Why so many Japanese VCs won’t invest in Japan

Japanese startups is hot right now, and more and more foreign money is flowing in. But many Japanese VCs remain stubbornly outward-looking. Today we sit down with Shri Dodani, who after a series of highly successful American startups, decided that Japan is the best place to invest right now, and co-founded of Global Hands-On VC, to make those investments. We talk about the unique advantages startups have in Japan and why Japanese founders often have trouble leveraging those advantages. It's a great conversation, and I think you'll enjoy it. Show Notes The unique potential Shri first saw in the Japanese market How Japanese buying patterns help Japanese startups Japan's transition from VC 1.0 to VC 2.0 Are Japanese startups really becoming more globally minded? Why the large global VCs seem to have so little interest in Japan How Japanese VCs and corporates are more supportive of startups than in other markets Why it's important to invest in  Japanese founders "with a bit of an attitude” What's holding Japanese founders back today What actually stops Japanese founders from going global? The importance of role models and for Japanese founders to mentor The most promising startup sectors in Japan How recent immigration tightening will affect innovation in both the US and Japan Links from the Founder Everything you ever wanted to know about GHOVC Follow them on Note Connect with Shri on LinkedIn Check out an interview with him on YouTube Follow (GHOVC co-founder) Ken Yasunaga on Twitter @ken_yasunaga Leave a comment Transcript Welcome to Disrupting Japan, Straight Talk from Japan's most innovative founders and VCs. I'm Tim Romero and thanks for joining me. Longtime listeners of Disrupting Japan know that I'm extremely bullish about Japanese startups. In fact, most of us on the ground here are pretty optimistic about the whole situation. And yet a surprising number of Japanese LPs and VCs seem to have little interest in investing in Japan preferring to focus on high profile San Francisco. Today we sit down with Shri Dodani and we look into exactly why that is. Now Shri is a successful American founder with multiple exits, totaling well over $1.5 billion. And when he transitioned from startup to VC and put his first fund together, he decided to focus exclusively on Japan in order to take advantage of what he thought Japanese and foreign VCs alike were overlooking. Shri and I talk about Japan's transition from VC 1.0 to VC 2.0, the aspects of the Japanese market that give it a unique advantage over Silicon Valley in some areas, the one thing that's holding Japanese founders back the most and why it's important to invest in founders who have a bit of an attitude. But, you know, Shri tells that story much better than I can. So, let's get right to the interview. Interview Tim: So, I'm sitting here with Shri Ddani of Global Hands-on VC, a serial entrepreneur and founder and managing partner at Global Hands-on VC. So, thanks for sitting down with me. Shri: Thank you, Tim. It’s an honor. Tim: I'm glad we've got a chance to talk because I think you really do have a different perspective on what's going on in the Japanese market today. And just to give our listeners a bit of a background, so before moving into VC, you had a remarkable string of successes. As a founder, as an operator, you had six startups and six exits, including one that was a $550 million acquisition and IPO that was worth over a billion. I don't want to dig too much into that because we could be here all day talking about it and it'd be a worthwhile conversation. But after being such a successful operator for so many different types of startups, why the move to VC? Shri: A good question. So sometime I do one day even after became a VC, that should I continue doing my own companies because I'm good at that. Having done company in different field, you kind of get the nose for the technology. Obviously you have to be technical person, but beyond that, you get nose of different technology, how they relate to the actual product. And how do consumer or the industries benefit out of that? Most of the VCs come from financial world and what we can bring them uniquely is that we give them perspective from development perspective, but we can help the companies from a product development perspective as well. Tim: I can completely understand the value add both to the other partners, to the investors, to the startups you're investing in. But like on a personal level, it's a really different job. So, why did you want to make that jump? Shri: Service time, I've done several companies, as you noted, they've done in different industry. So as you want to get new challenge always right, because that's what keeps you young. Secondly, I've invested in over 25 now 28 companies of my own money and equal number of companies as an advisor as well. So, I've made money as an