LOGON
by John Stern

Otemachi Meets Sand Hill Road

Be careful what you wish for.

In years gone by, the Japanese government tried to energize a native venture capital industry from dead chunks of local industry and finance. The concrete science parks in the boondocks and the Five Year Plans never came to life as a risk-taking culture. But suddenly, the electricity of the US stock market has brought a Japanese venture capital industry to life; trouble is, that industry doesn't call the Japanese government "Master."

Logon calls this the "third wave" of US venture capital in Japan. The first wave was when pioneers like Robert Francis (then with Milford Partners) and Kenneth Rind (then with Oxford Partners) came to Tokyo looking for Japanese company money and Japanese production partners for their US start-ups. The first wave receded when Japanese corporate investors, like the trading companies that lost $50 million when Stardent Computer went belly up, found out that most startups fail.

The second wave was caused by a technology earthquake -- an unknown firm by the name of Netscape shifted the ground with Web browser software that shook giants from Redmond to Hitachi City. Japanese companies began investing in US venture capital funds, letting the fund managers pick the winners. In the meantime, the Japanese companies got a peek at the business plans of budding Netscapes before investing. Some Japanese companies, Softbank for example, have done spectacularly well, letting their US managers -- like Gary Rieschel -- pick up shares of pre-IPO Yahoo! and eBay for less than a valet tip at the San Jose Fairmont. NEC hasn't done well enough as a venture capital fund principal to boost its stock to the eight digits (in yen) boasted by Yahoo! Japan, but it is still a player at the table. NEC was a partner in the recent $250 million Intel 64 Fund, advised by Jim Breyer of Accel Partners, that seeks to commercialize 64-bit applications for the Merced chip.

The third wave is now breaking on Japanese shores. US venture capital firms that are awash with bull market gains are finally looking to invest in unlisted Japanese technology firms, and sending people like Mike Moritz of Sequoia Capital over here to find them. They are being joined by institutional investors like the Warburg and Rothschild Funds, and Atlas Pribikoff, which need to diversify their America-heavy equity portfolio. These huge institutional funds are keeping certain Otemachi headhunters busy trying to hire talent for Japan technology investment.

Intel knows that getting larger and richer every year is a tough act to continue, so it is auditioning technology firms that can serve as a supporting cast. This spring Intel brought its in-house venture capital division to Tokyo, led by ex-Nikko Securities ace Kazuo Higashi. Intel's Corporate Business Development team wants to nurture Japanese technology firms working on technology that could increase demand for Intel products. Japanese technology firms will find Intel's investment terms attractive, particularly since Intel doesn't interfere with Japanese management. Having Intel as an investor will be a seal of approval for Japanese lenders that are not yet comfortable lending to new companies that lack real estate or manufacturing plant. The highly successful "Intel Inside" campaign was born in Japan (where it started as "Intel In It"); who knows what other good ideas Intel will pick up? Logon would like to see more foreign IT companies follow Intel's lead and team with Japanese startups, rather than trying to share visions with older, slower Japanese firms -- a futile effort.

Japan subsidiaries of American companies have seen buyouts of business lines by foreign executives like Mike Alfant (Fusion Systems) and Rick Dyck (Teradyne). Now, the Japanese executive running a foreign subsidiary who complains about headquarters is getting a chance to put his money where his badmouth is. Logon recently visited the lecture halls of Nomura Securities, where 70 or so Japanese executives were being tutored in the services Nomura offers to entrepreneurs. Nomura's services, and those of Mitsui & Co.'s MVC Fund, are also available to executives at famous Japanese firms who would rather buy out a failing division and fix it than wait for the restructuring axe. Hiroshi Kodama and colleagues at Nomura Securities' International Finance Division can offer assistance with leveraged buyouts, employee incentive plans, and IPOs. They even deal with the psychological changes that accompany going from being an expense account executive to owing: as an owner, Nomura says, you will turn out the light that you left on when it was "other people's money."

MITI and MOF really wanted a venture capital market, and they're getting one. With the market's inspiration increasingly coming from the US, though, the mandarins' influence on information technology is bound to decline. It's the Golden Rule: he who has the gold makes the rules.

Like they say, be careful what you wish for. You may get it.

Questions about Japan VC? Contact John Stern, president of Japan Market Engineering, at jme@consultant.com.

HOTLINKS FOR WEB POSTING
Gary Rieschel, Softbank VC,
http://www.sbvc.com
Jim Breyer, Accel Partners,
http://www.accel.com/contact/
Mike Moritz, Sequoia Capital
http://www.sequoiacap.com/sequoia/team/team_mmoritz.htm
Warburg Pincus,
http://www.warburg.com/investment_reviews/wpotc-4.htm
Nomura Securities,
http://www.nomura.co.jp/venture/index.html

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