Six years ago, when Teruhide Sato, founder of Tokyo-based venture capital (VC) firm Beenos offered an investment proposal to Satyen Kothari, co-founder of payments firm Citrus Pay during a meeting in Mumbai, Kothari was taken aback.
As flattering as it was, Kothari decided to politely reject the offer as the amount was too small.
“Later,” Kothari said, “Sato did something that was classically Japanese. He went quiet and listened to me. Afterward, he worked hard behind the scenes and found another Japanese investor who was ready to invest in us.”
In December 2013, Citrus became one of the first Indian startups to receive funding from Japanese VCs that included Beenos and Digital Garage. They together invested about USD 5.5 million in the Bengaluru-based startup. When Kothari sold Citrus Pay for USD 130 million to Naspers-backed PayU in 2016 and launched a wealth management firm Cube Wealth in 2017, Sato’s other VC firm Beenext backed him, along with another Japanese investor, Asuka Holdings.
Come 2019, India has over 50 active Japanese investors pouring in billions of dollars in Asia’s second-largest economy. According to a recent report by DataLabs, between 2014 and the first half of 2019, Indian startups have raised over USD 51 billion from Japanese investors.
In comparison, Japanese investors, within the same time period, poured in USD 12 billion in startups back home where the market has matured and lacks growth as well as innovation. While the traditional companies thrived over the last two decades in Japan, making it one of the richest countries in the world, its startup ecosystem went through long inactive periods. VCs in this East Asian country have enough money to go around, but there aren’t enough good startups to invest in since youngsters prefer well paying corporate culture compared to uncertain startup stints.
Parking their money in a promising overseas business is a win-win for Japanese investors since keeping their money in local banks is counterproductive due to the negative interest rate in their country. India seems to tick all the right boxes for them.
Destination India
“Japanese VCs need avenues to deploy this capital to generate good returns. The large markets for this include the US, China, and India,” Amit Gupta, co-founder of Bengaluru-based mobility startup Yulu told KrASIA. “But both these (US and China) markets have high competition for good startups while the Indian startup ecosystem is still evolving.” Yulu raised USD 7 million in its Seed round from several investors including Japan’s Akatsuki Entertainment Technology (AET) in 2018.
This year, Japan collaborated with India to launch a USD 187 million fund-of-funds for Indian tech startups during prime ministers Narendra Modi and Shinzo Abe’s meet at the G-20 summit in Osaka earlier in June. While 80% of the fund, dedicated to 15 to 25 VC funds, has been raised from Japan with Mizuho Bank, Development Bank of Japan, Nippon Life, and Suzuki as the main LPs (limited partners), rest has come from India.
“India offers huge opportunities across sectors despite the economic slowdown. And given Japan’s relation with India, it makes sense for them to explore the investment opportunities in the country,” Anil Joshi, managing partner at Unicorn Ventures told KrASIA. Unicorn Ventures was one of the co-investors in the digital banking platform Open when Japan’s Beenext and Recruit Strategic Partner participated in a USD 5 million Series A round this year.
Typically Japanese investors can be categorized into two buckets. Independent venture firms like Beenext, Incubate Fund, and Rebright Partners, which primarily invest in Seed and Series A round across segments. And corporate venture capital firms such as investment arms of Mitsubishi, Mitsui, Sumitomo, and Toyota, which generally make strategic Series B and Series C investments in a smaller set of industries.
“Independent Japanese VCs are trying to find new emerging models in India across different sectors,” Brij Bhasin, general partner at Japan’s Rebright Partners told KrASIA.
While Beenext and Incubate India Fund has backed about 20 and 10 Indian startups, respectively, Rebright Partners has a portfolio of at least 12 early-stage startups that span across deep-tech, analytics, health tech, mobility, and e-commerce.
“There is a longtail of corporates that are using their internal accruals to make strategic investments in the sectors that strongly align with their larger objectives,” Bhasin said. “These are the markets where either Japanese corporates see a strong fit for their existing products or they are trying to build a new business.”
