One year ago we announced the Sprout initiative at Shizen Capital.

Sprout is a GP-in-Training program for ambitious women in Japan who aspire to manage their own VC fund. The Sprout participant is first employed by Shizen Capital as Investment Director, during which she is exposed to all aspects of VC fund operations in a compressed timeframe. We attempt to convey to the best of our abilities the decades of experience we’ve gained from investing in startups (ideally minus our bad habits), and subsequently enable the Sprout participant to branch out as a GP with her own fund when she decides she is ready.

Our rationale in launching the Sprout program was driven by our observation of a pervasive lack of gender diversity in Japan’s venture capital sector. We believe that this pernicious issue negatively impacts VC fund returns, impedes female and other under-represented entrepreneurs, stifles the health of a region’s startup ecosystem, and deprives society as a whole of innovation.

In September, Mayumi Wakebe joined us as the inaugural Sprout candidate. Mayumi entered the program with a commendably open mind, i.e. she was graciously willing to serve as a pioneer (or test subject ?) for our pilot year. We believe perfection is the enemy of progress, so at Shizen Capital we prefer to launch experiments and then iterate as we go along. Mayumi joined us with exactly the right mindset compatible with this philosophy.

Not only has Mayumi survived; she has thrived ! Sure, we have been mentoring her along the way, but Mayumi has contributed disproportionately more to us in return.

Let’s tally up Mayumi’s contributions to Shizen Capital in her first 9 months.

Some of you may be wondering why I am crowing about Mayumi’s contributions so publicly. My motivation is threefold:

1. To boast. There’s nothing humble about this brag. I am truly proud.
2. To publicly celebrate Mayumi. She’s very modest (in fact, she only reluctantly agreed to let me post this), and I believe that the world needs to hear how awesome she is.
3. To inspire other VC funds in Japan to consider offering a GP fast-track to talented and ambitious women in VC. I know that many of our peers share our conviction on the value of gender diversity in VC. They are welcome to copy our playbook verbatim, or simply draw inspiration from it to tailor their own initiatives.

As an individual from another fund in Japan remarked, Mayumi has accomplished more in 9 months than they have been permitted to do over their career. Comments like this remind me that there remains much work to be done.

One of the phenomena I witness so frequently among founders in Japan that it warrants a dedicated blog post is the topic of agility in a potential venture investor.

This topic reared its head again the other day in a discussion with a local startup founder who was grappling with his VC investor base. The founder’s business was facing some challenges requiring relatively urgent and decisive action. Unfortunately however, he was struggling to obtain consensus from his investors.

Part of the problem in this particular case was contextual. Certain operational decisions required the approval of his investors before the founder could act.

Yet another part of it was more general. The founder was finding that his investors were lacking an agility to take a position. Some of his investors were hampered by internal organizational hierarchy, which slowed decision-making, while other investors were simply uncomfortable with making choices based on incomplete information.

Struggling to choose is choosing to struggle

Postponing difficult decisions is more likely to kill a startup, than acting decisively, even if the decision turns out to be the wrong one.

Let me repeat this because it is a counterintuitive concept for some:

Making the wrong decision in a startup, but doing it quickly, is usually less harmful than performing extensive and time-consuming analysis in pursuit of the perfect solution.

The reason for this is that innovation requires experimentation, and startups are essentially a collection of repeated experiments. Each decision is an experiment. The results of each experiment provide insight, which is more reliable and helpful than months’ worth of analysis.

Perform an experiment; measure the results; adjust; iterate. Sometimes the adjustment requires only minor tweaks, whereas other on other occasions, backpedaling on a misstep is necessary. The benefit, however, of making decisions quickly is that it breaks down complex challenges into more manageable parts. This also means that the consequences of a wrong decision are less damaging.

When we evaluate a prospective investment for our fund, we assess the founder’s level of comfort with the risk of making wrong decisions, and their adaptability to measure and adjust accordingly.

Yet the obligation flows both ways. When raising capital, startup founders are perfectly entitled to assess each prospective investor’s comfort level with decision-making in an environment of incomplete information. In fact, I would submit that startup founders should perform this assessment, because this trait will be an ongoing requirement over the life of the startup.

Practical tips for founders

So how can founders evaluate for this characteristic in a prospective investor ?

One way is to solicit feedback from founders of other startups in which the VC has invested.

