Seeking Start-up Funding? Your Best Strategy Depends on Where You Are

I recently had the opportunity to speak to two different groups of business students about my experiences as an entrepreneur in Silicon Valley. The talks – one in the U.S. and one in Japan – brought to mind the profound differences between the sources of start-up capital in the U.S. and Japan, as well as the implications this has for American and Japanese entrepreneurs.

In the U.S., particularly in Silicon Valley, entrepreneurs enjoy a wealth of choices to finance their new business ideas. Angel investors (wealthy individuals), private equity firms, venture capitalists, venture lenders and even banks compete heavily to invest in the next great opportunity.

U.S. investors often have deep personal (and successful) experience with technology and startups. This gives them great confidence that they can understand the technologies promoted by entrepreneurs and offer excellent hands-on advice to the companies they invest in (although some entrepreneurs may disagree!).

As individual investors or partners at firms, they stand to make millions of dollars if their investments prove successful. This provides them with a big incentive to get directly involved in the company’s activities, and they often join the board of directors and acquire a controlling stake in the venture.
In Japan, sources of capital for early-stage businesses are largely limited to banks and venture capital firms – few angel investors exist. Japanese venture capital firms are often funded and largely staffed by people from banks and securities companies, few of whom have technology or entrepreneurial backgrounds. Moreover, these employees usually receive a salary and thus have limited financial incentives to generate big returns.

As a rule, Japanese investors are more comfortable co-investing with others than they are leading an investment round. Many investors fear failure more than they desire a big success, so they keep their investments small. They generally receive common stock for their investment and often don’t hold majority positions or even sit on the boards of portfolio companies.

The vast differences in approaches to venture finance imply very different recipes for fund-raising success. In the U.S., an entrepreneur needs a great story, team and technology – as well as chutzpah. Venture investors want a “home run” and, before investing, they need to be sold on the company’s ability to dream big, hire top talent and clobber the competition.

In contrast, Japanese investors want to see a straight line to a modest goal – with limited risk of failure. The potential investor is more worried about the historical operations of the business than the “change-the-world” dream about future opportunity. Unable to assess the technology of the business, they focus their due diligence on the CEO’s personal background and are impressed by big-name schools and employers.

So, what’s an entrepreneur with a great business and a need for capital to do? If you’re in the U.S., start putting together a killer pitch – and don’t be afraid to hype the business until you’re blue in the face. If you’re in Japan, well, start working on a really nice set of historical financials and dust off your blue chip diploma.

Return to Resources