Allen Miner

Can Japan bounce back? This man likes the odds. Allen Miner, founder and CEO of venture habitat SunBridge, says this is the time when greatness emerges.

Allen Miner, former head of Oracle Japan, set up a "venture habitat" (he never liked the connotations of "incubator," he says) last year in Tokyo, just as the Internet bubble was about to burst. So we expected to find this self-described "blond Japanese" a little off-balance and defensive. Boy, were we wrong! Miner believes that 10 years of lackluster economic performance is just what Japan needed to bring out the latent entrepreneurial spirit of its people. He predicts big things for Japan. And he's made a few tweaks to his original plans for SunBridge, situated in Tokyo's bustling Shibuya district.

Last year, you declared in your book I'm Betting on Japan that you have complete faith in Japan. Do you still believe that?
Yeah. Yeah ... (laughs) My tendency is to give lines that are too long, so I'll try to keep it short. Yes.

Tell us about how your business has been since we featured you in the July 2000 issue of J@pan Inc.
[When we talked last time], we were just getting started, kind of working on the concept of what's a venture habitat, and what does that mean, and how it would be different from an incubator. We've been quite fortunate to be close to the right place at close to the right time with a team of people that all have strong backgrounds in building software businesses in Japan.

Initially we were looking at investing in and providing for startups broadly across the Internet space. As we were looking at business plans and meeting with entrepreneurs, we found that the only businesses we could really get our minds around were software startups. We could see where the holes were; we could also see how to fill the holes.

Coming from IBM Japan and Oracle Japan and Adobe and Sybase and elsewhere, it makes perfectly good sense that we would be most comfortable with software businesses. We've never stated that we're not looking at other businesses anymore, but we kind of coalesced around software as our focus area. That's been one evolutionary change.

There was a big question when we got started whether we had made the right choice in providing our services on a fee basis rather than on a for-equity basis, which was very popular at the time. My gut feelings then were that equity-for-services deals tended to have both the service provider and the entrepreneur think too loosely about the true value of the services being provided. Sometimes service providers would be giving their services for equity that was never going to be worth anything. And sometimes entrepreneurs were willing to give up too much of their company for poor quality services because there was a sense that it was free money. The fact that many of the services were structured in a way that was one or two levels removed from a cash transaction, we thought, would encourage sloppy thinking on both sides. And obviously it also implies a much longer time frame before the service provider could become profitable if the only revenue stream is capital gains. So we were comfortable with the idea of charging for services while investing and having all the interactions be around cash.

When we took equity in a company, it was for cash investment and it forced us to think carefully about what companies we were taking equity in. It kept us from getting involved with too many businesses that we didn't really understand.

Once we put cash in, we had some entrepreneurs who thought this would be a great place to start their business, some who felt that the overhead cost for offices was a big deal and they wanted to go some place less expensive. We had some entrepreneurs who felt our technical services were right for their businesses, and some chose to use the money we invested to get technical services elsewhere. With some companies, we have no equity relationship; they are just technical services clients.

Having that model of charging cash for services and taking equity only in return for a cash investment proved to be a good framework for us to build a business, and SunBridge is now close to breaking even.

Any forecast on when?
It could happen any month now. It depends on the progress of projects that are under way; it depends a little bit on the flow of tenants through the space. The key breakthrough for whether we switch over to a sustainable, profitable business will be how large a fund we are able to raise and the management fees that will kick in. Our investment activities have been all supported by the anticipation of capital gains. The work put into investment has had no sustaining short-term business model behind it. Depending on the size of the fund that we are able to raise between now and December, that could give us enough income from management fees to have the whole company break even. The service business has been break-even from fairly early on.

The overall economy is pretty weak. You have said before that sometimes that could actually help people get into venture businesses, but the flip side may be that investors are wary of anything too risky.
We certainly have seen a drop-off -- I'm trying to think of how to say it nicely -- in the flipping that was happening, the investing and rushing something out to an IPO to get a quick turnaround on the money. That model is no longer sustainable. And so the amount of dollars being invested in companies has gone down. The demands by investors for companies to have truly viable businesses in order to receive investment have gone up. But I think both of those are just a return to venture capital as usual, or as it should be.

As for the general economy in Japan being weak, one of the most basic rules of thumb in investing is buy low, sell high. We are definitely in a buy-low time. If you are able to find good quality entrepreneurs and companies with potential, this time more than any other is when you would want to be making your investments in them and helping them to grow, because from the investor's point of view, it is certainly much easier to negotiate reasonable terms for the investment.

[Price-earnings ratios] are still not back to the historical average of 15 in the United States. The S&P is still in the low 20s. So I think there is room from a historical point of view for the stock market to fall further in the States. But in Japan we are at 20-year lows. The PEs in Japan, for the first time since I've been in business in Japan, are down in a range where I think you can justify them from the company's fundamentals and from the market's fundamentals.

I think the foolish investment has stopped -- the racing to put lots of money into every concept that comes along in the hope that you can rush it out to public market and generate a short return. That mode of investing has gone away, and that's a good thing.

