overview of japan vc industry by standford japan

7/27/2019 Overview of Japan VC Industry by Standford Japan

1/25

Japanese Venture Capital

An Analysis of Start-up InvestmentPatterns vs. Silicon Valley

Robert Eberhart, STAJE Fellow

Stanford University


2/25

research questions

What are the apparent differences in venture capitalinvestment patterns in Japan versus Silicon Valley?

How can these empirical differences be understoodwithout cultural explanations and be consistent withthe empirical data?

Do the explanations - consistent with theobservations - help us understand the future patternof VC investment in Japan?


3/25

japan VC market

Note: Annual figures. Figures from 1991 to 2002 are for annual periods through September of indicated year. Figuresfrom 2003 to 2006 are for annual periods through March of following year. E.g., 2006 is for the fiscal year ending March

31, 2007. Source: VEC, Japan Venture Research

Japanese VC Investment Dat

0

500

1000

1500

2000

2500

3000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Deals,

Investmen

tinMillionsofYen

Total Invested

Number of Deals


4/25

US VC marketUS VC Investment Activit

0

5000000000

10000000000

15000000000

20000000000

25000000000

30000000000

1995-1

1995-3

1996-1

1996-3

1997-1

1997-3

1998-1

1998-3

1999-1

1999-3

2000-1

2000-3

2001-1

2001-3

2002-1

2002-3

2003-1

2003-3

2004-1

2004-3

2005-1

2005-3

2006-1

2006-3

2007-1

2007-3

2008-1

2008-3

2009-1

0

500

1000

1500

2000

2500

Deals

Amount Invested


5/25

japan VC IRR


6/25


7/25

Comparative IRR


8/25

Syndication

Syndication

In US, most deals

One contract,several investors

Claimed uncommonin Japan

1 SOURCE: Japan Venure Research 2009

Preliminary Surveydata: 60-70% of Japan VC

deals are de facto

syndicated1 Three to four firms per

deal With similar term sheets

A de facto lead

Lead assigns directorand coordinates

Lacks the form of a USsyndicate but is samefunction


9/25

empirical data revisited

Start with 2800 deals and @Y95M per deal With de facto syndicates, we recalculate to obtain:

Actual NET: (approx.) 1500 deals, $1.9M per deal

Versus US, 2006: 3080 deals with $7.1M per deal

So, truer picture is:

in Japans economy deals are roughly equal, given relative economy size

but average deal size in Japan is 1/4 of US

What can explain this empirical difference?


10/25

empirical summary Any explanation of Japan VC patterns must

account for:

Comparatively different deal size

US: $23.5 billion into 3080 deals (2006) Japan $2.8 billion into 1500 deals (2006)

Long term Japanese IRR is lower than U.S. Japan LT Avg, life of fund = 3.9%1,2

U.S. LT Avg, life of fund = 16.5%

2

1 SOURCE: Japan Venture zResearch

2SOURCE: Martin Haemmig 2009


11/25

is current literature explanatory?

Institutional Environment Lack of Syndication

No common contracts

Japanese VCs do not assign adirector

Ownership at IPO Japanese firms at IPO greater

founder control

Structure of VC firms Shareholder =>Risk

diversification strategy

Japanese VC JPF structure=>Internal VC staff to find andpersuade investments

Tax Implications

Cultural Explanations Japanese entrepreneurs

resist loss of control

Japanese VCs are riskaverse Salary motivations

culturally

Poorly developed reputationmarkets for VCs

Entrepreneurs cannot

decide which VC => lessopportunism

Do these explain the data?


12/25

analysis The current

explanations:1. Suggest a reduction of

the supply of funds,which

2. Implies a higher returnto reflect attracting thesmaller supply.

3. However, Japan haslower returnso

inconsistent with manyexplanations


13/25

Now what?

What is theexplanation of the

differences?

What can we learn?


14/25

Heterogeneity can explain

culture Cultural

explanations mayactually be pathdependencies withina heterogeneousindustry structure

Can find a behaviordepending on thefounding date andstrategy of a VC firm

ex. Salaryman type portfolioinvestment In some firms, not others,

not in new firms

Persists in some firms (pathdependence)

Each period of VCfoundation has its owninstitutional pathdependencies

Appears cultural because acultural explanation can besupported by behavior ofsome firm.


15/25

heterogeneity in governance


16/25

heterogeneity in strategy


17/25

Lower return from lower costs

agency cost differences can explain lower returns

Opportunism and agency costs VC and entrepreneurs interests are not aligned

opportunistic behavior VC

Common shareholder


18/25

opportunism IN US

VCs control commonshareholderopportunism by

Preferred shares

Obtaining early controlvia

large investment

Preferred shares

Common control of VC

is less effective Shareholder activismnot favored by courts

In Japan VCs almost always common

shareholders less divergent interests

More important - less abilityto control through shareacquisition

Must acquire commonshares for control

Rights in law for significant

minorities Silencing requires coalitionof 71% or greater

Shareholder activism canbe expressed effectivelyextra-legally


19/25

mitigating opportunism

U.S. VC can control with

sub 50% ownership

and preferred rights Vocal minority can

be silenced withinvoluntary buy-out

Courts rely oncommonshareholders sellingto get out

Japan

sparse preferred so

VC needs 50%+ tocontrol

To silence a minoritymust control morethan US

Courts generallyhear remedies tounfair practice


20/25

conclusions


21/25


22/25

conclusions

Cultural explanations Inconsistent with IRR

data

Can be explained byheterogeneity of VC firms

Many apparentdifferences aredifferences of form notfunction

Agency costs, fromopportunism mitigationtactics, may explain thedifference: US structure creates need for

control by VCs to mitigate Common shrdr opportunism

Operationalize VCopportunism

But, not reqd or available inJapan

Is consistent with empirics

Explains why Japanesefounders come to IPO withmore ownership


23/25

the future Because of the agency

cost situation inJapanese VCinvestment

And because ofheterogeneous VCsystems

Japan has the ability to

adjust to new economicreality perhapseasier than US VC firms

Predictions of a VCshakeout in US

Predictions of second

lost decade in Japan

But entrepreneurship isan element of recovery..

VC is a catalyst


24/25

Thank you


25/25

overview of japan vc industry by standford japan

Documents