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Startups

Sequoia Capital seeks to hit jackpot in Japan's digital shake-up

Silicon Valley venture capital firm targets high-tech gems with values up to $1.3bn

TOKYO -- Sequoia Capital will bring its hefty checkbook to Japan, looking for promising tech startups in a country undergoing digital transformation as China increasingly loses its appeal, Nikkei has learned.

The American firm will look for startups that deliver high-end technologies to corporate customers and have valuations of 30 billion yen to 150 billion yen ($279 million to $1.3 billion).

The Menlo Park, California, venture capital firm goes back to 1972, Silicon Valley's early days. It has provided investments to the likes of Apple and Google, and more recently Zoom Video Communications of the U.S. It has also invested in China's Alibaba Group Holding and ByteDance. Its investee companies' combined market capitalization exceeds $3 trillion.

Sequoia plans to cultivate the Japanese market through its Chinese office for the time being. At first, it will provide funding to Japanese venture capital firms with which it has partnerships. A source said it plans to "decide on projects sometime within between half a year and a year."

Investors have high hopes for the potential growth of the digital market in a country that still relies on paper documents, hanko stamps and face-to-face doctor visits rather than telemedicine.

The American venture capital firm will work out of its Chinese office and collaborate with its Japanese peers in cultivating the Japanese market.

As the pandemic spurs change in this analog culture, technologies such as cloud services and artificial intelligence are expected to improve business and day-to-day life. This paves the way for success for startups that can facilitate these digital shifts and provide new services.

Sequoia had focused its Asian operations on China, but the country's cooling economy, U.S. sanctions and the mainland's crackdown on Hong Kong have heightened risks there. In Japan, the coronavirus pandemic has cooled a previously overheating market, bringing valuations back down to earth and creating an easier investing environment.

Venture capital investment in Japan totaled 38.7 billion yen in the first quarter of 2020, a 31% drop from October-December 2019, data from Tokyo-based Venture Enterprise Center shows. Funding this quarter is likely to come in below year-earlier levels.

This marks a turnaround from last year, when spending reached an all-time high. "The overall value of startups is down by half," said an executive at a mergers and acquisitions advisory firm.

Investment in U.S. startups exceeded $130 billion in 2018, 40 times the Japanese total. For Japanese startups, funding from a discerning U.S. venture capital fund would serve to vouch for their growth potential and technological capabilities, and could also offer avenues for overseas expansion.

Sequoia's entry also means more competition for Japanese venture capital firms, which is likely to reinforce the trend of cash gravitating toward a handful of leading companies.

A growing number of Japanese firms are finding it harder to raise cash. In a survey by Deloitte Tohmatsu Venture Support, about 90% of venture capital funds and investment arms of large companies said they would invest less this year than in 2019.

"Japanese venture capital firms are drawing up lists of 'investees worth saving' and reassessing [startups'] future prospects," said a source in the finance industry.

Funds are likely to become pickier about the fields they invest in. Unlike the 2008 financial crisis, when cash flows froze up across the board, "investment this time around will focus on remote-friendly and health care-related startups," said Koichi Noguchi of PwC Consulting.

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