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Japan bets on Indian startups after missing out in China

Brings expertise, discipline and patience to capital infusion

BANGALORE -- Six years ago, when Teruhide Sato, founder of the Tokyo-based venture capital company Beenos, offered Satyen Kothari an investment proposal during a meeting in Mumbai, he was disappointed. 

Kothari, the co-founder of Citrus Pay, a payment platform, was flattered by the offer but decided to politely turn it down. The amount was too small. 

"Later, Sato did something that was classically Japanese," said Kothari. "He went quiet and listened. Afterwards, he worked hard behind the scenes to find another Japanese investor ready to invest in us."

In December 2013, Citrus became one of the first Indian startups to receive capital from Japanese venture capital companies. These included Beenos and Digital Garage, and the combined investment in the Bangalore-based startup was about $5.5 million. Kothari sold Citrus for $130 million to Naspers-backed PayU in 2016, and the following year launched Cube Wealth, a wealth management company. That was backed by Sato's other venture capital outfit, Beenext, along with another Japanese investor, Asuka Holdings.

By 2019, India had attracted more than 50 Japanese investors, collectively pouring billions of dollars into Asia's second-largest economy. A recent report by DataLabs, an analytics company, estimates that from 2014 to the first half of 2019, Indian startups raised over $51 billion from Japan. 

Over the same period, there was only $12 billion in startups in Japan itself, where the more mature market lacked the same growth potential and need for innovation. While traditional companies have nevertheless done well there in recent decades decades, maintaining Japan's place among the world's richest countries, its startup ecosystem has gone through long fallow periods. Although funds exist, entrepreneurial talent has generally opted for safe, well-rewarded corporate employment over the uncertainty of startups. 

Parking money in promising overseas businesses is a win-win when money can rot in local banks earning negative interest -- and India as an alternative option often seems to tick the right boxes.

"Japanese venture capitalists need avenues to deploy this capital to generate good returns," Amit Gupta, co-founder of Yula, a mobility startup in Banglalore, told KrASIA. "The large markets include the U.S., China and India." While the U.S. and China have high competition for good startups, the Indian startup ecosystem is still evolving." Yulu raised $7 million in its seed round from several investors, including Japan's Akatsuki Entertainment Technology in 2018.

In June, Japan collaborated with India to launch a $187 million fund-of-funds for Indian tech startups when Prime Minister Narendra Modi was received by his Japanese counterpart, Shinzo Abe, at the G-20 summit in Osaka. While 80% of the capital going into over 15 funds was raised in Japan with Mizuho Bank, Development Bank of Japan, Nippon Life, and Suzuki as the main limited partners, Indian investors provided the rest. 

"India offers huge opportunities across sectors despite the economic slowdown," Anil Joshi, managing partner at Unicorn Ventures, told KrASIA. "And given Japan's relations with India, it makes sense to explore the investment opportunities in the country." Unicorn Ventures was a co-investor in Open, a digital banking platform.  

Japanese investors usually fall into two camps. Independent venture companies such as Beenext, Incubate India Fund, and Rebright Partners primarily invest in seed and series A rounds across multiple segments. Corporate venture capital companies, such as the investment arms of Mitsubishi, Mitsui, Sumitomo, and Toyota, generally make strategic series B and  C investments in a smaller set of industries.

"Independent Japanese VCs are trying to find new emerging models in India across different sectors," Brij Bhasin, general partner at Japan's Rebright Partners told KrASIA.

Beenext and Incubate India Fund have backed some 20 and 10 Indian startups, respectively. Rebright Partners has a portfolio of at least 12 early-stage startups spanning tech, analytics, health, mobility, and e-commerce.

"There [are many] corporates using their internal accruals to make strategic investments in the sectors that strongly align with their larger objectives," Bhasin said. "These are the markets where either Japanese corporates see a strong fit for their existing products or they are trying to build a new business."

