Willing to travel: Japanese tech firms look overseas

"Five years ago when you thought about competition it was domestic players only, but now you have to be aware that there may be potential competition coming in from overseas," says Shinichi Takamiya, partner at Japanese GP Globis Capital Partners. "You have to really think about how you can gain the advantage."

In response to the globalization of its market, the technology-focused VC firm decided the best way to gain this advantage was by taking its companies global too. The change is reflected in Globis' latest fund. About 40% of the Globis Fund III portfolio has plans for overseas expansion, compared to just 15% in the firm's 1999 debut vehicle.

It is part of a broader trend of Japanese companies targeting overseas markets for growth - whether it is VC-backed start-ups seeking new customer bases, strategic investments via corporate venture units, or standard M&A.

One of Japan's strengths is mobile gaming and internet technology. The country had mobile internet way back in 1999, when most of Asia was just beginning to set up cellular networks. It already has a 4G LTE network in place and 3G penetration is around 95%. A lucrative social gaming industry, now worth about $4 billion, has been built on this infrastructure and globalization has played a role in its development. When the likes of Zynga and Playfish launched in Japan, domestic technology companies saw both a threat and an opportunity.

"Since we are ahead in terms of the technology, we could develop a sophisticated product and then export it to other markets," Takamiya says.

Familiar patterns

Southeast Asia has emerged as a focal point for these efforts, not only because it offers youth and rising wealth, but also because the internet environment is similar to that of Japan - countries have leapfrogged the fixed-line internet revolution and are moving into mobile. In Vietnam, for example, more than two thirds of the population is 16-64 years old, consumption has been growing at 20-24% per year for nearly a decade; there are 2.7 million wired broadband subscribers and 20 million 3G subscribers.

"We can predict what trend will come over in the next few years because that is what happened in Japan, China and also the US," says Toshi Namba, senior vice president at CyberAgent Ventures (CAV), the venture capital arm of internet advertising and social games company CyberAgent.

This "time machine" model has been one of CAV's strategies in Asia, where the firm provides invests from a $15 million fund that targets consumer internet and online advertising services. However, Namba observes that the model must be localized to fit in with particular cultural and socioeconomic trends. A local presence is also required to gauge the speed at which mobile infrastructure is developing.

"We think sometimes it might be early but we are pretty sure they are catching up so it is important for us to locate our team there and put our investment into the right company at the right time," he explains.
CAV has offices in China, Vietnam, Taiwan and Indonesia, and it set up in South Korea a year. This network is also able to support portfolio companies that want to expand in the region.

CAV is not alone in targeting Southeast Asia with a view to accumulating knowledge and experience that will ultimately benefit the parent group. The VC unit of social gaming and networking provider Gree has invested in Indonesian start-ups such as real estate market place Urbanindo, fashion store Berrybenka, e-commerce site Bukalapak and price comparison site Pricearea. About 60% of Gree Ventures' JPY2 billion fund will be deployed in the region, while the rest goes to Japan and Korea.

Meanwhile, GMO Venture Partners, the VC unit of GMO Internet Group, is investing in Southeast Asia via its JPY1 billion ($10.5 million) GMO VP Fund III. The vehicle follows its parent's interests by targeting advertising, e-commerce, payment processing, and smart phone services.

Japanese investors are also present in the US through the likes of media conglomerate Recruit Holdings' Silicon Valley-based Recruit Strategic Partners and wireless carrier Softbank's investment arm Softbank Capital. In May, Softbank raised $50 million to invest entirely into New York start-ups. It already has 32 investments in the city, and past exits include Huffington Post, Hyperpublic and OMGPOP, which were bought by AOL, Groupon and Zynga, respectively.

Another means by which Japanese technology firms are gaining exposure to new innovations and markets is through investments in external venture capital funds or joint ventures.

Earlier this month, Southeast Asia-focused VC Ardent Capital received strategic investment from GMO Venture Partners, Recruit Strategic Partners, and US-based Siemer Ventures. Ardent invests in technology companies with a strong focus on e-commerce and digital media. It has two main divisions - Ardent Ventures, which provides early stage investment, and Ardent Labs, an internal incubator that builds companies.

Lightspeed China Partners (LCP) counts Japanese companies among the LPs in its debut fund, which closed at $168 million in January. However, in addition to providing capital, Ron Cao, managing director at LCP, expects the Japanese to add value to the portfolio.

"They are in Southeast Asia and a number of places so they have a lot of tentacles in terms of portfolio companies or partnerships or joint ventures that can be value add," says Cao, whose fund invests in internet, mobile and technology-enabled consumer businesses. "They will work with us to understand what the good sectors are."

Japanese technology companies have also invested in Silicon Valley VCs, "in the hope that they get an early look at some of their interesting portfolio companies, which they can then understand and bid for," according to Ash Roy, managing partner at Japan Edge, an investment firm that supports Japanese companies expanding overseas. "It's a more recent trend - the mobile business has exploded in the last 4-5 years. It was not a big deal before that because the network bandwidth didn't exist. Now that they're going into 4G LTE a lot of things are possible on the mobile side."

From VC to M&A

According to Thomson Reuters, US-based private equity and venture capital investors have made 11 exits to Japanese corporates in the high-tech space since 2010, with total deal value coming to $1.38 billion. In Asia there have been 13 such deals over the same period, although the amount invested is a more modest $295.4 million.

Japanese companies are certainly keen to form joint ventures in Asia, leveraging their knowledge, and there is the possibility this could translate into more M&A activity.

GMO Internet Group, for example, has a joint venture with Chinese internet research specialist Horizon E-lab, called GMO E-Lab Marketing Research. The idea is to combine GMO's brand with E-lab's local operating methods, marketing strength and business expertise.

In another instance, after DeNA Group launched its Mobage social gaming platform in China in 2011, it entered into local partnerships to bring its games to Chinese users. Partners include social networking Internet platform Renren, micro-blogging platform Weibo, and online games developer NetDragon Websoft.

In India, Softbank and Bharti Enterprises, the parent of Bharti Airtel telecom, have a joint venture that invests in the mobile internet ecosystem, with an emphasis on social media, gaming and e-commerce. So far it has invested in Hike, a free mobile app that integrates instant messaging and SMS for the Indian market, where more than 90% of the 900 million-strong mobile population uses feature phones.

Randy Laxer, a partner at law firm Morrison & Foerster, says he has seen deals which begin as joint ventures or corporate VC-type investments culminate in M&A, but it doesn't happen quickly.

"Corporate VC investment could be a first step to a potential acquisition but with a long term view - to understand the target company better, so it's a slow moving process," Laxer explains. "You make a corporate VC investment at first, with the potential maybe of acquiring the company at some point in the future."

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• Topics
• North Asia
• Venture
• CyberAgent Ventures
• Globis Capital Partners
• Lightspeed Venture Partners
• Softbank China Venture Capital
• Japan
• Venture
• M&A
• TMT