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Interview with Yukio Iura, President & CEO of Nippon Angels Forum

By Keith W. Rabin

Mr. Yukio Iura started his career as a banker at the Bank of Japan in 1965. In 1982 he was dispatched to the I.M.F. (International Monetary Fund). From 1989 to 1999 he worked for B.I.S. (Bank of International Settlement) in Basel, Switzerland as a fund management officer, in charge of managing eight percent of reserve assets of the central banks. After resigning from the B.I.S. in 1999 he started the Smart Investors Forum from which he created a group of more than 400 individual investors who are eager to invest their assets in the stock or bond market. In 1999 he also started NAF, a group of angel investors who would assist entrepreneurs both by investing money and by providing advice. As of June, 2000 this group consists of 450 members and holds monthly meeting to help match angel investors with entrepreneurs. He incorporated NAIC in June, 2000, using the core members of NAF. He intends to assist entrepreneurs more effectively and systematically. Mr. Iura holds a Bachelor of Economics Degree from Aoyama-Gakuin University.

Thank you Iura-san for offering our readers this chance to learn about your work. Can you tell us a little about the Nippon Angels Forum (NAF) and Nippon Angels Investment Co., Ltd. (NAIC) and your activities over the past few years?

Following my retirement from the Bank of International Settlements in 1999, I enjoyed a short vacation but soon began to think about the problems facing the Japanese economy. In time I came to view one of the primary challenges being the need to promote entrepreneurship. Japan lags behind the U.S. and many other economies in new business formations. We have ample capital, but promising companies are not able to connect with VCs and other investors who are reluctant to invest in seed stage businesses. This is one of the great tragedies of the Japanese economy. The consequence is that many good business seeds are dying because they are not fed enough money to start-up. As a result I decided to form the Nippon Angels Forum (NAF), which facilitates matchmaking between angels and entrepreneurs.

In addition, I formed the Nippon Angels Investment Company, Ltd. (NAIC) as a means to invest in the most promising firms. The NAF now has 450 members. Half of them are entrepreneurs who want the support of angel investors. Through these members, we identify promising seed stage businesses, which present themselves at our bi-monthly matchmaking meetings. The formula is proving very successful and as a result, we are now receiving inquiries from individuals who are helping us to establish sister organizations across Japan.

Given current market conditions, investor interest in start-ups and angel funding in the U.S. and many other markets has grown very sparse and difficult. Judging from the sense of excitement and mood of the participants and presenting companies at your latest event in Tokyo, however, it seems very alive in Japan. I was impressed by the wide diversity of people in attendance, ranging from young and middle-aged entrepreneurs to private, corporate and institutional investors. Do you view angel investing as a growing phenomenon in Japan and if so, can you explain why this should be the case when at least for the moment it is declining in most other markets?

You have to remember that we started from scratch. Not many organizations in Japan offer a platform for angel investing. Although we are starting from a small base, Japanese angel investors have found a place to exchange information at NAF. In U.S. and other markets, after the IT investment boom went bust, the market was full of suddenly empty forums. Here, we are only starting, and so the reverse trend is seen in Japan.

Your web site (http://www.naic.co.jp) highlights the mismatch between venture capitalists and venture businesses and talks about your goal of providing business acceleration and incubation services to startups and firms. It states "no venture capital companies (VCs) are going to invest in them because they cannot measure the potential of these venture businesses". In the past, however, we have seen firms such as Softbank and Hikari Tsushin in Japan and CMGI or Internet Capital Group in the U.S., which made many, what can be termed "indiscriminate" investments in large numbers of firms. Most of them have not performed well from the standpoint of investors. Can you explain how NAF and NAIC differs from these entities and why your own business model should meet with more success?

Softbank and Hikari Tushin had abundant funds and their policy seemed to be betting on statistics, i.e. ignoring research but with confidence that a large net will catch a star opportunity or two which will more than wipe out the losses incurred by the remaining junk stocks. They had money and time, possessing young presidents and were happy to take on big risks. On the other hand we have very limited funding resources, and therefore choose investment candidates very, very carefully. We have no other measures other than a determination to make careful and sound investment selection. Neither NAF nor NAIC can afford to make "indiscriminate" investments because of our limited financial resources. There seems no other way but doing extensive research work in advance and screening carefully. This, we believe will result in successful investments.

Can you give us some specific examples of the types of companies who have been participating in past NAF's, how they are selected, their success record in gaining funding, as well as your own NAIC investments and their subsequent performance?

Our business flow is as follows: First, we organize start-up company presentations every two months. Each time10 companies make presentations. We choose these 10 companies carefully out of 60-70 candidates. Second after each matchmaking session, we select the 2-3 firms that generate the most positive reaction, who return to make what we call "deep presentations". Here they are able to make detailed business pitches to those angels that showed interest at the initial presentation.

