Trace the roots of most modern Japanese technology companies back far enough and there's a good chance you'll stumble across a little-known venture capital (VC) firm called Jafco Co.
Since its inception in 1973, Japan's oldest and largest VC has quietly backed almost 4,000 companies, including giants like SoftBank Group Corp, Muji stores operator Ryohin Keikaku Co and Street Fighter games producer Capcom Co. Almost a thousand of its investments have gone public and today command a market value of about $530 billion. Jafco is Japan's version of Sequoia Capital, the legendary Silicon Valley firm that was also founded in the early 1970s and helped launch Apple Inc, Oracle Corp and Google Inc.
But Jafco, which oversees about 430 billion yen ($4.3 billion), is now overhauling its strategy. The firm's investments haven't come close to the kind of global success companies in the US and China have had, part of Japan's underwhelming track record of fostering world-beating start-ups. Jafco Chief Executive Officer Shinichi Fuki thinks the problem is that his country's entrepreneurs give up too quickly on their ambitions and go public too soon. He is starting to make fewer, bigger bets on start-ups that will stay private longer and use the time to plot global domination, like Uber Technologies Inc and Xiaomi Corp.
"Compared to Silicon Valley, I'd say we're about a quarter century behind," Fuki said in an interview at his office overlooking Tokyo's Otemachi financial district. "Start-ups need to aim globally from the get-go. It's not enough to settle for an IPO of a few billion yen. We need them to aim for IPOs that are 50 or 100 billion yen."
Compared to Silicon Valley, Fuki believes that Japan's start-up scene is about a quarter century behind.
Jafco has been both a contributor to and victim of Japan's mediocre start-up scene. The firm's annual return since inception is about 2.6 per cent, according to Bloomberg calculations based on company documents. That's slightly off the Nikkei 225 index's 2.7 per cent during the same period and is light years behind the roughly 18 percent US venture funds have delivered on average over the past three decades, according to Cambridge Associates.
Fuki, who took the helm in January 2010, says it's not for a lack of effort. Over the decades, his fund has doled out billions to thousands of companies in industries ranging from satellites to mobile gaming. The relatively poor returns, he says, are a result of an ecosystem that allows founders to cash out early before expanding globally, which ultimately lowers the reward backers get for finding young companies with bright ideas. Only 31 per cent of Japan's IPOs raised more than $30 million in 2014, compared with 92 per cent in the US and 67 per cent in Hong Kong, according to the Securities Analysts Association of Japan.
In an effort to break the cycle, Jafco has begun channelling money into fewer start-ups and giving them larger chunks at earlier stages. The average initial investment size in its latest fund launched in 2013 was 280 million yen, more than double the 130 million yen from its 2005 fund. Early-stage investments made up 83 per cent of deals in the 2013 fund, compared with 44 per cent for the 2005 fund.
© Bloomberg
