Venture Funding for Small Businesses

Business - July 15th, 2005

by Jonathon Walsh and William Steele

Before any start-up venture can set sail, it must first find a way to raise money. To find out how, more than 60 busi­ness people packed EA-Tokyo’s 2nd anniversary seminar, held on Jun. 7 at the City Club of Tokyo, to hear the advice of in­vestors Hitoshi Suga and Mike Alfant, venture capitalists who have helped finance numerous Japanese start-up companies.

Banks vs. ‘Bootstrapping’

“For non-equity financing, entrepreneurs should not expect to get much help from banks in Japan,” says Suga, who is currently Vice Chairman of FoodX Globe Co., Ltd (Tully’s Coffee Japan Co. Ltd). Instead, he ad­vises, entrepreneurs should rely on alternative forms of financing such as:

  • Their own money
  • Money borrowed from friends or relatives
  • Government loans
  • “Angel” investors
  • Corporate partners

“Bootstrapping is basically the way to go in Japan at an early stage,” says Alfant, President of Building 2, a technology investment company located in Tokyo and Boston. “Japanese banks aren’t interested in small ven­tures, especially those run by foreigners.”

Alfant encourages those interested in starting their own companies to first incorporate their ventures as Kabushiki Kaisha (KKs). If someone has not gone to the trouble of setting up a KK, he says, “the odds are I’m not going be interested in dealing with you.” He adds, “What it comes down to is, you need the wherewithal to at least get enough capital yourself. It’s a test. It’s not meant to be easy.”

Suga noted that starting in 2006, a change in the Japanese commercial code will allow any business owner to establish their KK for just one yen. After that there will be no Yugen Gaisha (YK) limited liability com­panies. “This is a substantial change,” Suga says. “Any entrepreneur…should really take advantage of that.”

Venture capital sources in Japan

Suga says that 95 percent of the 150 so-called ven­ture capitals in Japan are backed by big commercial banks and insurance companies. The presidents of these companies are typically salaried bank managers with little decision-making authority.

Alfant says that as a venture capitalist he mostly looks at high tech companies, spending anywhere be­tween 100 and 200 hours evaluating each. He looks at four things to determine if he will invest or not:

1   Their own money.

2   Ability of management team to generate and manage cash flow.

3   Production release of the product and service in question.

4   Relationships within the company environment between employees, business partners, suppliers, vendors, landlords, etc.

“Normally, I tend to look for some record of achie­vement. Any number of things where an individual set out to do something, and did it, impresses me.”

A lot of interesting startups are profitable until they go out of business

Suga: “People are by far the most important ele­ment in any investment decision. If you’re an entre­preneur looking for funding outside, you really have to develop a personal chemistry or synergy between yourself and the investor. This is more important than business plans and business models.”

Alfant: “At the end of the day, it’s all about cash flow. A lot of interesting startups are profitable until they go out of business because they didn’t manage their cash flow. When you’re cash flow is negative, you lose control of the ship — you’re just day-to-day.”

Q & A

KK or YK?

Alfant: “I don’t think you need to have a KK to get started, I think you need to have a KK if you want to get some money from somebody. Many people start with no corporate structure and no corporate entity which is sort of questionable, but it’s understandable. It all depends on the kind of company.”

Suga: “From next year, business owners will not be al­lowed to form a YK. There is a substantial increase in the number of YK being incorporated this year to take advantage of the minimum capital requirement of ¥3 million. After setting up a YK this year, you can con­vert it very easily into a KK from next year.”

What do you look at in that very early stage of an idea turning into a business?

Alfant: “For me, ideas are a dime a dozen. It is all about operations and the ability to execute. I normally look at the management and a diversity of skill sets, so I don’t want to see three programmers or three marketers who decide to start a company.”

Steele and Walsh are writers and editors at Business Grow, an innovative company specializing in providing a wide range of top quality editorial and advertising services to Japanese and foreign organizations.

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