The idea to institutionalize the startup business is an American one. Rather than let entrepreneurs go it alone, institutions now offer a school like environment where entrepreneurs can learn the ropes of a startup business. Replete with mentors, workspace and seed capital, the aim of these ‘accelerators’ or ‘incubators’ as they are known, is to jumpstart new businesses. Tough acceptance requirements, high standards and good marketing ensure a high proportion of graduates from top institutions succeed in attracting follow-on funding.
In the US, Paul Graham pioneered the accelerator business in 2005 with the launch of Y Combinator. His firm gained the reputation as the top US institution. Graduating from Y Combinator is akin to earning a degree from Harvard. A high proportion of Y Combinator graduates have become digital success stories, including Scribd, reddit, Airbnb and Dropbox.
In 2010 accelerators began appearing in Japan. Hironori Maeda, then a 23-year-old computer science graduate from Bucknell University, was among the first to adopt the Y Combinator model in Japan. Today, Maeda’s star making machinery produces the rising stars of Japan’s digital economy. International business angels and venture capitalists take note of his investment decisions. Often they follow him by making additional investments into the companies he’s backed.
In 2008 good fortune smiled on Maeda when fresh out of college he met Teruhide Sato, the CEO and founder of netprice. Netprice is a well-known e-commerce company listed on the Tokyo Stock Exchange. A serial entrepreneur, Sato took netprice public and then built Tenso.com and Brandear. Tenso.com is a fast growing cross border logistics company that forwards Japanese goods to foreign customers. Brandear resells branded goods bought from consumers through auctions sites. Sato was also an early investor in Aucfan, a firm that went public in April 2013.
Maeda and Sato discussed ways to find startup investment opportunities and to jumpstart entrepreneurship in Japan which had withered due to the US subprime crisis. The two shared similar investing ideas and wondered if they could reproduce the Y Combinator model there.
Soon after the pair approached Joichi Ito, an Internet entrepreneur and venture capitalist who Businessweek labeled one of the “25 most influential people on the web.” Ito was looking for startups for his company, Digital Garage, to invest in.
If Sato was a star, then Ito was nothing short of a superstar. He had backed many notable startups in the past, including infoseek Japan and Twitter. More recently, Ito became the high profile director of MIT Media Lab.
The stars were in alignment. Netprice and Digital Garage formed a joint venture called Open Network Lab (Onlab). The accelerator provides office space in Tokyo where entrepreneurs gather to share thoughts and experiences in an open and transparent environment. Maeda became its champion. His job was to pick star investments. Those chosen each receive their first round of seed capital, typically in the range of $10,000 – $15,000.
That may not sound like much money, but consider this: Accelerators like Onlab sit at the bottom rung of a venture capital ecosystem within a quickly expanding digital universe in which ‘software is eating the world.’ Often a seed investment by Onlab represents life breathing first money into a startup. A $15,000 seed investment from a Japanese accelerator may buy a 5% equity stake, which presumes a pre-money valuation of $300,000 on a firm which is nothing more than a dream. Second round pre-money valuations are typically $1.2 million. The hope is a startup will exit by trade sale or better yet through a public listing, often before the firm is profitable and at a significantly higher valuation. Twitter’s IPO valuation, for example, was $14.2 billion.
It pays to get in early if you know what you’re doing. Most likely Onlab and Maeda do. Almost 70% of Onlab graduates have attracted follow-on capital, some from high profile investors like Dave McClure who invested in three Onlab startups through his company 500 Startups. Y Combinator provided follow-on finance to Onlab’s startup Anyperk. Maeda commented, “I don’t know any other accelerator in Japan that has attracted investment from Dave McClure or other high-profile US investor.”
How much of Onlab’s success is down to good marketing is anybody’s guess. Onlab’s investments have the implicit backing of Ito, a superstar as earlier mentioned. That matters because venture capitalists, like all human beings, are subject to herd mentality. They take great comfort from walking the same chosen path of others deemed wiser, especially when that road is sprinkled with stardust. On the other hand, Onlab investees have access to great mentors from around the globe thanks to Ito. “We could not have built a startup accelerator without him,” says Maeda.
Onlab was a success. However its mandate was limited to investing only small amounts of seed capital. So its business model didn’t scale. Further, Ito’s Digital Garage was already investing larger sums of growth capital into startups showing promise, including those seeded by Onlab.
To scale their investment activities, Maeda and Sato launched BEENOS, netprice’s own in-house startup ‘studio’ and venture capital firm in July 2013. The idea was to build a dedicated operating unit within netprice whose sole mission was to build investment companies both domestically and internationally. It is backed by netprice’s substantial balance sheet.
At BEENOS, Maeda put an evolutionary spin on the accelerator business. He hired a 20 person in-house team to support the firms they helped to launch. Among those hired were experts in programming, design, distribution, marketing and finance. Many had past entrepreneurial experience and could empathize with problems that startups face. “One of my biggest concerns when running Onlab was there were few people, especially investors, who could empathize with entrepreneurs,” says Maeda, adding, “They were bankers, not entrepreneurs.” Hiring the in-house team helped solve that problem.
Further, BEENOS launched an ‘inception program’ in which experienced entrepreneurs could search for startup opportunities that fit the entrepreneur’s experience and passion. When they find a match, the entrepreneur starts building the new business drawing on BEENOS’s in-house team of specialists.
One bright star in the making at BEENOS is Kazutoshi Shirata. Shirata was Sato’s classmate at Keio University. He helped Sato build netprice in its early years and then left to join CyberAgent. Ten years later, Shirata returned initially to help out one of netprice’s companies. Then he built his own company with the help of BEENOS’s development and distribution team, as well as with their money.
Shirata’s company, FORii, makes apps for children aged 0 – 6. The app replaces children’s books like, ‘The Cat in the Hat’ and ‘Are You My Mother?’ Animated with rhyme, parents give their smartphone or tablet to their children to learn through play. Children simply love the rhymes and stories. 350,000 have been downloaded since the app was launched in August 2013. Children have replayed them 10 million times. The app is shining at number one in its category within the iTunes store. Users pay on average ¥772 each month for the service.
BEENOS’s in-house developers built Shirata’s app. Another in-house specialist optimized key word search within the iTunes store. Optimization ensures that theirs pops up within the top 10 apps when a mother searches the store. “Once you’ve gained that high level of awareness,” says Maeda, “downloads continue to rise because of the snowball effect.”
FORii’s success is due to good execution and lack of competition. Traditional print publishers have been slow to transition to the digital economy, as have been incumbents across many other industries. Maeda is optimistic FORii will continue to be a star performer within BEENOS’s investment portfolio.
Meanwhile, Maeda still retains his financial interests in Onlab and spends one day a week at their Ebisu workspace to keep an eye on investments. Not to be outdone, Ito invested $7.7 million into netprice through Digital Garage in December of last year, no-doubt to preserve his relationship with the firm (see link).
I asked Maeda, still only 27-years-old, what he thought he might be doing in 20 years time. He wasn’t certain, but believed he would be doing something related to startups. Beacon Reports will certainly have one eye trained on this bright spark.