Additionally, there’s another way that is staring all founders directly in the face: the investment process itself. The fundraising discussion with a prospective investor represents the most accurate glimpse into that investor’s comfort level with decision-making in a context abundant with uncertainty. Here are a handful of questions that a startup founder might consider asking their prospective investors in order to make this assessment.

• How hierarchical is the investor’s decision-making process ?
• How many steps and approvals are necessary ?
• How long does it take from start to closing: a few weeks, or a few months ?
• Is the investor willing to take a leading role by making a written investment proposal, or would they rather wait until others commit for reassurance ?
• What is the timeframe of their due diligence ? Do they insist on speaking with customers before making a written proposal ? (a practice we advise founders to reject)
• Are their interactions during the negotiation phase efficient, or does each point require extensive reflection or analysis ?
• Is the investor generally exhibiting a fear of ambiguity in their interactions with you ?

The agility (or lack thereof) with which an investor conducts themselves during the fundraising discussion is a good indication of how they will approach decisions over the life of your financial partnership together.

Many of you are undoubtedly aware of last week’s Viva Technology conference (VivaTech) in Paris. Japan was featured as country of the year for VivaTech 2024. Hats off to the Japanese government officials at JETRO and METI for securing this honour for Japan !

The Country-of-the-Year selection was indeed a big deal for Japan, as the nation sits on the cusp of an innovation renaissance. Frequent readers of this blog know that I am incredibly bullish on early-stage investing in Japan right now. I see greater asymmetric upside here than any other tradfi asset class.

As was the case with booming startup ecosystems that have risen before (Silicon Valley, Western Europe, China, Southeast Asia), their success involved a combination of local and global. Practitioners of innovation know that it best occurs when there is a convergence of talent, ideas, creativity, and resources across disciplines, backgrounds, borders, and cultures.

One negative perception held in Europe about Japan is that Japanese investors speak a lot about being global but fail to actually make investments in global teams.

My defense to such criticism is that becoming comfortable with the cross-border part often takes a bit longer in Japan. The language and cultural gap is a wider chasm to cross than in other markets, so it requires more patience, as well as actors who can help serve as a bridge.

Followers of us at Shizen Capital know that our reflex upon seeing such friction in a system is to accept some accountability for it ourselves, and to try to figure out what role we can play in ameliorating it.

An experimental invitation to Japan’s VCs and CVCs

So in the spirit of serving as a bridge, let’s try a little experiment. While at VivaTech, my partners and I encountered over 30 investment teams visiting from Japan (a mix of independent VC funds, and CVCs), all purportedly scouting for startups and scale-ups in France whose innovations could be relevant for the Japanese market. We were scouting for them too, and have even opened an office in Paris to facilitate such sourcing efforts going forward (as well as serving as a launchpad for our Japanese portfolio companies to expand into Europe).

We understand that investing in companies with foreign founders, business culture, and language is daunting, so we’ll make it easy for you.

Below are 16 such companies which we believe to hold compelling potential for success in Japan. All of them are on our radar at Shizen Capital, and we expect to invest in several of them. If you would like to join us as a co-investor, our door is open. This is an opportunity to prove the critics wrong. We’ll even be happy to serve as lead investor and organize all due diligence efforts and transaction documentation (in Japanese, even !), if it facilitates your ability to act. By revealing our dealflow here, we are being radically transparent. Now, over to you !

• Pi-xcels
• Planetary
• WeatherMind AI
• Sittap
• Peel Lab
• Unmanned Life
• Bifrost
• COD
• Zeteoh
• Swift Robotics
• Ontbo
• Daan Tech
• Bottless
• Eyeguage
• Istya
• Apollo Plus

It was an honour to host a delegation of investors and corporate executives from Japan at VivaTech this week. Japan was selected as the Country of the Year for VivaTech 2024.

Part of the festivities included the Global50 event at Station F, a networking and pitch session with 16 European startups and scale-ups innovating in the domains of AI, ClimateTech, and DeepTech. Each of them has an ambition to scale in the Japanese market.