For instance, Akatsuki Entertainment Technology (AET) Fund, set up by Tokyo-headquartered entertainment company Akatsuki, invests and engages with “all businesses that deliver emotional experiences.” In India, it has written cheques for at least 10 companies including gaming platforms SuperGaming and MechMocha, superhero merchandise seller PlanetSuperheroes, and online tutorial platform Doubtnut. Similarly, Japanese automobile giant Toyota has backed mobility startups Droom and Shuttl, while Nippon Life, Japan’s largest life insurance company, has invested in lending startup Moneyview and wealth management platform Scripbox.
According to Bhasin, independent VCs usually write a cheque ranging from USD 100,000 to 3 million whereas corporate venture capital firms put somewhere between USD 3 to 5 million. Although, Masayoshi Son’s SoftBank has been an exception, pouring in hundreds of millions of dollars in startups like payment service firm Paytm and hospitality startup Oyo.
Barring few investors such as SoftBank and technology-focused fund Infinity Ventures, Japanese VCs missed out on investing in China owing to the political tension between the two Asian countries. Japanese companies have also been concerned about the long term protection of their money and intellectual properties when they deal with Chinese startups, an investor told KrASIA, requesting anonymity. Although in recent years they have begun to invest in Chinese companies, they don’t want to repeat the same mistake with the Indian market.
The Asian investors’ psyche
While Japanese firms have set up operations in Southeast Asian countries including Singapore, Thailand, Indonesia, and the Philippines, India is the only other market that is comparable to China, despite five to seven years difference between the two.
In fact, in the last two years, Japan and China have been aggressively fighting for stakes in overseas Asian startups. In India, Chinese VCs invested have invested over USD 2.2 billion in startups between January to September this year, while Japanese investors have poured in USD 1.5 billion in 2019 (year-to-date), according to research firm Venture Intelligence.
Cube Wealth’s Kothari said investing in India is Japanese VC’s hedge against China, as it might help them counter increasing Chinese influence in Asian markets.
“Chinese investors who are coming to India are first-generation entrepreneurs. Their investments are based on their entrepreneurial appetite and their ability to take risks, so they are aggressive in their investment philosophies,” Mahendra Swarup, founder, Venture Gurukool told KrASIA.
“Whereas the roots of the majority of Japanese VCs can be traced back to larger corporates in the country. Unlike Chinese, Japanese investors are slightly conservative and very choosy,” he said.
The investors and entrepreneurs KrASIA spoke to, said Chinese investors go for startups that are either growing really fast or have business models similar to something that has worked in China, while Japanese look for long term relationship building.
Japanese investors, according to Rebright’s Bhasin, steer clear from companies that aim high growth rate and cash-burn. “The startups have to have sound fundamentals, with proper justification for cash burn and a sustainable growth cycle.”
He added that Japanese VCs expect proper corporate governance from startups for risk prevention.
Chinese investors, according to Unicorn Venture’s Joshi, are fast at decision-taking, whereas the Japanese VCs move slowly but are long term players.
“Japanese investors first build trust,” said Rajan Bajaj, founder of Slice, a three-year-old non-banking financial company that offers credit to youngsters and has four Japanese investors on its cap table including Das Capital and M&S Partners. “The relationship may take time to be built but once they trust you, that’s when the money starts coming in.”
Chinese investors are primarily interested in consumer internet startups as they have seen such companies become big rapidly. Japanese, on the other hand, lean more towards financial technology and mobility startups, given their exposure in the global capital market and prowess in manufacturing and automobiles, although they have made bets across tech-focussed sectors like health tech, e-commerce, logistics, and gaming.
“In Japan, the consumer cycle has matured for a long time now. So they do not have the same experience and background as Chinese investors,” Kothari explained. “Their expertise lies in asset management, lending, and payments, as well as in the future of mobility.”
B2B is another area where Japanese VCs have shown their interest as it is easy for them to validate the scope of scaling up. Companies like e-commerce platforms Shopkirana, Ninjakart, BulkMRO, and IndustryBuying; logistics tech company Locus, and warehouse automation company GreyOrange, among others have Japanese on their cap table.
Bajaj from Slice believes they are not fixated at investing only in proven models but actively look for new ideas to invest in with a long-term outlook. Japanese investors together have backed a number of lesser-known startups, like early-stage fashion e-commerce platform Elanic, a health tech startup Healthians, and online marketplace for used vehicles, Droom.
“Having built very large companies themselves, they know the business for what it is and have a perspective of what it will be in the next 5 to 10 years,” Bajaj said.