Evolution of Japanese Venture Capital. April 24, 2008 Michael Korver Managing Partner Global Venture Capital

Transcription

1 Evolution of Japanese Venture Capital April 24, 2008 Michael Korver Managing Partner Global Venture Capital

2 Some Observations Both high-growth expectation entrepreneurial activity and VC funding levels in Japan are much lower than in the US (even when adjusted for population and size of economy). Also lower than in Europe. According to the Global Entrepreneurship Monitor (GEM), Japan ranked second from last among high-income countries surveyed in terms of the prevalence rate of highgrowth expectation early-stage entrepreneurship during Venture capital is available in Japan, but much of it comes from organizations affiliated with large financial institutions. Most VC-backed companies in Japan target domestic market exclusively. According to GEM, Japan ranks last among high-income countries surveyed in terms of the prevalence rate of the international orientation of its entrepreneurial ventures. According to GEM, Japanese have the lowest perceptions of the positive attributes about entrepreneurship activity in the world. Japanese VC s depend heavily on a handful of Japanese stock exchanges for exits (and performance) of their domestic portfolio companies. Japan is a technologically sophisticated country with large domestic early-adopter markets and global companies generating significant amounts of technology innovation. What is the role of entrepreneurship and venture capital in driving this innovation?

3 International Comparisons U.S. venture capitalists invested $29.4B in 3,813 deals in 2007 marking the highest yearly investment since 2001 (MoneyTree Report) According to preliminary figures released by the EVCA, European venture capitalists invested 11.5B in 2007 Japanese VCs invested 2,800 hundred million in 2,773 companies in the year ended Mar. 31, 2007 Primary exit vehicle for venture-backed companies in U.S. and Europe is the trade sale; in Japan it is the IPO (although many more IPOs in U.S. than in Europe for venture-backed companies)

4 Most Active Japanese VCs SBI Holdings Chuo Mitsui Capital JAFCO NIF SMBC Ventures Nikko antfactory JAIC Mizuho Capital Tokyo Marine Capital ORIX Capital Mitsubishi UFJ Capital Amount Invested (100 Mil. Yen) 1, Source: Nihon Keizai Shimbun

5 How Attractive? Availability of Venture Capital U.S. x Japan x Size of opportunity

6 Global Venture Capital Tokyo-based independent venture capital firm investing since 1997 Five partners Invested in over 35 ventures in Japan, Hawaii, California, U.K. Investment thesis: source globally, invest locally

7 Source Globally, Invest Locally Investments in early-stage ventures located around the globe that have meaningful contacts with Japan and/or other East Asian economies. Meaningful contacts include one or more of the following attributes: Large market potential in Japan and/or other East Asian countries and a strong commitment on the part of management to consider these markets to be of significant importance. Technology, product or service amenable to due diligence by applying internal resources or by tapping resources in Japanese and/or other Asiabased corporations or academic/research institutions. Strong potential for partnering with Japanese or other Asia-based corporations. Potential to undertake an IPO on Japanese capital markets.

8 Our Investment Strategy One size doesn t fit all innovation not bounded by geography; markets are global Silicon Valley doesn t need more VC money or bridging organizations U.S. not the appropriate first market for all innovations Too competitive Early adopters may be elsewhere Infrastructure to support growth of the market may not exist in the US Larger potential markets may exist outside of the U.S. Powerful potential competitors or partners may lurk in Asia

9 What we look for Market opportunity Large and fast-growing Compelling value proposition Effective go-to-market strategy Management team All bases covered Experienced Technology or other sustainable barriers to entry

10 Case Studies Hoku Scientific (Nasdaq: HOKU) Alternative energy (Hawaii): achieved IPO on the strength of commercial relationships with two large Japanese companies SpectraGenics Medical equipment (California): Launched product in Japan pending FDA approval in the U.S. ReallyEnglish.com ITC (U.K.): English language online learning content developed in U.K. but primary customers in Japan GeoVector ITC (California/New Zealand): Development team in NZ and first market in Japan s world leading mobile telephone sector

11 A Little History 1973 Japan Associated Finance Co., Ltd. (JAFCO) established in 1973 as a JV among Nomura Securities Co., Ltd., Nippon Life Insurance Co., and Sanwa Bank, Ltd JAFCO established Japan s first VC fund 1987 JAFCO shares start trading on OTC market 1996 Global Venture Capital established 1998 Japanese Limited Partnership Law implemented 1999 TSE Mothers exchange started in NASDAQ Japan exchange started in JAFCO listed on the first section of the TSE in Major revision of the Commercial Code 2002 Japan Venture Capital Association established 2005 NIF Ventures merged with SMBC Capital to form NIF SMBC Ventures 2006/8 NIFSMBC VC Fund 2006 Series ($600K) 2007/7 JAFCO Super VC Series (>$1B) 2007/9 JAFC V2 Fund Series ($1B)