For instance, the Akatsuki Entertainment Technology Fund, set up by the Tokyo-based entertainment company, invests and engages with "all businesses that deliver emotional experiences." In India, it has written cheques for at least 10 companies including gaming platforms Supergaming and Mech Mocha, superhero merchandise seller Planet Superheroes, and Doubtnut, an online tutorial platform. Automaker Toyota has backed mobility startups Droom and Shuttl. Nippon Life, Japan's largest life insurance company, has invested in lending startup Money View and Scripbox, a wealth management platform. 

According to Bhasin, independent VCs usually write cheques for between $100,000 and $3 million while corporate venture capitalists invest $3-5 million. Masayoshi Son's SoftBank has gone far beyond that, pouring hundreds of millions of dollars into Paytm, a payment service startup, and hospitality startup OYO.

Apart from SoftBank and Infinity Ventures, a technology-focused fund, Japanese venture capital has essentially missed out on China because of tense relations. Japanese companies have worried about the long term security of their funds and intellectual properties when dealing with Chinese startups, according to one potential investor speaking to KrASIA on condition of anonymity. 

Japanese venture capitalists have also been active in Southeast Asian countries like Singapore, Thailand, Indonesia and the Philippines, but India is the only market that begins to compare with China in terms of size.

Over the last two years, Japan and China have competed for stakes in overseas Asian startups. In India, Chinese VCs invested over $ 2.2 billion in startups this year up to September, while Japanese investors have poured in $1.5 in the year to date, according to Venture Intelligence, a research company.

Cube Wealth's Kothari sees investing in India as a hedge against increasing Chinese influence in Asian markets.

"Chinese investors who are coming to India are first-generation entrepreneurs," Mahendra Swarup, the founder of Venture Gurukool, told KrASIA. "Their investments are based on their entrepreneurial appetite and their ability to take risks, so they are aggressive in their investment philosophies. The roots of the majority of Japanese VCs can be traced back to larger corporates. Unlike the Chinese, Japanese investors are slightly conservative and very choosy." 

Investors and entrepreneurs KrASIA contacted said Chinese investors tend to go for startups that are either growing really fast or have business models similar to something that has worked in China. The Japanese look more for long term relationships to build. 

According to Rebright's Bhasin, Japanese investors steer clear of companies aiming for high rates of growth with heavy cash burn. "The startups have to have sound fundamentals, with proper justification for cash burn and a sustainable growth cycle," he said. He noted that Japanese VCs being risk averse also expect proper corporate governance. 

Unicorn Venture's Joshi said Chinese investors make decisions quicker than the Japanese, who see themselves more as long term players. 

"Japanese investors first build trust," said Rajan Bajaj, founder of credit lending startup Slice, which has four Japanese backers including Das Capital and M&S Partners. "The relationship may take time to build, but once they trust you, that's when the money starts coming in."

Chinese investors are primarily interested in consumer internet startups because they have seen such companies grow rapidly. The Japanese lean more towards financial technology and mobility startups, a result of their exposure in the global capital market and prowess in manufacturing. But they have also made bets in tech-focussed sectors such as health, e-commerce, logistics, and gaming.

"In Japan, the consumer cycle has been mature for a long time now," said Kothari. "So they do not have the same background as Chinese investors. Their expertise lies in asset management, lending, and payments, as well as in the future of mobility."

B2B is another area in which Japanese VCs have shown interest. E-commerce platforms Shopkirana, Ninjakart, BulkMRO, and IndustryBuying; logistics tech company Locus, and warehouse automation company GreyOrange all have Japanese investors. 

Slice's Bajaj does not see an investment fixation with proven models, but openness to new ideas and a changing long-term outlook. He notes that Japanese investors have supported less obvious ventures, such as Elanic, a fashion e-commerce platform, the health tech startup Healthians, and Droom, an online marketplace for used vehicles. 

"Having built very large companies themselves, they know the business for what it is and have a perspective of what it will be in the next five to 10 years," Bajaj said.

KrASIA is a digital media company focused on technology-driven businesses and trends across the Asia-Pacific region. It is part of 36Kr, a tech news portal based in Beijing. Nikkei has a minority stake in 36Kr.

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