Deep bow of gratitude to my colleagues Mai Iida and Takumi Mannen for your organizational heroics ! And a special thank you to our corporate sponsors for your support: 三井不動産, 戸田建設株式会社, addlight Inc.、電通, Finesse Ventures Co., Section L, CIC Tokyo, Agenium, Charlotte Bio, Bridge, 日経

Expect more soon…

“When I spoke of Raksul [a successful Japanese startup] to an American professor at a Japanese business school, she reacted, ‘It seems a bit sad that, in a country that has produced giants like Honda Soichiro, (Founder of Honda Motors), Matsushita Konosuke (Founder of Panasonic), this generation is being symbolized by someone who has come up with an Uber for delivering flowers.'”

The remark from this professor betrays an embarrassing misunderstanding of innovation. It reminds me of the time a decade ago when a former French minister drew jeers from the audience at the country’s largest tech conference for proclaiming that Uber did not innovate anything.

Although peppered with stories from critics and cheerleaders alike, the book is primarily a data-driven assessment with a message.

Perhaps the best encapsulation of the message that Katz appears to be sending to the Japanese government with this book is the following:

“Japan’s tragedy is that the country need not change that much in order to set recovery into motion. The payoff from some of the tax incentives proposed here would be very impactful while causing little disruption. In too many cases, even obvious reforms are blocked by ideological blinders and inertia, even when they do no harm to any vested interests. In fact, Japan’s problems are, in many ways, much easier to solve than some of the problems troubling, for example, the United States, with its bitter partisan animosity, threats to democracy, the existence of a large underclass, and the poor educational achievement of large parts of the population. So many of the initial measures I’ve suggested [for Japan] could easily be adopted and implemented if the political will were there. Seeing greater-than-expected economic payoff and less-than-feared social pain from these measures would make it easier to take more difficult steps.”

From the perspective of an active investor in Japan right now, I find Katz’s conclusion sober yet promising. Enjoy the book.

先日、ヨーロッパのある大手成長株ファンドから連絡があった。このファンドは北米だけでなくヨーロッパ全土に投資している。東京にオフィスを開設することを検討しているとのことで、私に連絡をくれた。

これはもちろん素晴らしいニュースであり、日本のデジタルルネッサンスという投資機会に、世界各地の資本配分担当者がいかに目覚めているかを示すものだ。

このファンドとの話し合いの中で出てきた逸話に、東京のオフィス探しに関するものがある。東京の不動産会社がいかに大きなチャンスを盲目的に見逃しているかを思い知らされた話だ。

このファンドは、ある有名な不動産デベロッパーのウェブサイトの問い合わせフォームから問い合わせをしたらしい。彼らは、その不動産会社の web サイトの英語版で、英語で問い合わせをした。これが最初のミスだったのかもしれない。

それから2ヶ月以上が経過したが、ファンドマネージャーはいまだに不動産会社から何の返答も受けていない。

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The other day a large growth equity fund in Europe reached out to me. This firm has invested across Europe as well as into North America. They contacted me because they are considering to open an office in Tokyo.

This is of course fantastic news and a testament to how some capital allocators globally are waking up to the opportunity of Japan’s digital renaissance for investment.

One anecdote that came up in my discussions with this fund relates to their search for Tokyo office space. It is a story that made me realize how Tokyo’s real estate companies are blindly missing a massive opportunity.

Apparently, the firm had submitted an inquiry via the contact form on one of the websites of a well-known real estate developer. They expressed their inquiry in English, on an English version of the real estate company’s website. Unbeknownst to them, this may have been their first misstep.

Over two months have elapsed, and the fund manager still has not received a response of any kind from the real estate company.

Hello Tokyo, is anyone home ?

Now, this is a fund with over $2 billion in assets under management, and over 100 portfolio companies spanning 10 countries. They intend to use their future Tokyo office as a launch pad both for investing in APAC and for bringing European companies into the Japanese market. Needless to say, this fund’s first interaction with Japan at the operational level has not left a favorable impression.

I’ve been fortunate to meet members of the investment and innovation teams of several real estate firms in Japan. Nearly all of the individuals I have met strike me as incredibly intelligent, open-minded, and innovative. Yet there seems to be a disconnect between the strategies of Japan’s real estate firms on one hand, and with the government’s ambition to transform Japan into a startup nation on the other.

To their credit, the Japanese government has crafted policies which have fostered incredible progress in accelerating Japan’s venture ecosystem in a short time. I tip my cap to the forward-thinking champions in the government who are driving these reforms. True, Japan trails other successful venture ecosystems like North America and Europe, however the benefit of being late is that there are successful models available for Japan to emulate.