Additionally, through NAIC we are able to make investments in the most promising firms. This structure enables angel investors to make direct investments or to participate in our special purpose funds where they are able to gain the diversify that comes from utilizing a portfolio approach. Through these funds we have made investments in more than 20 companies. I'd like to mention three examples.

First, Business On Line: This company offers quick accounting services to accounting firms. They also offer OEM services to the U.S. firm, Intuit. After having set up their company in August, 2000, they have expanded into various small and medium sized firms and envisage an IPO within 2 years.

Second, Oregadale: This company created a secure Internet messaging method. They have an alliance with Japan Oracle. Their business performance to date has been excellent.

Third, Apparel Web: Japanese apparel companies have close business connections with China. The company helps both Japanese apparel companies and Chinese counterparts to use Internet technology. At the moment China takes care of the manufacturing function for Japanese apparel companies but in the near future China will no doubt become an attractive consumer market for Japanese companies. The company provides useful services for both Japanese and Chinese apparel companies.

It must have been a major adjustment to move from the Bank of Japan where you worked for so many years to dealing with the concerns of these smaller, privately-held enterprises. Can you give us an idea of the challenges you have had to face?

After monitoring the Japanese economy from outside of Japan for many years, I decided that helping start-up companies and venture capitalists is one of the most important factors needed to revitalize Japan's depressed economy. At NAF and NAIC we are trying to revitalize the Japanese economy from the firm level, for which many of my colleagues at BOJ have also expressed concern. In Japan with 10 years of almost no growth, high unemployment rate and strong downward pressure on prices, it is extremely difficult for start-up companies to build their businesses. But Japanese individuals have huge assets and I am trying to lead some of those assets to flow into start-up companies.

Your experience as a central banker combined with your new role as a provider of advice and capital to private enterprises give you a unique perspective on the Japanese economy. International media coverage on the Japanese economy has been quite negative for several years now. Is this justified and how do you perceive the general outlook moving forward?

I often quote from Franklin D. Roosevelt - "The only thing to fear is fear itself." Many Japanese economists and professors together with various media sources repeatedly make negative comments on Japan's economic prospects. This results in a negative perception by Japanese people on the future, letting them wait for the worst to come. In my opinion a vicious circle of pessimism makes Japanese people weary of taking risks in their investments. Of course the Japanese have their own problems.

Nonetheless, I feel such problems are common in the U.S and Europe as well. We all suffer from various problems one after another. In the past we experienced Oil Crises, the disastrous earthquake in Kobe, serious deflation after the bubble bust, and a lot of large companies have been trying hard to restructure and re-organize to maintain their integrity in a mature economy. Continuing bad debts, deflation, deep-rooted problems in the banking system, the weak stock market and a lack of consumer demand and confidence, are all negative factors for the prospects of venture capitalists. That is no doubt about it. For us, we just do what we can do with our limited funding resources. The venture capital market is declining in Japan. That has affected new start-up companies. We are trying to make every effort to encourage investors as well as start-up companies and C level companies.

In a large, complex economy such as Japan's there are always bright spots, no matter the state of the overall economy. In fact, some would argue these very problems are driving and giving rise to many unprecedented and exciting opportunities. Can you comment on whether you believe this to be the case and talk about some of the sectors and areas that offer the most potential to corporate and portfolio investors. If possible can you give us some examples of specific companies that will benefit from these emerging trends?

Currently various liquor shops and rice selling shops are beginning to suffer from changing pricing policies by the government. A number of these liquor shops' profits are declining sharply. In addition, "gofuku" or "kimono" shops are suffering from weak demand from young women. But some of them are trying to build networks with other similar small shops. Some are converting themselves into supermarkets or convenience stores. In the case of "kimono" shops, some are developing brand businesses, using their well-known names to market handbags and jewelry.

One interesting example is Suzuran International Corp. This company is a Japanese "sake" producer in Iwate Prefecture. They are small but produce one of the best sakes in the Tohoku region. They established a network of small liquor shops and now their annual sales total 250 million yen. The president of this company founded a Japanese sake bottler in Australia, where rice prices are 1/8-1/9 compared with that of Japan. Down there the company can produce sake at less than half the cost in Japan. By importing sake produced and bottled in Australia back to Japan, they are selling via a distribution channel of networked small liquor shops around Japan. Suzuran International has made individually weak and unorganized small liquor shops a high performance retail network by realizing such a unique idea. This is one of the good examples how one can revitalize scattered and depressed small retailers.

There are various business opportunities in severely regulated sectors including agriculture, education, and medical industries. Mr. Taguchi, the former executive officer of Misumi, introduced the possibility of medical doctors without hospitals. The idea is to send doctors directly to patients' home. Visiting doctors can save patients' time.

