Net ventures in Japan

It's no secret that Japan produces few true entrepreneurs and even fewer start-ups. Some of this can be blamed on Japan's so called lifetime employment system and on an inherent Japanese desire to work for big, prestigious companies. The private money supply is limited by a lack of venture capital talent and an aversion to risk. Couple this with strict government regulations that have put a damper on public offerings for years and you might think that there are never any new companies started in Japan -- which of course is not the case. A typical pattern is a "start-up" launched by a large multinational corporation, sometimes with another large multinational as a partner. This is more of a spin-off of a division rather than a start-up, and is usually done to manage risk or to keep the books looking good (by keeping the profits in the parent corporation). NTT has several good examples of this practice with its various subsidiaries operating ISPs (NTT PC Communications, OCN), search engines (Goo, NTT Directory), and content sites (CNet, Hot Wired and Internet TV Guide).

Softbank leading

There are exceptions, and Softbank leads the list. Probably the most well-known Internet player investing heavily in US companies, Softbank has bought into several US companies and then played an essential role in launching their Japanese subsidiaries. Yahoo, OnSale, Geocities, Cybercash, and E-Trade, are but a few examples. Softbank has been quick to land the big names in a particular segment, and has established a reputation for offering top dollar, usually by investing in the US operation before it goes public. Trans-Cosmos focuses primarily on the Japan side, and invests in the Japanese subsidiaries of Pointcast, DoubleClick, and Progressive Networks. Digital Garage establishes joint marketing arrangements rather than equity investments. DG represents Infoseek, Tower Records, and Sonic Net in Japan and is actively pursuing an entertainment-based portal strategy called Web Nation with an initial emphasis on music downloads.

I recently spoke with well-known Internet visionary Joichi Ito and asked him where his company, Digital Garage, fit in the mix. "An Internet company looking to get into Japan can pick a trading company, a manufacturer, or a media company with lots of money and slow feet," Ito asserted, "or they can pick us."

Ito also shed some light on the grim state of the IPO market in Japan. "Multitudes of restrictions make it practically impossible to bring a IPO to market quickly. Material changes in equity are restricted for 2 years before the IPO. And on most exchanges, a company has to show profitability for a year before it can go public. I can't remember a US Internet company that was profitable before its IPO -- can you?"

In today's economic climate, the time couldn't be better for staffing a small start-up. The lifetime employment system is clearly not keeping its promise during this recession and hundreds of thousands are losing their jobs to restructuring. A similar corporate shedding occurred about 8 years ago in the US and the number of new start-ups rapidly increased. With a few changes in regulations, the same could hold true for Japan.

The Golden Egg

Japan is noted for its very small population of individual investors. On the Tokyo Stock Exchange, a mere 22% of the total shares is owned by individuals compared with over 60% on the US NASDAQ. Financial institutions and corporations make up the majority (65%) of share ownership in Japan. Internet savvy investors have become an increasingly powerful force in the US markets. Today, the information that amateur online investors posses rivals that of professional traders. Recently, Charles Schwab (the largest broker in the US) announced that over 50% of its trades were being placed via its website. In anticipation of broker deregulation in 1999, investment has begun in Japan. E-Trade and Softbank launched a $20 million joint venture to push online trading, and Merrill Lynch has hired 2,000 employees from failed Yamaichi Securities Co. in order to start a retail network. Travelers Group's brokerage subsidiary Salomon Smith Barney also recently took a 25% stake in Japanese broker Nikko Securities Company Limited. Recently Sony and Charles Schwab are reportedly in talks to begin a brokerage service as well.

Japanese investors -- many burned when the Bubble burst -- are waiting for a sign of hope before jumping back into the markets. But the Internet is changing attitudes, and the arrival of online investing couldn't come at a better time -- or in the words of Joichi Ito, "Who knows, maybe it (online trading) will become a fad and the egg will lay the chicken."�

Japanese Internet ventures

Forest Linton is IE Group Product Manager for Microsoft Japan. His views are expressly and exclusively his own and do not necessarily reflect the opinions of Microsoft.You can reach him at forest@gol.com.