When it comes to allocating real estate toward building global innovation hubs, I submit that lessons from the fantastically successful experiences of France, the Netherlands, and the Nordic countries could prove relevant for Japan to consider.

As our friends in Europe discovered, the best innovations tend to arise when there is a density of entrepreneurs working on a diverse array of startups within close physical proximity. This is not only true in theory; there is also empirical evidence to back this up. When the density of founders surpasses a certain threshold, the probability of unique insights and groundbreaking innovations rises exponentially.

Twenty years ago, the aforementioned European countries set out to replicate Silicon Valley in their own geographies. However, they lacked many of the fertile conditions that the San Francisco Bay Area possessed for becoming startup hubs. Following a couple false starts and failed attempts, they eventually cracked the code in creating the necessary critical density of entrepreneurs.

How to cultivate an international startup hub

So how did they do it in Europe ? One key factor is that they found a way to give free office space to startups. Some governments funded initiatives directly, whereas others nudged private sector actors, such as banks and real estate companies, to offer free office space themselves.

From the perspective of a startup founder, every 1€ spent on rent is 1€ deprived from working on innovation. So naturally, startup founders flocked to these free office space offerings: Over a short time; the critical density thresholds were surpassed and the virtuous cycle kicked in.

Moreover, these startup office hubs became some of the most sought after locations in which large enterprises desired to join as tenants. Even from the narrowest of financial perspectives for a property owner, offering free office space to startups more than paid for itself from the increased appeal of the property. With Japan increasingly rising onto the radar of international investors, there is a compelling opportunity here for a real estate company to step outside of their conventional business model and become a Tokyo hub for global startups and fund managers.

Beyond of course natural gratitude for the citation, I enjoyed Chris Newland’s article in today’s Financial Times. Global media is also awakening to Japan’s startup renaissance.

As General Partners of Shizen Capital, we consider ourselves very fortunate to work as venture capitalists. We each also happen to have founded tech startups in our prior careers before entering the VC world. Although we would love to believe that we are brilliant, the reality is that we’ve been lucky. Any flashes of wisdom we do show on occasion comes from the dizzying volume of mistakes we made as entrepreneurs or later as naive investors in our early VC days. Any ostensible brilliance derives mainly from the catbird seat our job affords us to witness growing tech companies over and over again.

So when we write a piece entitled “How to pitch us,” we’re doing it not to preach wisdom from a textbook, but rather to provide pragmatic advice in the pursuit of two specific goals: i) to help us be good stewards of the capital we’ve been conferred to manage, and ii) to optimize your time as founders, from which we feel honored to be benefiting, and maximize your chances of success.

We receive hundreds of investment solicitations every year and, as much as we try, cannot possibly respond to every single one of them. Here are some practical suggestions on how best to attract our attention and make a compelling investment pitch to us.

The approach:

Your goal in the approach is not to convince us to invest, but rather to convince us to schedule an introductory meeting or conference call with you.

• Rise above the noise level by contacting us via an endorsed introduction (e.g. such as via our portfolio companies or a trusted person in our network).
• That being said, we also pride ourselves in being accessible, so please do not be afraid to reach out directly, especially in creative ways. When Mark was recently solicited by an entrepreneur who had made a habit of constructively commenting on his blog posts, he didn’t hesitate a split second to schedule a meeting with him.
• Pre-qualify the relevance of a prospective meeting with us by reading the description of our investment sweet spot. Explain how your company fits if the fit is not obvious. You can also gain insight into our investment philosophy by reading Mark’s blog and reviewing our portfolio companies.
• We also expect that you will have reflected on whether VC funding is appropriate for your startup before contacting us. We recommend reading our post on VC Math related to this topic.
• Please don’t ask us to sign an NDA up front (see a more detailed rationale). Send us something non-confidential that wouldn’t upset you if we solicited the opinion of a trusted advisor.
• Send a clear and concise executive summary (we’re not hung up on the format of it, however, often we may be reading your email while off the grid, so anything requiring us to re-connect or access some cloud links often slips through).
• It almost goes without saying that the following techniques are very ineffective: mass email intros to multiple recipients, cold emails requesting a call back, or generic emails clearly absent any review of our investment scope and philosophy.

