The Rise and Fall of a Japanese 'Netrepreneur
Broken Dreams: How two very different entrepreneurs stumbled--a Computing Japan special reportTaking a start-up business from concept to success means being in the right place at the right time. But it also requires having the right technology, right from the beginning--and that proved to be HyperNet's Achilles' heel.
Noriko Takezaki It was a quick fall from heaven to hell. it all happened in just one year," reflects Yuichiro Itakura, the 34-year-old former chairman and founder of Hyper Net. Although it was Japan's first Internet advertisement company in 1996, the once high-flying Hyper Net lost its wings when it declared bankruptcy in December 1997. Hyper Net first attracted public attention in the spring of 1996, when it introduced an innovative Internet-based direct marketing service. The Hyper Net system offered individual users free Internet access; in return, users volunteered their personal information, which Hyper Net amassed in a database and sold to advertisers. And while users were online, a small browser-like message viewer -- called Hot Cafe and capped with ads -- was displayed on their screen, giving them one-click access to sponsoring Web pages. Hyper Net's business got off to a fast start after a tie-up with ASCII, then a major Internet service provider. Using the Hyper Net Hot Cafe system, ASCII launched its own free Internet access service, called ASCII Internet Freeway, in June 1996. By October, ASCII Internet Freeway had over 100,000 users, and Hyper Net's advertising revenue reached the 30 million mark. Owing much to the blazing debut of this new service -- on what was then still a new communication medium -- Hyper Net was lionized as a pioneer of the Internet era in Japan. The company even received a Minister of International Trade and Industry award of the year for its "successful introduction of a promising new business." But even as Hyper Net was basking in the sunlight of public adulation, dark clouds were forming on the horizon. We are now experiencing technical difficulty... Hyper Net's downfall was triggered by the failure of its core system to reliably collect the user profile information on which its contracted advertisers depended. The information collection system, whose development and operation had been entrusted to Tandem Computers, suffered repeated failures right from the beginning. "System operation failed quite often because of system bugs, or even because of simple operation errors by Tandem's engineers," mulls Itakura. "We often spent nights in our office to [try to] improve the systems, but sometimes entire data logs were lost because of operational errors. We could not get control over the system failures." Itakura says Hyper Net repeatedly asked Tandem to improve system reliability, but no improvements were forthcoming. Meanwhile, advertisers became disillusioned with the over-hyped potential of this Internet-based advertisement system and began to cancel their contracts. Rankled by Tandem's inability to ensure system reliability, Hyper Net decided to develop a new system in-house. Work proceeded rapidly, and the company was able to replace the disappointing Tandem-developed system with its own new system in July 1997. The new system worked well, but its implementation came too late for Hyper Net to regain the trust of the advertisers -- and of the banks. The elusive NASDAQ IPO When Hyper Net launched its unique Internet advertisement business, the company was able to get unsecured bank loans totaling 2 billion from several banks (thanks in part to the Internet fever sweeping Japan). With such strong support from the financial community, Itakura imprudently adopted an aggressive business plan and decided to expand into selected foreign markets. In May 1996, Hyper Net opened offices in San Jose and New York to prepare for business expansion into the US. And in March 1997, the company established a subsidiary in Korea. For its US market entry, Hyper Net formed a partnership with a major PC communications company. Like the Japanese, the American Internet industry was intrigued by this new advertising paradigm. Soon after the service started in the US, Hyper Net was approached by a US securities firm to do an IPO (initial public offering) on NASDAQ. Itakura jumped at the opportunity, and he spent some 100 million in preparation for going public on NASDAQ in March 1997. The IPO plan began to unravel, however, when Hyper Net's US partner suffered a business downturn and abruptly backed out of the partnership agreement. This caused the American securities firm to have second thoughts about Hyper Net's business potential in the US; it recommended that the IPO be postponed until 1998. That delay proved fatal, as Hyper Net's Japan operation collapsed in late 1997. Foundering on financial shoals When advertisers on Hyper Net's service started canceling their contracts because of the ongoing system breakdowns, the Japanese banks that had been so helpful a few months before, changed their tune. Worried about the long-term viability and profit potential of Hyper Net's business, Japanese banks -- which were facing financial difficulties of their own because of mounting bad loans -- not only refused to make further loans, but even began pressing Hyper Net to make early payment on the outstanding loans. "Japanese banks were like loan sharks then," recalls Itakura. "They would do just about anything to collect their money" without regard for how that might affect a company's ability to operate. When it became obvious that Hyper Net's financial situation was precarious, some Japanese and US companies offered help in return for a stake in the company, or tried to buy it outright. Itakura, still hopeful of finding a better alternative, either turned down their offers or simply neglected to talk with them in the midst of the ongoing chaos. The window of opportunity proved to be narrow, and having missed his chance, Itakura eventually saw no choice but to declare bankruptcy as the banks closed in. One of the companies that had expressed an interest in purchasing Hyper Net was Microsoft. The relationship between Hyper Net and Microsoft began in December 1996, when Itakura and other Hyper Net management members were invited to the Microsoft Japan office to meet with Bill Gates. "Bill Gates spent more than one hour with us," recalls Itakura, "although the original schedule called for just a 15-minute meeting. He seemed to be very interested in our technology." Soon after the meeting, Microsoft KK began to investigate Hyper Net's technological assets, including patents held, and its financial situation as a prelude to a buyout. But Itakura was not then willing to sell his company, and hoped instead that negotiations might lead to a mutually beneficial relationship or business tie-up. Microsoft, however, reportedly found inefficiencies in Hyper Net's corporate management, and declined to continue the negotiations. Venturing a step too far "I realize now that I overestimated the power of my company. I tried to do too many things that are beyond the capability of a venture company in Japan," admits Itakura. The business concept behind Hyper Net was great, he maintains, but he lacked the systematic support to implement his concept both technically and financially. For venture companies like Hyper Net, Japan is not a comfortable business environment. Banks are reluctant to lend substantial funds to small venture companies, particularly in the wake of the collapse of the "bubble" economy and resulting massive bad loans. Also, the Internet business market here has not yet matured, in part because lower system reliability makes it difficult to realize a profitable business, but mainly because the public remains skeptical of businesses using not-yet-proven technologies. If Hyper Net had received appropriate technical and financial support, Itakura contends, the company might have changed the Japanese Internet and the Japanese way of doing business. "Japan is still a closed, conservative country," he laments. "The Japanese cling to their own, outdated business methods, and they are not yet willing to accept risky -- but with much future potential -- new businesses." If the conservative business culture of Japan is to change, it will be through the efforts of visionaries like Itakura entrepreneurs who are willing to challenge existing business concepts. But unless they back up their dream with solid implementation technology, start-up companies may find that they have ventured a step too far. Yuichiro Itakura has written a book about his experiences entitled "Why I Wrecked My Company," Published by Nikkei BP. Sold at major bookstores throughout Japan, it is currently available in Japanese only. |