12 Venture Enterprise Center VC Fund Benchmark Report In most recent report (for fiscal year ended March 31, 2007) 85 VC fund management organizations reporting for 451 funds Average fund size around $40M with 10 limited partners Japanese investors 71%, non-japanese investors 13%, GP 14% Data go back to vintage year 1982

13 Japanese Stock Markets for Emerging Growth Cos. Name Established 2006 IPO s Listed Cos. Market Cap. ( 100M) Avg. Amount Raised at IPO ( 100M) JASDAQ Feb , Tokyo Stock Exchange MOTHERS Nov , Osaka Stock Exchange HERCULES May 2000 as NASDAQ Japan , Note: (1) All figures as of end of December, 2006 unless otherwise indicated. (2) JASDAQ launched NEO market for emerging growth companies at end of 2007.

14 Equity Investments by Japanese Venture Capital Funds and Companies %!!! Units: 100M for Amounts and number for Companies $"!! $!!! #"!! )*+,-. /+* #!!! "!!! $!!# $!!$ $!!%&# $!!%&$ $!!' $!!" $!!( Note: Annual figures. Figures from 2001 to are for annual periods through September of indicated year. Figures from to 2006 are for annual periods through March of following year. E.g., 2006 is for the fiscal year ending March 31, Source: VEC

15 Investment Trends Nearly 80% are new investments (vs. follow-on) Nearly 80% of new investments are for Japanese companies Shift from start-up/early to later stage investing <5 years from founding: 46% 40% 5 10 years from founding: 22% 32% From hi-tech to medium-tech IT related: 35% 30% Life Sciences/Medical: 18% 13% Manufactured products/services:25% 40% Financial services, Real estate: 5% 17% Source: VEC

16 Performance? For 402 funds for which performance data is available with vintage years from , aggregate IRR is 4.55% (vs. 3.47% for weighted avg. TOPIX) For vintage years before 2003, three years ( 89, 90, 01) in which aggregate IRR is negative Source: VEC

17 What (or who) is responsible?

18 This man..

19 Regulatory and Tax 2006 National Tax Agency imposes 20% withholding on capital gains distributions to foreigners investing through Japan domiciled venture capital funds 2007 Ministry of Finance regulates management of venture capital funds 2007 Ministry of Finance imposes mark to market rules for audits of venture capital funds

20 VC Investments Drying Up? Source: From Masashi Kobayashi blog (

21 Also, Japanese IPOs Source: From Masashi Kobayashi blog (

22 !"#$%&'(&)*+,-./-&0,'123&4'*56/.+% <87 <77 EFGHIJ ;7 :7 K)L4MN)B OPQRST 7 877= > 877: 877?

23 Japanese Emerging Growth Companies 2005(92 Observations) 2006(115 Observations) 2007(76 Observations) 2008 Jan. - Mar.] (17 Observations) Avg. Market Cap. At Initial Trading Price 231Hundred Mil. Yen 172 Hundred Mil. Yen 94 Hundred Mil. Yen 79 Hundred Mil. Yen Avg. Amount Raised 11 Hundred Mil. Yen 10 Hundred Mil. Yen 10 Hundred Mil. Yen 9 Hundred Mil. Yen PER at Initial Trading Price 149X 107X 54X 15X Amount Raised Prior to IPO 13 Hundred Mil. Yen 8 Hundred Mil. Yen 9 Hundred Mil. Yen 10 Hundred Mil. Yen VC Ownership at IPO 13.53% 16.23% 17.21% 16.95% CEO Ownership % at IPO 28.04% 31.78% 29.94% 21.65% Founding to IPO (Yrs.) CEO Age at IPO Note: 2008 excludes Seven Bank

24 Emerging Growth Companies 2007 Web2.0 (5 Cos.) ICT (20 Cos.) Life Sciences (8 Cos.) All Industries (76 Cos.) Avg. Market Cap. at Initial Trading Price 170 Hundred Mil. Yen 107 Hundred Mil. Yen 61 Hundred Mil. Yen 94 Hundred Mil. Yen Avg. Amount Raised 10 Hundred Mill. Yen 11 Hundred Mil. Yen 7 Hundred Mil. Yen 10 Hundred Mil. Yen PER at Initial Trading Price 16 X 48X 44X 54X Amount Raised Prior to IPO 8 Hundred Mil. Yen 7 Hundred Mil. Yen 23 Hundred Mil. Yen 9 Hundred Mil. Yen VC Ownership % at IPO 13.53% 15.77% 24.49% 17.21% CEO Ownership % at IPO 28.88% 26.81% 31.84% 29.94% Founding to IPO (Yrs.) CEO Age at IPO