|
Seeking
Start-up Funding? Your Best Strategy Depends on Where You Are
by
Steve Pollock
(Originally published in the Nikkei
Weekly as part of the Japan Business Seminar column.)
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
|
|