But the best time for investment is when you can buy low, and if you, like I do, believe that Japan still has many attractive areas -- lots of innovation happening, solid new businesses being created both inside and outside the large corporate environment -- if you have a reasonable hope for the prospects of business creation in Japan, there couldn't be a better time to be investing here than now.

The Net bubble didn't get as big here and the subsequent fallout was less severe. Maybe you had more sensible business models being introduced here?
There were plenty of pie-in-the-sky models here in Japan as well. A lot of it, I think, was copying pie-in-the-sky models in the States that happened to have gone public and made somebody rich for a few months. But the bubble was shorter; there wasn't as large a pool of venture capital chasing the ideas, so it was harder to sustain a business for a long time just on investor money. The companies were forced earlier in their lives to attempt to generate revenues from customers, as opposed to just generating capital from investors. That contributed to a larger percentage of Internet startups finding a way to survive without venture capital.

You have talked about the word "incubator," and how that wasn't the right word for you because it sounds like something on life support. Instead, you've created a habitat. How has it worked out?
One example is the way that we've structured our services. We have the sales and marketing unit, the technical services unit, the finance unit, and office space. Each of those are one element of the way Silicon Valley works. There are landlords that specialize in startups in Silicon Valley, there are venture capitals, there are PR firms that specialize in ventures, there are technical services firms that specialize in the issues that ventures face. They come together in an ad hoc way around individual entrepreneurs and entrepreneurial teams to address the needs of that specific team.

By using the habitat label, and thinking in terms of an eco-systemDtype model, a collection of players coming together, and structuring our own business in that way, it has led to us being quite flexible.

Initially, we thought that we had to fill the space with all portfolio companies. But at the outset, we didn't have enough large portfolio companies to fill a space of this size. [We said,] "While we've got this extra space, why don't we work with the Irish Embassy and set aside part of it for Irish companies coming into Japan? Yokogawa Electrics is a client rolling out a new IT division; why don't we have their IT planning team come in and we'll work together onsite?"

We did these different experimental, ad hoc things because we had some extra space, and because we were thinking about our whole range of services as a combination of elements that dynamically and naturally evolve. What's happened is that a year and half into that, we have come to the conclusion that it is much more interesting to run the office environment not as an incubator facility for our portfolio companies but as a space with a variety of players.

Something mysterious happened in Silicon Valley. And maybe if we get the players and the right synergies and the right catalysts, something like that might actually emerge in Bit Valley.

Yokogawa went along with your idea of getting out of their headquarters and coming to Shibuya?
We tossed it out kind of as a joke. I said, "You couldn't possibly come up with new ideas in the old headquarters out in Mitaka [20 minutes by train from Shinjuku in Tokyo]. You ought to move to Shibuya." So they did. And a few weeks later, the managing director came and told his team, "You're not working fast enough. Look at how fast everybody is working around here!"

We did a seminar with them and it was oversubscribed. They didn't have enough capacity for it, and they felt they were being very rude to their customers, as traditional Japanese would. They said, "There aren't enough seats for the customers. This is so rude." And, "We couldn't possibly follow up with all these leads in the next month. Let's wait for a few months before we have another seminar so we can follow up on all the leads and take proper care of the customers."

But I said, "No. The idea is that when you have a hot technology you get it in front of as many people as you can. You run the risk of underserving a few of your customers in the battle to win market share. Eventually you get the right balance between services and sales. If you have this kind of oversubscribed seminar, what that means is not that you need to wait for a few months until you are ready to serve all of the customers, but you need to do another seminar next week or two weeks from now. You keep pushing." And that way of thinking was very unusual for them.

Even for a company like Yokogawa -- a big, traditional, and strong Japanese firm -- taking a project team, putting them here in Shibuya, and doing business in a venture-like way has been an interesting thing.

You came from one of the biggest corporations in the world: Oracle.
Today it's one of the biggest corporations in the world, but Oracle was only 400 people worldwide when I joined it in 1986. It was still a pretty small company. When I came to Japan, I was the only employee. As the company grew, for me personally, it was less interesting. The time I enjoyed most was when the entire international section was 15 people and I was one of them, or in Japan, from the time it was just me to the time when it was 40 or 50 employees.

Personally, I learned a lot watching the company grow, and seeing how it went through different stages, how the company culture and management issues evolved. But the time I enjoyed the most was when we were taking a project from nothing.

It would be very difficult for me to have that kind of role in Oracle today. It's a very large company now. It's much more fun for me to now be involved with 15 to 17 companies that are all between one and 50 employees, trying to get something off the ground, trying to get the first customer to buy their software, get the first channels to agree to sell it. Being with entrepreneurs who are starting up their own companies is much more interesting than anything I could be doing at Oracle today.

I think each company is unique enough, particularly in the startup phase, that the kind of flexibility that you need when you're trying to get your first customer or get your first product out the door makes the startup business much more art than science.

The question comes up: Should people be getting MBAs? My view is that the science of business management that is learned in most of the MBA programs is very useful and very applicable when you are trying to optimize strategy, or function effectively, or contribute to a large organization. But, I think, so much of a startup's success depends on dynamic interaction between the founder and the first customers. It's much more art than science.