The first meeting:

• Prepare for an efficient discussion limited to one hour. 50 minutes is even better, as it will allow us to be punctual for the meeting following yours.
• Demonstrate that you’ve identified the problem, and clearly explain your vision of a solution.
• Tell us specifically what you’d like from us.
• We are more intrigued by your ambition than by your planification exercise in exit strategy (e.g. “We plan to IPO on TSE Growth in 7 years.”), which betrays naïveté in a context of abundant uncertainty.

Our commitment to you:

• We will give you our full undivided attention in our meeting. That means no distracting behavior on our smartphone with email, etc. during our session together.
• We will not waste your meeting time by grandstanding you with our accomplishments. In fact, we will try to speak as briefly as possible about ourselves and our firm, and only insofar as relevant for our interaction (unless of course, you want us to do so; the point is: the hour is yours to focus on what you deem most important).
• We will offer you a decent cup of coffee or tea. If our uncultivated nature lets this basic courtesy slip our minds, feel free to smack us.
• We will be straightforward about our investment intentions post-meeting. If we do not intend to invest at this time, we will make this clear as early as possible so that you can move on. We will not string you along with a never-ending due diligence ordeal. We can decide on investments quickly, and we can move quickly. Sometimes, however, we simply lack enough bandwidth to prioritize your investment even when we are interested. Regardless, we will tell you so.

Takerufuji toppled fellow rank-and-file wrestler Gonoyama today to win the Emperor’s Cup at the Osaka sumo basho. The 24-year-old from Aomori Prefecture became the first rikishi in over 100 years to win his first tournament upon promotion to the elite makuuchi division.

Congratulations Takerufuji, and thank you for demonstrating that anything is possible.

Thank you to Dr. Stefanie Di Russo, Rebekah Cheng, and James Hollow MBE from Fabric for leading yesterday’s Shizen Capital Workshop on design thinking.

Stefanie and Rebekah offered insights on design-oriented frameworks for startups to consider before embarking on a costly product development endeavour. For example…

Design the right thing

• What is the problem we are trying to solve ?
• Who experiences this problem, and what part of their journey does it affect ?

Design things right

• Are we referring back to the core problem or experience ?
• Have we tested our prototype on the person we are trying to help ?

Good vibes to our colleague Mai Iida for running the show !

Before embarking on a fundraising journey from VC, every founder should first reflect on whether venture capital funding is appropriate for their company.

Financial backing from a VC firm, especially if it’s a good one, can provide potentially heroic benefits to a startup.

However, depending on a founder’s level of ambition and personal motivation, VC funding is not desirable for everyone. Bootstrapping a company while retaining full control can be a more appealing path for some founders, as is building a profitable lifestyle business. Such aspirations are perfectly fine and commendable, though they are generally not compatible with the venture capital model.

The raison d’être of venture capital is to provide a high-risk / high-return asset class to investors in the fund. An investor’s allocation to a VC fund — whether they be an institutional asset manager, a family office, a high net worth individual, or even a retail investor — often represents a component of a diversified investment portfolio. Given the high risk profile of the projects in which a typical VC fund invests (i.e. startups), the VC fund’s investors expect high potential financial returns, usually in the range of 20-30% annualized over the lifetime of the fund.

Of course, there are exceptions to the above parameters, but these generally hold true for most VC funds.

So let’s break this down further. If we take an average 25% internal rate of return expectation (IRR), the VC fund can only invest in startups which offer the potential promise of meeting this threshold, and ideally with far higher upside. Another way to think about it is that an IRR of 25% equates to a return of over 5x in 7 years or over 10x in 10 years, net of fund management fees. We must also take into account the dilution effect of follow-on financing rounds. The quantity, frequency, size, and parameters of such follow-on rounds will vary depending on the startup’s performance but for this back-of-the-envelope estimate, I will assume a 50% dilution on the initial VC capital over the life of the investment. For VC funds that only focus on growth stage startups, this dilution effect will be lower.

The result is that every investment the VC fund makes should offer the potential of returning at least 10x in 7 years or 20x in 10 years. For growth stage VC funds, the lower dilution effect renders the result closer to 5-8x in 7 years, but the principle is the same.

For a founder, knowing the return expectations of the venture capital model will enable you to determine whether VC financing is appropriate for you, and if so, to be better prepared for your VC pitch meeting.