went public), getting metrical information out of them proved difficult. We therefore decided to be more qualitative in our descriptions. We show you the company's strategy, leaders, and successes so far, as well as the big trend it's riding.

Our list started with more than 50 companies, which came courtesy of the various VCs, investment bankers, and incubators we asked for recommendations. Below are some of the criteria that shaped our decision-making process.

We looked for young companies. Our oldest pick, Cybozu, was founded in August 1997. On the other hand, the venture had to have some sort of track record. That's why Silver Egg Technologies, which looks promising but doesn't have a product on the market, isn't listed. (We do come across a lot of other brand-new companies, of course -- you can find some of the more interesting ones, along with other companies we're keeping an eye on, in "On Our Radar," a new feature in the Investor section.)

We looked for Japanese companies. That means companies registered in Japan and focusing (primarily, though not exclusively) on this market. It doesn't matter who runs the company -- could be a gaijin -- but the focus has to be on Japan. We nixed any company targeting Japan from another country.

We looked for tech companies that were tapping into a broad trend in Japanese society, and could therefore grow exponentially by riding that trend. Examples include government deregulation in all areas, widespread company restructuring, the for-real opening of the telecom market, and the increased use of wireless technologies.

And, obviously, we looked for companies involved in the Net and IT. There are some hot new ventures in Japan that aren't tech-oriented, of course, but there's a reason we have an @ symbol in our name.

Our mission is to chart the New Economy's rise in Japan. Each month we show you how the world's second-largest economy is being transformed by the power of the Net and information technology. If you take the US out of the world scene, Japan is the largest economy, with the biggest online population. Those who ignore what's happening in Japan do so at their own risk. Some of the most innovative tech startups on the planet are here. We hope that by reading J@pan Inc. you gain not only enlightenment, but a real-world competitive advantage.

-- Steve Mollman

Research assistance for this article provided by Christian Walker.

Cybird Giving all those cell phone surfers stuff to do. Big trend: The wearable wireless Web Related articles: "Unwired," June 2000 "Cybird Proves Online Content Can Pay," July 2000 Location: Tokyo Founded: September 1998 CEO: Kazutomo Robert Hori Employees: 100 URL: www.cybird.co.jp

We're a bit infatuated with this company, probably because we're editors and it's making money off online pay-for content -- and what could be more worth paying for than good content? Of course, sometimes the content is nothing more than surf conditions around Japan, but, duuude, that's cool -- we're just giving you the surf conditions for the Internet biz in Japan. The fact is, Cybird is the premier (and first-mover) content provider for NTT DoCoMo's i-mode service, which has done sort of well over the past year or so. Cybird is also a trusted source from DoCoMo's point of view, which means other content providers wanting a prize spot on the small screen are well served by going through Cybird. Also, Cybird is teaming up with IBM Japan to provide m-commerce companies with services like distribution, payment processing, and customer management.

Cybird charges users from ¥100 to ¥300 per month for content. But the beauty is that Cybird doesn't do the billing -- if it did, no one would pay. Who wants to enter a credit card number for surf conditions? Instead, the fee shows up automatically on users' monthly statements from i-mode. DoCoMo takes 9 percent. Cybird CEO Kazutomo Robert Hori -- a dashing, bilingual thirtysomething -- thought of this business model a few years back but couldn't get the time of day from cellular service providers. He was persistent, though -- to the point of having a shoe hurled at him -- and when the idea finally sunk through over at DoCoMo, he was the first one they approached for content. Cybird's investors now include Omron, EDS Japan, Orix, and Intel, and among its partners are Recruit and Meikyosha.

In July we reported that Cybird's sales reached ¥375 million in the year to March 2000. Analysts expect a ten-fold jump when the figures for March 2001 come out. A lot of competition has sprung up, though. Cybird used to be one of only a handful of small-screen content providers, and now there are well over 10,000, and the number is growing too fast for anyone to keep track of.

Some have theorized that in the long run the wireless providers will pay Cybird heaps of yen for the privilege of hosting its content. Others say cell phone pay-for content is doomed because non-official sites will offer the same information for free. But with its own content, a key role as an i-mode intermediary, and its m-com services, Cybird will win either way.

Cybozu Groupware done right. Big trend: Web-based everything Related articles: None Location: Osaka Founded: August 1997 CEO: Toru Takasuka Employees: 33 URL: www.cybozu.com

Of course, Cybozu must do more than sell software, and has plans to leverage the portal-bility of its offering. End-users are not going to be advertised at like on My Yahoo, but Cybozu figures it can profitably match eyeballs to vendors in a win-win-win way. The company is staying mum on its exact plans, but in the meantime it's collecting new end-users at a remarkable rate -- it should hit the half million mark by year's end. It's also going international, the first step being a recently released English version of its suite.

Cybozu started turning a profit five months after it was founded and has tripled its revenue every year since. Sales for the six-month period January 31 reached ¥400 million. Investors include JAFCO and Angel Securities, but the company is mainly employee owned.