Plus doing business outside of your own country poses challenges.
No, Japan is kind of my own country. Certainly, I was born and raised in the United States. But my business life is pretty much tied into Japan. My industry contacts, my sense as to what proper business practice is, how to interact with customers, was pretty much acquired living and working in Japan. I call myself a blond Japanese.

I feel more culture shock when I do business in the States. When I see investment rounds that have two inches of contracts to do investments for an early stage company -- that's culture shock. Making an investment on a handshake, which happens sometimes in Japan, is much less of a culture shock.

You've talked about growing pains. What kind of growing pains do startups here have? There are a lot of regulations, traditions ...
I don't think that the regulations have ever stopped anyone who's got a really good business idea and the passion to do it. The regulations have never stopped anyone from being successful. They force people to be creative, sometimes, to find ways to work around the regulations. Or they make it more difficult than it needs to be.

The pain always comes when you lose your first big customer; you have a deal that you thought was all wrapped up and someone surprises you and takes it away from you, or the customer changes his mind at the last minute. Or the pain comes when one of your co-founders decides that the company has outgrown him, or the direction the company has had to take to be successful no longer fits his own personal vision.

Government has talked a lot about helping venture companies. Are they doing enough? Are they doing it in the right way?
I think they are. We used to believe in the Japan Inc. story, and that MITI had this master plan for industry and they were going to pick the winners. A book I recently read by Michael Porter called Can Japan Compete? basically shot that down as a myth. It said that the industries where the government proactively tried to build businesses in Japan were generally weak industries. The strongest industries in Japan today had the least government support.

This time around, what the government is doing is basically making the system more flexible, cutting out some of the regulations that are either out of date or making things more difficult than they need to be to start a new enterprise.

As long as what they do is to clear the land, if you will, cut out a little of the overgrowth of regulations, cut down some old dead trees, open up land where the entrepreneur can go out (and make their decisions); as long as the government is allowing entrepreneurs to choose whatever startup model feels right to them and giving the system some time to figure out the combination of Silicon Valley methods, Japanese methods, and new methods that evolve here in a free-thinking, open-ended environment, to let the system experiment with things and see what is successful and what is not, then that can only be positive.

Rather than going in to set up some kind of government-managed venture capital fund that is going to invest in specific sectors, or trying to salvage companies that are struggling, which has been a tradition for Japan for quite some time, they should let the system play out its own course as it will, and allow the stronger companies -- whether they are mature companies or new companies -- to thrive in a relatively deregulated, uncontrolled, more laissez-faire environment, and long-term results will come.

Now there is a chance for us to experiment much more broadly with startup styles. That's a big step forward.

You talked about the myth of Japan Inc. Are there other common misperceptions that people are making about Japan?
I think another one is that there are no entrepreneurs here. I hear all the time from Japanese as well as foreigners, "Are there really competent entrepreneurs in Japan?" The question is usually framed as something like, "Hasn't the Japanese culture for centuries been so conservative, group-oriented, anti-individual, anti-entrepreneurial? How could a culture like Japan's foster entrepreneurialism?"

The most obvious counter-example to that is the incredible wave of now globally successful entrepreneurial businesses that were started in the five to 10 years after World War II. Companies like Sony and Omron and Kyocera, JAL, Wako, and Nintendo; all these companies got established in the period within three years before and after 1950, at a time of extreme economic difficulty. Actually it was much more severe then. It was a time when my grandmother-in-law can recall not knowing where the next bowl of rice was going to come from.

In that sort of time, when the Japanese are forced to be entrepreneurial, the evidence is clear that they can. It's impossible to predict 20-30 years from now what is emerging around us at the moment.

The changes in the Commercial Code are very interesting (see "Commercial Code Reform," http://www.japaninc.com/mag/comp/2001/10/oct01_code.html, October 2001). So is the emergent thinking in universities about how the universities engage with the industrial community, and take ideas and concepts that have been created in universities, and make those available to society in the form of products and businesses. The new markets -- Nasdaq and Mothers -- now allow a more flexible approach to the financial side of starting a business.

The positive things that are happening and the negative things that are happening are coming together to encourage people to be a little bit more creative.

The 1990s were supposed to be the 10 lost years in Japan, but in those 10 lost years we saw a whole new generation of very innovative laptop computers, the emergence of NTT DoCoMo as a clear leader in the evolution of wireless technologies and applications, robots that you can play with from Sony, and others. Despite the difficulties that Japan is undergoing, there has been a continuing stream of innovative products.

The Japanese people's ability to innovate, and when necessary to create companies from scratch, are both evidenced by what we see around us.

The higher level of concern, or the sense of crisis, or the somewhat gloomy outlooks that people have for Japan have not stifled their ability to innovate. If anything, I think they are encouraging creativity and entrepreneurialism. If things are not working out in the large corporations they work for, they may think it's time to start their own. I think 30 years from now, we will look back and see a very distinct spike around the year 2000, plus or minus three years, of very interesting, significant, global Japan-based companies that were formed. @