Mark P. Rice
Phillip G. Wickham
Lally School of Management and Technology
Rensselaer Polytechnic Institute
Troy, New York 12180
This paper will explore relationship and deal structuring for Japan(U.S. venture capital partnerships, identify potential problem areas and explore alternatives for resolution.
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.
Question #1: What type of partnership, if any, between American and Japanese venture capital firms best leverages the modern economy?
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.
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.