In Japan, there are many established firms, which are fundamentally sound, but need to adopt more competitive financial, marketing and other business practices. In many ways these firms, which are not dependent on the development of new technologies and who already possess infrastructure and customer and business networks would seem to have less risk to investors -- who can gain dramatic increases in valuations through standard restructuring practices. Can you comment on the importance of restructuring and reengineering in Japan?

In the case of Nissan, Carlos Ghosn has been very successful in restructuring its operation and has made Nissan regenerate profits. There are many other examples similar to Nissan type restructuring. Especially construction companies and distribution sectors are suffering from very weak profits base and many manufacturing companies need to re-orient their business prospects. Now many consulting firms are helping such large and small companies to reorient themselves. I think Nissan is the tip of the iceberg. Gradually that trend (restructuring and reorienting) is spreading to small companies as well.

Foreign investors do not seem to understand the geographic diversity offered by Japan, believing that all business is conducted in Tokyo and perhaps Osaka. Can you talk a little about opportunities outside of these major metropolitan areas and the attractions offered by different local economies in Japan?

There is no doubt that 25-30% of companies are situated within a radius of 100 kilometers of Tokyo or in Kanto Plain. Many other parts of Japan seek opportunities in Tokyo and its suburbs as possible marketing places to raise funds. However, there is a very good chance for various Japanese and non-Japanese firms to establish themselves outside of Tokyo. The central government of course helps in such efforts, and prefectures and cities are also prepared to support those who will do business in local cities. The central and local governments find NAF quite useful to access such private sector needs. We hope to cooperate with such public sectors and provide matching coordination for private entities.

Can you also talk a little about the emergence of China, Japan's relationship with Korea, and other relevant factors as they pertain to foreign investors that are looking to increase their exposure in the region and with small to mid sized firms in particular.

China has a big presence in Japan and it is my belief that the emerging China will be favorable to Japan. China and Japan have been influencing each other through our long-term relationship, for 2000 years or more. China has always been a good partner of Japan. China is the main exporter to Japan and Japan exports cosmetics, underwear, and other vital items to China. We have cultivated a mutually profitable relationship. South Korea is also clearly an important partner for Japan, and I hope South Korea has the potential to become another Singapore in terms of developing a free economic zone concept.

One major problem foreign investors have when dealing with Japanese firms is their intense domestic focus and difficulties in understanding Japanese business and accounting practices and most importantly, monitoring investments after a transaction is completed. Cultural and language differences also often represent a real problem. Do you think that small to mid sized Japanese companies have a capacity for dealing with outside investors - both foreign and domestic?

Integrated and international companies such as Sony, Hitachi, and Toyota, these companies operate internationally and domestically. But are you aware of the "Ichiro effect", Hideki Matui , another of our baseball stars, has just signed a contract with the New York Yankees. Today Japanese individuals are becoming international stars in many fields. And after the successful World Cap Soccer Games held in Korea and Japan I feel internationalization is beginning to penetrate into smaller companies in Japan as well.

Some of the foreign investors and financial intermediaries we deal with are considering a funds-based approach to investing in Japan. Through these vehicles they are seeking to achieve additional diversity as well as the ability to rely upon professionals who are better able to interact with, and monitor, these companies and accelerate their long-term performance. From your perspective, which approach makes more sense for foreign investors and are their any particular factors, i.e. size of companies and investment, etc. that are especially important to consider when considering either option?

Definitely we propose a funds-based approach. Look at NAF and NAIC. We can interact between foreign investors and Japanese companies. We are in the same group offering various services for growing Japanese and foreign companies, offering both direct investment and funds.

Iura-san, you clearly have come a long way in only a few short years. What are your plans for the future? How would you like to see NAF/NAIC develop over the next few years? Do you have any plans to expand in markets outside Japan?

I have growing confidence in creating a new angels market in Japan thanks to the past three years' experience at NAF and NAIC. When the Japanese economy hits bottom, our activities will expand fairly quickly just like a forest fire. For the moment we are not planning on exploring other markets, say in U.S. or other part of the world although in the long run we envisage opportunities in the U.S. as well as Chinese and Korean markets.

Thank you so much for your time and attention. Do you have any final points you would like to make to our readers?

Media reports are always very negative and not productive. By activating sleeping finances, new businesses will bloom. I am confident that there are enough business opportunities in Japan, those areas, which Japan has neglected over the past 50 years.


Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editor: Dr. Jonathan Lemco, Director and Sr. Consultant

Associate Editors: Robert Windorf, Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Jonathan Lemco, Jonathan Hopfner, Caroline Cooper, Sergei Blagov, Jean-Marc F. Blanchard and Andrew Thorson

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