500 Startups’ Japan-focused fund has closed fundraising after exceeding its US$30 million target, with an investment from a Japanese government-backed vehicle taking it across the line.
500 Japan received a reported US$10 million from Cool Japan Fund, a public-private entity that focuses on backing businesses that promote Japanese products and services worldwide, taking its total fund value to US$35 million.
Cool Japan Fund – established in 2013 under Japan’s Ministry of Economy, Trade, and Industry, with a mix of public and private capital – typically invests in areas such as food and beverages, fashion, media, and other businesses that are seen to promote Japanese cultural awareness. One of its most high-profile investments is ramen chain Ippudo, which has grown its presence beyond Japan with outlets in Europe, North America, and Southeast Asia in recent years.
So far, Cool Japan Fund has concentrated its efforts on investing in more mature, mid-stage businesses that are angling for expansion overseas.
By backing and partnering with seed-stage VC 500 Startups, the government fund is hoping to tap young tech businesses and assist them in growing abroad too.
“When a company expands outside of its home turf, it needs to be able to hit the ground running, connect with local partners, find good office space – all those really fundamental things,” James Riney, 500 Japan’s lead partner, tells Tech in Asia. “Our focus is to help Japanese startups achieve that and begin to compete on a global scale. We are providing that platform and seeding them. Then Cool Japan Fund can come in at a later stage.”
One example of this partnership that predates Cool Japan Fund’s investment in 500 Japan is manga and anime-centric ecommerce site Tokyo Otaku Mode. “They started out as a Facebook page, and since there are plenty of Japanophiles abroad, the obvious transition for them was to move to ecommerce,” Riney explains. “They participated in one of our accelerators in US, and that really encouraged them to think outside of their home market.” Cool Japan Fund invested in Tokyo Otaku Mode’s series B, leading a round worth US$13 million.
500 Japan’s own portfolio – which included 21 investments in the last year – has covered sectors as diverse as bioinformatics, shipping logistics, satellite transmission infrastructure, and human resources software.
Riney says that 500 Japan has no obligations under its agreement with Cool Japan Fund to invest in any particular area, despite the latter’s “cultural exports” emphasis. Likewise, 500 Japan-backed companies can accept investment from anyone they want; Cool Japan Fund can be a partner for them, but this isn’t obligatory.
A first for Japan
This is the first known instance in which a Japanese government vehicle has invested in a Silicon Valley-based venture capital fund, according to Riney.
“One benefit of this investment is that it gives 500 Startups a huge boost in credibility in Japan,” he says. “It means we now have a network to navigate those more heavily regulated industries in Japan.”
For the startups under 500 Japan’s wing, perhaps the biggest advantage of the hook-up with Cool Japan Fund is the flexibility it brings in a market where options for seeking growth capital beyond seed stage have typically been limited. “Historically, if you wanted to raise a big multi-million-dollar round in Japan, you’d have to go to the public markets,” says Riney.
The problem that many early-stage businesses face is that their would-be shareholders are focused on short-term gains. As a result, many Japanese startups that go down this route end up sacrificing growth for profitability. “What we’ve been seeing now in the wake of Silicon Valley, is that Japanese startups are choosing to stay private longer, raise bigger rounds, and focus on growth,” says Riney. “But at the same time, venture capital sources remain very limited. It’s always the same crowd leading the rounds.”
The partnership shows that Silicon Valley VCs can find other ways to enter the sometimes impenetrable Japanese market – and gives Japanese businesses more options for furthering their global ambitions, he adds.
“That this is the first Japanese government investment in a Silicon Valley VC is symbolic of the change in change attitude here towards entrepreneurship,” he says. “We see a lot more of the government encouraging and fostering entrepreneurship.”
Riney suggests that this proactive approach from the state is having a notable impact. In 2016, Japanese VC investment hit its highest ebb yet, totalling approximately US$1.8 billion.
Converted from Japanese yen. Rate: US$1 = JPY 109.6.
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