Disrupting Japan

Japanese enterprises are particularly susceptible to disruption, and Japanese startups have a harder time than most pivoting. Both of these problems stem from the same root, and today we are going to dig up that root and have a look at it.

Today we sit down with Shogo Kawada co-founder DeNA, and we talk about both the challenges of the company’s early startup pivots and the post-IPO difficulties they faced with new disruptive challengers.

Shogo is now one of the most active and successful angel investors in Japan, and he explains how both the role and profile of Japanese angels is shifting. He also outlines the reasons why their presence is leading to several positive changes in Japan’s venture capital ecosystem.

It’s a fascinating discussion, and I think you’ll really enjoy it.

FinTech in Japan is far more advanced than most outside observers imagine it to be, and based on new deregulation and government incentives, finTech in Japan is about to accelerate even more.

Today we sit down and talk with Toshio Taki, co-founder of Money Forward, advisor to Japan’s Financial Services Agency, and the head of the FinTech Institute of Japan. He not only tells the story of the founding and growth of MoneyForward -- one of Japan's finTech success stories, but he outlines how the Japanese government’s plans to promote financial innovation while still maintaining the integrity and stability of the industry as a whole.

The Japanese banking regulators are, at least in this sense, far less conservative than you think, and they are setting up a finical ecosystem in Japan that will lead to far more innovative finTech startups than we are seeing coming out of Europe of America.

It’s a great discussion, and I think you’ll enjoy it.

This is a short and very personal episode. Things will be changing for me and for Disrupting Japan, and sometimes when you are facing a lot of big changes, it really helps to be able to share your thoughts with people you care about.

That's you.

There is no guest this time. It's a story about me and magic and chivalry and startups.  I hope you find something in it.

Two of the most persistent and damaging myths about Japan are that it is hard to start a company here and that it is hard to do business as a foreigner.  Well, those are not complete myths. Both of those things are indeed difficult, but no harder than they are in any other country.

Today Marty Roberts explains not only how he started and rapidly grew a successful startup here in Japan, but how he got the Japanese government to pay for it.

To contain health care costs, the Japanese government is pushing doctors to prescribe more generic drugs, and that is forcing the pharmaceutical industry to change they way they do business or to go out of business. Marty saw an opportunity in this shift, and his company has quickly grown to be the leader in its space.

Marty also offers some very practical advice for anyone thinking of leaving a senior management role to start a startup.

It’s a great discussion, and I think you’ll enjoy it.

Japan has a long history of small shopping streets and tiny markets. In fact, despite the population density, American-style mall culture never took off here. The back streets of even the most crowded downtown office districts are filled with little specialty stores and vegetable stands.

Akiko Nishiura, the CEO and founder of Nokisaki, wants to see that culture spread even further in Japan, and her company is helping small merchants find physical spaces for pop-up shops, vegetable stands and food trucks. Nokisaki is connecting these small merchants, who need just a little bit of space, with commercial landlords who have a little bit of free space and are looking for some additional foot-traffic.

It’s an interesting business model, and Akiko and I discuss how it will work outside of Japan or even outside of Japan's big cities.

She also explains how Nokisaki survived a crisis that would have bankrupted almost any other startup — at least any other startup outside Japan.

It’s a great discussion, and I think you’ll enjoy it.

Platform as a Service (PaaS) has been a difficult startup business model in the US, but Wayland Zheng, founder and CEO of Mobingi, has found a way to make it work in Japan. His approach involves a combination of leveraging both a unique feature set and some unique aspects of Japanese technical buyers.

Wayland also shares his story of what is probably a record for the fastest time to startup launch for any foreigner in Japan. Within two months of landing in Tokyo, and unable to speak the language, he had settled on a startup idea, found a Japanese co-founder, and been accepted into one of the most competitive startup accelerators in Japan.

Three years later, Mobingi has an impressive and growing list of clients and investors.

We talk about how he made all this happen, the importance of accelerators, and how you need to tailor your startup not just to a rational business model, but to the business culture of the market.

It’s a great discussion and I think you will really enjoy it.

It’s rare for a Japanese startup to challenge NTT and come out ahead. But that’s exactly what Takehiro Ogita and his team at TownWiFi have accomplished.

TownWiFi is a mobile app that automatically detects and logins into available WiFi hotspots. Since TownWiFi was very modestly funded, Takehiro and his team relied on a better user experience and word of mouth to get the word out.

Today we sit down with Takehiro and dive into that story, but we also look at the company's existing overseas userbase and his plans for global expansion on a shoestring.

