Fund focus: Foreign LPs creep into Japan VC
Japan’s Dimension has closed its first fund since spinning out from Dream Incubator, more than doubling its prior vintage and tracking increased interest among regional institutional investors
It was at last year’s AVCJ Private Equity & Venture Forum in Japan that Noriyuki Ito (pictured), an investor and business producer at local VC firm Dimension, began to notice international LPs circling his home market.
“Of course, their first interest is private equity, and compared to that, venture capital returns might be limited, but a lot of investors in Asia are beginning to get interested,” Ito said. “A lot of foreign investors were throwing me questions about track record and companies in our portfolio. They’re avoiding China, and they see Japan as having less political risk.”
This is where Ito first encountered representatives from a Singaporean fund-of-funds, although they didn’t get any further than handshakes and an exchange of business cards. After the event, the fund-of-funds made the first move, and a 10-month due diligence process was underway.
“They conducted interviews with the entrepreneurs who received investment from our fund. They asked them questions like, ‘Was our support sincere? Did Dimension give you practical advice?’ They conducted interviews with our co-investors about how we behave in the Japanese market,” Ito said.
“Two months ago, they visited Tokyo, and we had dinner. They’re trying to understand the Japanese market more through this investment.”
Dimension’s second fund closed this month on JPY 10.1bn (USD 75m), edging past a JPY 10bn target with support from the same fund-of-funds, its first overseas institutional LP. Additional contributions came from Japan Investment Corporation (JIC), Carta Holdings, Growin’ Partners, Loyalty Marketing, and SMBC Nikko Securities.
Fund I closed on JPY 5bn, mostly supported by individual and corporate investors, in 2019. That was when Dimension operated as unit of Dream Incubator, a start-up advisory founded in 2000 that went public in 2002. Dream Incubator’s founder, Koichi Hori, retired in 2021, and the succeeding management couldn’t abide the long economic timeframes of VC as a listed entity. This led to an amicable split.
The core Dimension team, including Ito, negotiated to keep their track record, assets, and network as part of a management buyout in September 2021. Dream Incubator now concentrates on its consulting business; the only investment activity is via an India cross-border fund that was never part of the Dimension team’s mandate.
“The MBO was one of the best decisions we’ve made,” Ito said. “We have more freedom, and our decision-making process is much more efficient. If we have votes from two out of three investment committee members, we can go for an investment. And we can collaborate more with big co-investors in Japan.”
Dimension has backed more than 150 Japanese technology companies to date. Of this, about 30 have gone public and 50 have been exited via M&A. Investment activity has historically spanned early to late-stage companies.
Fund II will be more than 90% in the early stages, where valuations are seen as more rational and stable. Ito cited a proliferation of “down-round IPOs” due to inflated valuations in more mature companies but noted investors could still realise 10x to 20x returns via IPO if they enter in the first round.
To this end, Dimension is honing its seed-stage approach, including a longstanding playbook for helping entrepreneurial teams spin out of large companies. Deals in this vein typically deliver the firm around 20% equity positions, more than double what it normally gets.
The new fund has made three such investments so far, notably including Pocketalk, a mobile real-time voice translator app that works in more than 80 languages. Dimension helped the business spin out from Tokyo-listed software company Sourcenext as part of a JPY 1.6bn investment last November. Having seen significant traction in US hospitals and schools, Pocketalk is now contemplating a US IPO.
“When it comes to start-ups, speed is everything,” Ito said, flagging healthcare and entertainment as sectors of interest for the new fund. “That’s why they want to carve out of these mega-companies and why there are a lot of investors who are willing to offer money for this kind of challenge – including us.”
More on North Asia
Latest News
Asian GPs slow implementation of ESG policies - survey
Asia-based private equity firms are assigning more dedicated resources to environment, social, and governance (ESG) programmes, but policy changes have slowed in the past 12 months, in part due to concerns raised internally and by LPs, according to a...
Singapore fintech start-up LXA gets $10m seed round
New Enterprise Associates (NEA) has led a USD 10m seed round for Singapore’s LXA, a financial technology start-up launched by a former Asia senior executive at The Blackstone Group.
India's InCred announces $60m round, claims unicorn status
Indian non-bank lender InCred Financial Services said it has received INR 5bn (USD 60m) at a valuation of at least USD 1bn from unnamed investors including “a global private equity fund.”
Insight leads $50m round for Australia's Roller
Insight Partners has led a USD 50m round for Australia’s Roller, a venue management software provider specializing in family fun parks.