individual investor, a good rate of return and it was an opportunity for me to work with Ken to sort of make it more formal. Tim: So, this is something you were kind of building up to through personal investments and angel investments over time. And as someone who's also done both VCs and founding startups, the ability to interact with lots of different ideas and ability to support a lot of different bets and interesting markets is exciting, but do you miss the ability to execute your own vision? Shri: Absolutely. Absolutely. I'd be lying if I said that I don't, right? Because I think ultimately, we are wired to drive our own destiny, but all along the way I have an opportunity to be advisors and investors and one of the things you learn is that the way to scale your operation is to other smart people as well. So, the downside, I'm not driving it, but the upside is I'm learning tremendously more from much, much smarter people than I am. Tim: You and Ken together established Global Hands-on what made you decide to join other partners rather than pulling in a fund of your own? Shri: Ken was investor in my company that we eventually exited and Ken and I got along well and he was with INCJ after that fund. And as part of it INCJ, him and I have invested in two Japanese company. So we've been touch, we've been helping companies go global. And even from that perspective, it was a good thing for me. I can't do Japanese company without Ken for sure, because I don't speak Japanese. So you needed a partner in Japan. So, that's one thing. Second thing, the challenge for me was Japan is, I'm trying to figure it out, that Japanese government, Japanese entrepreneur, everyone is doing fantastic job. They're following all the textbook thing of how to do startups, how to invest in startup how to nurture the startup. For some reason they can't break out in terms of the mass scale, a scalable global business. And I'm trying to understand why. Tim: This is something that's puzzled a lot of people, myself included. It's an ongoing theme of Disrupting Japan. So that makes sense to operate in Japan. You definitely won a strong team, people with a track record and the team at Global Hands on, definitely is that. But taking a step back, I mean, why Japan in particular? There's all kinds of things going on all over the world, so why focus on Japan? Shri: Yeah, it's a very good question, why Japan, especially for me, I could do something else in the US or anywhere else. In 2005, I put my first money into a fund in India. It was a small fund for $5 million. I wrote the first check it is now called Excel India. At that time, nobody wanted to invest until Google put last $1 million, the $11 million fund. And then we hit the flip card, the flip card changed the entire India story and they have massive investment, massive capital flow, a lot of startups, a lot of activity, energy and so forth. Japan, to me, because I'm a startup guy, feels like here's a country that had a lot of capital, has a government behind it, and a lot of talent, engineering talent, a lot of core technology on a global basis. It should be right for a disruption from a startup point of view where you could create new startups and hopefully get a competitive advantage from an investment point of view as well, while others are not seeing the same opportunity. So, for me it was no different than me doing a startup looking at where are the opportunities, what can be disrupted? Where can you get unfair advantage before competition discovers that opportunity? That's what interested me in Japan. Tim: So let's talk a bit about your history and connections to Japan. Shri: So back when I was working for another startup, early eighties, I was responsible for Japan joint venture with SIE chemicals. So, I've been exposed then it was obviously in a different time as before the bubble. Since then, I've done my own startups, six of them, almost every one of them had either investor, customer or partner in Japan. The three things that they taught me all along, it's very hard to get into Japanese customer because they're very, very demanding and challenging, but in reverse order, you learn the most from them. They make your product better, they make your technology better, they make you work towards success. Tim: Well, and Japanese customers also tend to be incredibly loyal. Shri: Loyal as well. Tim: Yeah. The upfront effort required in that long sales cycle is probably made up with mathematical identity, with lower churn rates and longer retention on the backend. Shri: Absolutely. Absolutely. And since then, every one of them, there's people still using those products even now, right? Tim: So identifying Japan as an underappreciated opportunity really makes sense. But there's a lot of early stage funds in Japan. So what were you trying to achieve with this one that was different? Shri: Yeah, for me, Tim, we're still learning.