There is so much changing among Japanese startups right now, and Takehiro explains some of the social forces working for and working against new Japanese startups.

It’s a great discussion, and I think you’ll enjoy it.

This is a rather personal episode. We have no guests this time.

It’s just you and me.

We talk a lot about Japanese startups on this show and the role they will play in shaping Japan's economic future.

Well, today we are going to look at this from a different angle; one that puts the hype aside and looks at some cold hard numbers. The result is sobering, surprising and,  believe it or not, kind of inspiring

So let's get right to it.

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Transcript

Disrupting Japan Episode 91

Welcome to Disrupting Japan straight talk from Japan’s most successful entrepreneurs.

I’m Tim Romero and thanks for listening 

Once again, I’ve got a special show for you today. There will be no guests, no beer, no playful banter with someone speaking English as a second language. Today it’s just you and me. For the next 20 minutes, I’ll be whispering in your ear about something I consider very important, but that not enough people are talking about.

It’s been a while since we’ve done one of these solo shows. They tend to among my most popular episodes, I get a lot of requests for them and I love doing them. I would like to do more, but you might be surprised at the amount of research and revisions that go into these solo shows. Not to mention the times when I get two-thirds of the way putting one together only to realize the primary thrust of my argument is flawed and the whole thing needs to be reworked.

Unfortunately, I’m not really smart enough to just turn on the microphone and talk for 20 minutes.  It’s so much easier sitting down and talking to amazingly creative Japanese startup founders and innovators who are doing and saying crazy things. 

Well, today, I’d like to share something with you that first occurred to me about a year ago. And the more I research it, and the more people I speak with, the more I become convinced it’s right.  I’ve haven’t talked about it a lot before, because well, frankly, it’s something that a lot of people in the startup community here will disagree with — and some will disagree in very strong terms. But it’s important, so let’s strap in and get right to it.

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Over the next twenty years, startups are not going to revive the Japanese economy, nor are they are they going to be the primary driver of innovation in this country. Don’t misunderstand, startups have a role to play, a very important role to play, but they will not be the primary drivers of change.

No. Japan’s mid-sized companies will be the primary drivers of both large-scale innovation and economic growth over the next ten years.

For this to make sense, we are going to look at the role that mid-sized companies play in the Japanese economy today, we’ll then step back in time both to see how things get this way and to understand why Japan is at such a pivotal juncture today, and then look at how thing are likely to shake out over the next 15 years or so.

Now, to the average podcast listener, this would sound like a dry topic, but you as a DJ listener are a special breed, and you’ll be rewarded for coming with me deep, deep into the weeds. If you come along, I promise that in twenty minutes you will have a new way of looking at mid-sized companies in Japan, and perhaps a new way of looking at Japanese startups as well.

You see medium-sized enterprises are the middle child in Japan’s corporate family. The large companies, the brands you know Toyota, Mitsubishi, Panasonic, Mitsui. For the most part are the remnants of the once incredibly powerful keiretsu groups.  These companies are the oldest child. Everyone knows who they are. They are in the news. They have influence. They work closely with the Japanese government, both the legislators and the bureaucracy, to ensure that the needs of Japan’s large corporations are reflected in national policy and international trade agreements. And of course, the vast majority of government grant money, primary contracts, and economic stimulus programs are directed at these large corporations.

Japanese startups are the little brother. Startup companies have captured Japan’s hearts and imagination not because of their economic impact, but because they are new.  They say, do and build crazy things and the country loves them for it. Startups get fawning press attention from the smallest of achievements. “Oh wow! You shipped a product!  That’s awesome. We’re so proud of you. Here. Have $1million.”

Japan’s medium enterprises, however, have been stuck in the middle. For the past fifty years. they have quietly and reliably formed the backbone of the large companies’ supply chains, employing most of the workers and often thanklessly providing a steady stream of innovation. Doing the bulk of the work and getting almost none of the attention.

And, you know, every time Japan faces economic problems it’s the medium enterprises that bear the brunt of the sacrifices. They lack the connections needed to arrange government bailouts, and when the large enterprises are hurting, they relentlessly squeeze their medium enterprise suppliers.

A bit later on we’ll talk about why they’ve traditionally been able to get away with that, and how this power dynamic is about to change. But first, let’s look at the simple reason why the economic future of Japan depends much more on the medium enterprises than on the large enterprises or startups. 

OK, so let's nail down what exactly we mean when we talk about large, medium and small enterprises. For today’s discussion, I’m going to use METI definitions because, well because they’re METI and they are the ones that decide on how these things are defined.

