This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.

The infographic we published last month proved popular. Some of the most encouraging feedback we received came from abroad, where foreign investors in the venture asset class expressed appreciation for visibility into Japan’s most active VC Funds. Even domestically, it appears that many local startup founders in Japan find our VC sector here equally opaque, and hence applauded this new transparency.

This collective feedback has inspired us to peel back one more layer of the onion: identifying Japan’s most active Lead VC funds.

What defines a Lead VC?

Quite simply, a Lead VC in a startup is the first venture capital fund to commit to a startup’s fundraising round. The Lead VC structures the investment round, establishes the terms and valuation in a term sheet, and sets the schedule for transaction closing. In Western markets, the Lead VC often represents the largest check in the round, though not necessarily, and this is far less common in Japan.

Japan Lead VC Radar 2021

Accordingly, the Japan Lead VC Radar, 2021 edition depicted below, reflects the number of investments by led by Japan’s independent VC funds into domestic startups in 2021. In a future post I will elaborate on why we believe this is an important tool for Japan’s growing venture ecosystem. Feel free to contact us for any requested corrections.

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.

We’ve mentioned this before: the venture ecosystem in Japan is on the rise! Now we have some supporting evidence. The Japan VC Radar indicates the most active VC funds in Japan last year.

Based on data sourced from Startup DB or the funds directly, the Japan VC Radar depicts the number of new domestic investments in 2021 by Japan’s independent VC funds (note: please feel to contact us for any corrections).

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.

There’s an old dig that venture capitalists like to make about private equity professionals: private equity folks boast about the size of their ego in AUM, whereas VCs know that what really matters is their IRR.

Now let’s define these three-letter words. First, I’m using the word ego as a euphemism here to be gender agnostic (albeit in reality it’s usually only men who tend to make this brag). AUM means assets under management (i.e. the total amount of money in the funds managed by the general partner team). IRR means internal rate of return (i.e. the cash returns distributed to a fund’s investors, annualized).

Asset managers care about AUM because it directly translates into guaranteed revenue. Closed-end investment funds typically follow a “2 and 20 model,” meaning annual management fees of 2% and a share of 20% of the capital gains generated by the fund (aka carried interest). The annual management fees are a direct function of AUM, i.e. 2% of total AUM each year. They are contractually established for the life of the fund, usually 10 years. The carried interest is a direct function of fund performance, i.e. 20% of the capital gains generated by the fund.

Accordingly, a large AUM directly translates into a significant guaranteed revenue stream for the entire life of the fund. A fund manager with $1 billion in AUM is probably receiving around $20 million per year in recurring revenue. A micro VC fund of say $10 million is receiving only $200k per year in recurring revenue via its management fees. 

Risk of misalignment

Since management fees are meant to cover the operations of the fund, excessively high management fees can translate into high salaries for the managing partners, luxurious offices, and lavish parties. Even if the fund’s financial performance is lackluster, a guaranteed annual revenue stream in the double-digit millions for several years makes for a fairly comfortable lifestyle. Do you see where a potential misalignment can emerge?

In contrast, a small VC fund can afford no such excesses. The managers of a small VC fund cannot become wealthy on management fees alone. They must perform. Only by generating significant capital gains on the funds they manage will they be able to generate wealth for themselves via the carried interest mechanism. IRR represents each fund’s financial performance.

For LP investors in private equity or VC funds who care about financial return, IRR is the metric that reflects their financial return, not AUM. So I submit that when a fund manager brags about their AUM, the appropriate rebuttal would be to ask their IRR.

Full disclosure: I too used to be guilty of the AUM flex. As a former GP in a fund that managed nearly $1 billion in AUM, I would often open my introduction at conferences by citing this figure. But over time, I learned that IRR represents my true KPI as a fund manager. IRR is the indicator of how well or how poorly I perform my job. It is not a mathematical anomaly that my best-performing funds have been those with smaller fund sizes, hence lower AUM.

In many ways actually, a propensity to chatter more about AUM than IRR is an indication of the stage of an ecosystem. When the venture market in a given region is still nascent, track records are limited, so the nearest metric people can look for is assets under management. However, once a fund manager has progressed beyond their first vintage, the more the relevant question to ask is, “So what is your IRR?”