Fund focus: Coral targets Japan's Series B gap

Coral Capital, formerly 500 Startups Japan, knows that Series B funding is a problem in its home market, and it’s one of the few early-stage players with a track record of practical efforts to fix it. This included raising a special purpose vehicle in 2018 that provided an entire JPY1.5 billion ($14 million) Series B round for one of the firm’s standout portoflio companies, enterprise software supplier SmartHR.

SmartHR went on to secure JPY6.2 billion in Series C funding and become recognized as a leader in its field. Believing it had similar prospects in its early-stage portfolio, late last year Coral launched another growth fund that could back several such companies. Like its predecessor, the new vehicle would offer start-ups a consolidated Series B cap table, a rarity in Japan. Then a macro plot twist recast the whole opportunity set.

“We had begun working on that fund with our LPs when COVID-19 hit, which accelerated our need to get it together. A lot of growth capital in Japan has been provided by corporates. They need to focus on their existing businesses and may not be in the mood to work with start-ups,” says James Riney, a founding partner and CEO at Coral. “Fortunately, our LPs moved very quickly and we put together this fund in the nick of time, which is great for our portfolio companies.”

Coral Growth closed last week at JPY2.7 billion less than a year after the GP raised JPY6 billion for its flagship seed fund from the likes of Mitsubishi Estate, J-Power, Mizuho Bank, and Shinsei Bank. The growth fund will back 3-5 existing portfolio companies from the main fund, with the first deployment expected within the year. Only 10% of the main fund has been called to date, suggesting that most of the companies that will eventually receive funding from Coral Growth have not yet joined the early-stage portfolio.

Although the need to help businesses cope with the stresses of COVID-19 is a compelling factor in all this, it is not the guiding motivation. Coral Growth was planned pre-virus to alleviate Series B shortcomings that were already part of the fabric of Japanese VC. Nevertheless, the current climate means that future investees will be prioritized not by valuation, but by survivability. Long runways and minimized exposure to the most at-risk business segments will be among the most attractive attributes.

“We’re lucky that the companies responsible for most of our returns have raised quite recently, so they have a lot of capital in the bank, and we don’t really have that much exposure to restaurants and tourism,” Riney says, adding that two portfolio companies focused on enterprise digitization services have already been shortlisted for growth-stage investment.

“In a way, the situation has actually provided these companies a tailwind. Even in a COVID-19 world, they are still essential to keeping business and the economy going.”

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• Topics
• North Asia
• Fundraising
• Venture
• Technology
• GPs
• Japan
• Coral Capital
• TMT