For manufacturing companies, METI defines a medium enterprise as one with between 20 and 300 employees. Firms with less than 20 employees are small enterprises and those with more than 300 are considered large enterprises. For non-manufacturing industries, medium enterprises are those with between 5 and 100 employees. So medium enterprises are defined as a bit smaller in Japan than they are in much of Europe or the United States.

Now, with the definitions out of the way, the most important thing to understand about the influence of medium enterprises on the Japanese economy is that medium enterprises are the Japanese economy. They employ 54% of the Japanese workforce, so more than large and small enterprises put together, and they account for 48% of all corporate revenues in Japan.

So, with medium enterprises responsible for so much economic impact, what explains their lack of influence over economic policy and their lack of bargaining power with their customers?

Well, we need to step back a few decades to understand how Japanese medium enterprises got themselves into this mess before we examine how they are going to get themselves (and the rest of Japan) out of it.

It goes back to the keiretsu, or I suppose the zaibatsu if you really want to go way back. Basically, after the war, Japanese industry was organized into competing corporate groups called keiretsu. Each keiretsu had it’s own major bank, trading company, real estate company, heavy manufacturer, etc. The major firms in the keiretsu were bound together by cross-shareholding and interlocking directorships. And these large firms were supported by a vast array of lesser-known large and medium enterprises that made up their supply chain. These supply chains were tightly controlled and, with only a handful of well-known exceptions, a medium enterprise that was part of one keiretsu’s supply chain would not sell outside of it’s keiretsu group. The fortunes of these companies were inextricably linked to those of the keiretsu itself.

Now, this arrangement sounds terrible for the supplier, but it was not as bad as it sounds. Particularly in the early days. The large keiretsu companies took an almost paternal interest in the medium enterprises that formed their supply chains.

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The large firms would provide technology transfer and training. They would often partially fund research and development at these firms, and best of all, they would guarantee them a certain level of sales and revenues. The owners and employees of these firms did not become wealthy, but their business was simple. They were protected from most market forces and never needed to develop sales or marketing functions, so they could focus on product development and production.

This arrangement worked well for everyone, particularly the large companies. As long as the economy was expanding rapidly, There was always enough money to go around.

But things began to change in the 90s. The yen become stronger, and that pushed up the price of Japanese goods overseas, and the large Japanese firms were no longer innovating the way the had been in the 60s and 70s.  With money tight, the big keiretsu firms began to squeeze their supply chains.

They made other cuts as well, but these mid-sized companies bore the brunt of the suffering within the keiretsu groups. Not only were these firms pressured to relentlessly cut costs, but the dominant firms looked to these mid-sized companies as a way to solve their new staffing problem.

You see, the large Japanese corporations had basically promised their entire workforce lifetime employment. Now this made sense when labor was in demand. Since no large firms accepted mid-career transfers, it kept salaries low and employees loyal. Sure, there was always some deadwood who couldn’t pull their weight, but since there never seemed to be enough staff, you could always find something for them to do.

All that changed when sales started slumping, these unproductive employees became a real problem both in terms of morale and productivity. Well, the leaders of the keiretsu came up with a perfect solution....

Most great startup ideas don’t grab your attention right away. It takes a while before the founder’s vision becomes obvious to the rest of us. On the other hand, the startups that immediately grab all the press attention often go out of business shortly after shipping their first product. Reality never seems to live up the to promise.

And then there are products like Orphe. This LED-emblazoned, WiFi-connected, social-network enabled dancing shoe seems made for fluffy, flashy Facebook sharing, but only when you really dig into it, do you understand what it really is and the potential it has in the marketplace.

Today we sit down with Yuya Kikukawa, founder of No New Folk Studio and the creator of the Orphe, and we talk about music, hardware financing, and why this amazing little shoe is finding early adopters in places from game designers to hospitals.

It’s a great conversation, and I think you’ll really enjoy it.

After the March 2011 earthquake and the explosions at the Fukushima nuclear power plant, TEPCO and the Japanese government tried to assure us that everything was just fine. The repeatedly insisted that there was no serious danger posed by the radiation.

Not very many people believed them.

Reliable data from fallout areas was sparse at best, and many Japan residents doubted that the government was telling the truth in the first place.

It was in that environment that Pieter Franken and his team created Safecast. Safecast began as a small group in Japan with home-made Geiger counters making their reading available to everyone. They have now grown into an international movement involving private citizens, universities, non-profit organizations and government agencies.

Pieter also explains why environmental science will look very different ten years from now.

It’s a fascinating discussion, and I think you’ll enjoy it.