Cybozu is sleeping with several 800-pound gorillas but is too fast to be crushed should one of them roll over. It should be a fun player to watch over the next few years. One last thing to ponder: Lotus took more than 10 years to reach 3,300 customers in Japan. It took Cybozu three years to reach 4,250. And that number is going nowhere but up.

eAccess Telecom all-stars making broadband happen. Big trend: Deregulation of the phone networks Related articles: "People: Sachio Senmoto and Eric Gan, CEO and COO of eAccess," June 2000 "People: Hiroaki Kobayashi, CEO of Tokyo Metallic Communications," May 2000 Location: Tokyo Founded: November 1999 CEO: Sachio Senmoto Employees: 70 URL: www.eaccess.net

We covered this company in our June issue, and we knew then it was hot. But we knew it was white hot when we were holding our first VC roundtable in the last issue. At one point in that conversation the question was, How does a startup find strong managerial talent, which is scarce in Japan? The participants began using eAccess -- a new telco offering high-speed ADSL Net access -- as the best example of a company that had done it right, and how that had led to its ability to quickly hire top talent in all areas.

The snowball effect started with CEO Sachio Senmoto, who in the '70s played a role in developing ISDN at NTT. In 1984 he cofounded DDI, Japan's first private phone company. A former professor of entrepreneurial management at Keio University, he's lectured at Harvard, Stanford, and Cambridge Business Schools. COO Eric Gan, meanwhile, is the former managing director of Goldman Sachs Japan (an investor in eAccess, along with Morgan Stanley Dean Witter). With Senmoto and Gan at the top, it's easy to see why the company had no problem attracting talent.

Its strategy is to offer not just high-speed Net access, but a variety of broadband-related services to business and residential customers. On the business side, think large capacity servers and billing services to ISPs and ASPs for starters, but eAccess is keeping quiet about new ideas and clearly wants to set the standard for broadband providers worldwide.

eAccess isn't profitable yet, and it has strong competition from Tokyo Metallic and NTT. But it's growing rapidly and smartly. And while it was founded last year, this is one startup that wasn't born yesterday.

Infoteria Enabling smarter B2B through XML software. Big trend: XML Related articles: "B2B in Japan Gets Net-Worked," March 2000 Location: Tokyo Founded: September 1998 CEO: Yoichiro Hirano Employees: 30 URL: www.infoteria.com

Infoteria makes XML-based software, and was the first to start doing so in Japan in late '98. XML, released by the W3C in 1995 and expected to become the standard format worldwide for B2B sites, is a type of markup language that allows companies to easily exchange data even if they use different applications. Without XML (Extensible Markup Language), companies wanting to do automated business transactions would need to be using the exact same applications. Founder and CEO Yoichiro Hirano, who was at Lotus Development Japan, foresaw the need for a standard B2B format in the early '90s.

His foresight paid off: Infoteria's first-mover advantage in the Japanese market matters. XML is new, and creating software compatible with it takes time. Infoteria's main products are iPEX, an XML engine; XML Solutions Components, which enable XML solutions when combined with POP3, IMAP4, SMTP, HTTP, and other servers; and XML Server for Domino, server software that provides XML solutions for Lotus Notes/Domino.

Infoteria is moving fast, fast enough to be early not just in Japan but in the US as well. Earlier this year, it opened a subsidiary in Massachusetts to sell its software Stateside -- and to do some reconnaissance work. Infoteria also created a subsidiary last October for helping clients set up advanced, custom-made XML systems.

We're not going out on a limb by picking Infoteria. It's hotly watched by VCs and received ¥2 billion from Goldman Sachs and others in March. And there's a long list of other investors, among them Softbank Investment, Nihon Investment Finance Ventures, Nikko Capital, and Nissay Capital. It should be a public company by early next year.

Open Loop Making the wireless/wireline Web secure. Big trend: Wireless ecommerce Related articles: "Unwired," June 2000 (plus sidebar, "Take My Number, Please" ), "Venture Watch: Open Loop Inc.," February 2000 Location: Sapporo Founded: October 1997 CEO: Kazunori Asada Employees: 21 URL: www.openloop.co.jp

"Most Japanese companies spend more on bad coffee than on network security." That was the display quote in our February issue, where we noted that Japan's networks -- intranets, extranets, wireless -- were not secure enough. We also foresaw big opportunities for network security companies, and three-year-old Open Loop is one of the smartest we've seen since then.

A spinoff from B.U.G. Software, Open Loop handles security R&D projects for big companies like ... well, they're big, OK? Half its employees are scattered about Japan, doing their work in a virtual environment for testing purposes. The company is essentially a security consultant that provides clients the research and technology they need to safely provide account settlement, mobile communications, contents circulation, et cetera over all kinds of wireline and wireless networks. The company also publishes books about network security. CEO Kazunori Asada is the former manager of security projects at B.U.G. He also helped develop ISDN, and earlier in his career he worked in R&D at ASCII Corporation.

Open Loop is conducting R&D projects of its own, though it won't disclose much. Some of its projects are underwritten by MITI and an MPT affiliate called the Telecommunications Advancement Organization of Japan.

Open Loop is perfectly positioned to provide the security solutions needed for mobile commerce, or business via portable, wireless Net devices. Earlier this year it worked on a credit card settlement system for m-commerce, but we expect bigger things to come from this savvy startup.

Open Loop was profitable in the first and second terms of this year, and it plans to go public before the end of next year, possibly by March (don't be surprised by a merger with a bigger player, though). Competitors include Baltimore Technologies and Sonera. Its only investor so far is Internet Initiative Japan, which holds about 7 percent of the company.