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Names
Mark P. Rice
Phillip G. Wickham
Masaki Kuroki
Lally School of Management and Technology
Rensselaer Polytechnic Institute
Troy, New York 12180
Telephone: 518-276-8398
Fax: 518-276-8661
Principal Topics
This paper will explore relationship and deal structuring for Japan(U.S. venture capital partnerships, identify potential problem areas and explore alternatives for resolution.
Method
In depth interviews of five Japanese principals from five Japanese venture capital firms and seven American principals, six from American venture capital firms and one from a Japanese venture capital firm were conducted by the first author during the last quarter of 1996.) The sample includes over 50% of U.S. and Japanese firms currently engaged in formal and informal partnering arrangements between U.S. and Japanese venture capital firms.
Major Findings
Question #1: What type of partnership, if any, between American and Japanese venture capital firms best leverages the modern economy?
Response
1J
2J
3J
4J
5J
6A
7A
8A
9A
10A
11A
12A
Informal,U.S. style
X
X
X
X
X
X
X
Formal, contracted
X
X
Unsure
X
None
X
X
Question #2: Why?
Two of the twelve venture capitalists (one American; one Japanese)
felt strongly that relationships with Japanese firms should be done strictly
on a formal basis, with terms and expectations in written contractual form.
Both agreed that the primary is to accommodate different operating philosophies
and systems resulting from cultural differences. The seven respondents
(four Japanese; three American) who supported informal partnerships felt
that both knowledge of and comfort level with each others' cultural differences
has increased significantly in recent years. All seven respondents
also agreed that an important benefit of a looser affiliation was the freedom
to choose a Japanese partners on a deal-by-deal basis. Two of the
twelve venture capitalists (both Americans) indicated that relationships
between American and Japanese venture capitalists(either formal or informal(are
of no value.
Question 3A: What factors influence Japanese venture capital firms
to partner with American venture capital firms?
All twelve respondents agreed that Japanese firms were entering the
American market for access to investments with a better return on investment
than can be obtained through the traditional Japanese approach to venture
capital. Insight into technology trends via access to the total deal
flow of American firms was stated by seven of the respondents (three Japanese;
four American) as a motivation. Insight into the American venture
process was a stated goal of five of the respondents (two Japanese; three
American). There was a perception among some American respondents
that, without daily interaction over several years, this goal is unachievable.
Questions 3B: What factors influence American venture capital
firms to partner with Japanese venture capital firms?
Access to Japanese markets (five Japanese; five Americans) and distribution
channels (two Japanese; two Americans) was perceived to be the strongest
motivation for American venture capitalists to partner with Japanese venture
capital firms. Technology issues, both access to R&D in Japan
(two Japanese; two Americans) and localizing American technology (one Japanese;
one American), were also cited as important motivations. Accessing
sources of capital accounted for two of the responses.
Implications
At this early stage of the research, several trends are becoming apparent. American and Japanese venture capital firms increasingly have a common understanding of the costs and benefits to each other of partnering. Even though the Japanese and American venture capital industries are still substantially different, the trend is toward similarity. American firms are increasingly funded by institutional investors and are investing more conservatively. The macro changes in the Japanese economy are causing some Japanese firms to begin to move away from the traditional Japanese venture capital model and toward the American model. There are strong motivations for American and Japanese venture capital firms to partner. For the American venture capital firms the Japanese market represents a major opportunity for products and services being developed by their portfolio companies. In addition Japanese companies can be a gateway to access other Far East markets. In addition the relative weakness of the Japanese economy with respect to generating new technology through startup ventures, combined with the large size of the Japanese investment pool and the increasing willingness of Japanese companies to engage in aggressive acquisition strategies, provide opportunities for American venture capital firms to harvest their investments at attractive rates of return on investment. For American venture capitalists, the value of the insights suggested by this exploratory study is related to the viability and sustainability of the technological and societal changes that have recently begun to occur in Japan. Should they take root, efficiently structured partnerships will be well positioned to leverage the benefits cited in this paper.