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Business trends

Innovation-hungry Japanese companies investing directly in startups

But some question whether corporate venture capital will truly pay off

KDDI bought "internet of things" specialist Soracom last year.

TOKYO -- Corporate venture capital funds are on the hunt in Japan as big-name companies become increasingly reliant on startups for innovation and talent, but their prospects for making the most of the spoils remain to be seen.

"We've had many inquiries from corporate venture capital funds about making investments, so it's easy to move toward creating ties with large companies," said Atsuyoshi Shimazu, president of internet security company Caulis.

The Tokyo-based startup has received investments from the Sony Innovation Fund and Seven Bank, among others.

Japanese companies have traditionally developed new businesses at their in-house research and development hubs, but rapid technological change has made it hard to keep up, even for the largest corporations. Sony apparently decided that Caulis had the technical prowess to cultivate new operations quickly, even with an investment of just a few hundred million yen.

With more companies setting up their own venture capital funds in recent years, startups increasingly are turning to them for funding rather than to ordinary venture capitalist.

Over four years through 2015, 12 companies and groups in Japan established venture capital funds, according to PwC Advisory in Japan. The pace has picked up significantly, with 11 more doing so since 2016.

Communication and internet companies like KDDI, NTT Docomo and Yahoo Japan led the way, but the ranks of companies investing in startups have since grown to include the likes of Panasonic  and Mitsui Chemicals. Nihon Unisys, Itochu Techno-Solutions and East Japan Railway have also joined the fray, although they are not included in the PwC Advisory survey.

The 10 billion yen ($95.4 million) Sony Innovation Fund, created in July 2016, has also invested in WAmazing, which offers information on Japan to visitors via free SIM cards. "We will consider collaborating with Sony on things like FeliCa," a contactless chip card technology, said WAmazing President Fumiko Kato. FeliCa is used in electronic payments and ticketing, among other applications.

The corporate venture capital fever is fueling concern, however, that a bubble may be inflating. With many companies setting up venture capital funds of 1 billion to 10 billion yen, investments in startups in Japan exceeded 270 billion yen last year.

"With corporate venture capital flowing into young startups that have been around only three to four years, business valuations are overheated," said an executive at an independent venture capital firm.

One challenge facing corporate venture capital funds is finding experts on startup investments. Among the companies surveyed by PwC Advisory, a plurality of 37% said they are not confident that they were investing under appropriate terms.

Veteran investment bankers are therefore a hot commodity among Japanese companies. Sporting goods company Asics has appointed Hiroaki Kageyama, who has a wealth of experience at foreign investment banks, as deputy chief of its corporate planning department. Kageyama, responsible for making decisions on investments of 3 billion yen, envisions the company becoming a game-changer in footwear and other gear. "We will showcase examples of innovation" to Japan and the world, he said.

Meanwhile, some companies are choosing to outsource fund operations. Toyota Motor and Sumitomo Mitsui Banking Corp.'s Mirai Creation Fund, with 36.7 billion yen in assets under management, is managed by Sparx Group. "We hope to invest in energy and mobility," said Sparx President Shuhei Abe.

American companies like Google and Intel have invested small sums in startups and have snapped up promising ones to secure technology and talent. "The long-term strategy of management and technology chiefs and what they do after investments and acquisitions are in sync," said Tesujiro Nakagaki of venture capital firm Draper Nexus.

U.S. companies ranked among the top five corporate venture capitalists worldwide in 2017, according to U.S. research company CB Insights.

Lenovo Group parent Legend Holdings of China ranked No. 6, the highest among Asian companies, followed by Samsung Electronics of South Korea. Nonfinancial companies from Japan have a limited presence in venture capital investments.

"Investments that count on simply absorbing the customer base developed by a startup often don't go well," said Shinji Asada, Japan head of Salesforce Ventures. Any bubble created by the corporate venture capital boom will be corrected at some point, he says. This would put a chill on much venture capital activity.

Will Japanese companies be able to transform themselves through venture capital activity, or is it all just a flash in the pan? The answer lies in whether they can apply long-term vision to open up new markets while taking advantage of other companies' strengths.

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