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.

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Over the past 6 months we were forced to bow out of an investment in a startup on which we were particularly keen, and we barely averted a similar situation on a second one, both for the same reason.

The hang-up came in the due diligence phase of our investment process.

The term due diligence can be misleading for founders. VCs employ the term differently amongst themselves. Some venture capital investors use the term due diligence quite broadly, with the scope of their due diligence efforts encompassing nearly their full transaction process. Due diligence can begin shortly after the startup’s initial pitch meeting, and could include the VC’s entire assessment of the company: market analysis, strategic review, business model assessment, valuation benchmarking, full financial and legal audits, reference calls, and interviews with customers prospects and/or partners.

In contrast, I am old-school. I tend to apply a more conventional Silicon Valley view of due diligence, which is much more narrow in scope, essentially limited to the following principle: to verify that what we’ve been led to believe is indeed actually true. Specifically, in my narrow characterization, due diligence is limited to the client and reference calls as well as any detailed audits when necessary (financial/legal/technical). Everything before that is simply part of my job as a VC.

However, I am not writing this to complain about semantics. Either definition is fine, as is anywhere along the spectrum between my narrow usage and some investors’ broad definition of due diligence.

My objective here, rather, is to shed some transparency on the concept so that founders can avoid being misled, however inadvertently. Opacity on the nature and duration of a VC’s due diligence procedure does a disservice to entrepreneurs. It potentially wastes their precious fundraising time, causes them to miss out on investment from another VC fund, or in the worst case jeopardizes their company’s commercial relationships.

To be crystal clear and sidestep any confusion over the word due diligence, I will refrain from using it here. Instead, I will refer to an important milestone in any VC investment process: the VC term sheet.

The VC term sheet is a blueprint for an investment, a non-binding legal document that forms the basis of more enduring and legally binding documents. It establishes the specific conditions, valuation, and rights pertaining to the VC’s investment in the startup.

The term sheet is important for the startup founder because it represents a genuine intent on the part of the VC to invest. True, the term sheet is a non-binding document that subjects the contemplated transaction to certain conditions. For instance, at Shizen Capital our term sheets are conditional upon the satisfactory outcome of my narrow definition of due diligence (i.e. reference calls), as well as approval from our fund’s investment committee.

I submit that VC best practice should be as follows: only after the term sheet is agreed upon should the VC be allowed to perform reference checks with clients/prospects/partners of the startup. Founders may agree to make an exception to this practice, but I believe that this should come at the founder’s prerogative, and that founders should not feel pressure to do this as the norm.

I have witnessed too many startups in Japan fall into a trap while fundraising of overburdening their clients with reference call requests from potential investors. It is perfectly understandable to me now how this situation arose, and I do not condemn the behavior of my VC peers in Japan. The VCs are simply trying to collect as much information as possible to reassure their decision-making process. Especially in hierarchical VC fund structures, the analyst or junior associate evaluating the startup is afraid to make a career-limiting move by presenting an investment case that lacks airtight certainty.

The conundrum, however, is that in early-stage ventures it is impossible to eliminate all uncertainty.

The result is an inherent misalignment which can bring great harm to the founder. It can extend an investment process from what should take weeks into several months. Worse even, it may raise doubts among the startup’s clients, who subsequent to frequent reference calls, may start to wonder:

• Is this startup having a difficult time fundraising?
• Is this startup financially stable, or should I consider switching my business to another vendor?
• Will being a customer of this startup always be so troublesome and time-consuming?

When a prospective investor requests client calls only to decide subsequently not to invest, the startup founder has squandered a bit of their goodwill with their customers. Multiply this by several VCs, and this becomes a burden on the startup’s commercial relationships.

Founders should not feel obligated to grant reference calls to any candidate VC who requests them.

Postponing reference calls until after the term sheet is signed will separate the VCs who are genuinely interested in investing from those who are merely gathering information or embarking on fishing expeditions.

This guest post is authored by Cherubic Ventures. Founded in 2014, they are an early-stage venture capital firm that’s active in both the US and Asia, with a total AUM of 400 million USD. Focusing on seed stage investments, Cherubic aims to be the first institutional investor of the next iconic company and back founders who dare to dream big and change the world. Their team sits across San Francisco, Singapore, and Taipei.

The Japanese translation of this article is available here.

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The global tech industry is seeing wave after wave of layoffs, from the unicorn level to the top internet giants. Statistics from Layoffs.fyi show that in the less than three months since the start of 2023, layoffs have already exceeded 100,000, with Google, Microsoft, and Meta topping the list.

It’s easy to write these job cuts off to companies cutting spending during an economic downturn, but take a deeper look. The mainstream adoption of work automation tools coupled with the effects of the pandemic has led to a tremendous shift in how manpower is used and organized. And we need to pay attention to the fact that the target of these layoffs has been in many cases middle management.

A recent Bloomberg report discovered that in its latest wave of job cuts, Google has targeted mid-level managers, of which the company revealed it has over 30,000. At the same time as this news, Meta identified 2023 as its “Year of Efficiency”. Tesla CEO Elon Musk has always been at the front of the “lean and mean” approach to management, so it’s no wonder that when asked about his least favorite part of running Twitter, his answer was that every engineer’s code seems to be managed by ten people.

Managers are supposed to make organizations more efficient in hitting targets, but in the current environment, the word “management” is starting to be seen as the new enemy of workplace efficiency and agility.

There seem to be 10 people “managing” for every one person coding

— Elon Musk (@elonmusk) October 30, 2022

When managers become “human routers”

In a tech industry where new technologies can be iterated rapidly and agility is essential to survival, companies are putting more stock in the “lean” mentality. But there’s no getting around the reality that as companies scale, they need to expand their workforce, which is why they need managers to handle communication and make sure all departments are aligned.

However, the result is that managers’ time becomes more and more consumed by managing communication. And when management has no time left for more growth-focused, value-added tasks, companies fall into the trap of organizational hypertrophy. Thus enters the concept of “human routers”, or mid-level managers with little function outside of organizing and disseminating information.

Work automation tools are rewriting the nature of work

The root cause of this trend is that automation and productivity tools are rewriting the nature of work. Today’s software tools can essentially perform the historical functions of mid-level managers, e.g. supervising team productivity, overseeing progress, and document management. At Cherubic Ventures, our productivity tool JANDI solves the interdepartmental communication pain point by letting us create special chat groups based on project, department, task, or topics. It can also assign tasks, monitor progress, and integrate with other apps such as Google Calendar and Salesforce.

A study by a Wharton Business School professor points out that automation in fact creates jobs, referencing how machinery freed past generations of farm workers to take on jobs in the newly created service industry. But when machines can take over tasks like reviewing reports, and perform them without human error, a reduction in the need for managers is inevitable – Gartner predicts that nearly 70% of daily tasks for middle managers will be fully automated by 2024, which will lead to a complete reshaping of this role.

The recent emergence of generative AI like ChatGPT and Midjourney give us a picture of where work automation is heading. All that these tools require is a few keywords or prompts to automatically generate blog posts or design images, with the human user only providing instructions and suggestions for optimization.

This does not, however, signal the end of management. If managers use automation tools to their advantage, more time will be released for high-level tasks such as team building and talent cultivation. And as the 2021 Harvard Business Review article “It’s Time to Free the Middle Manager” emphasizes, companies need to start looking at alternatives to the traditional promotion systems that allow workers to advance without necessarily taking on management responsibilities.

It’s a historical pattern that every new technology results in the replacement of some jobs. The only other constant is that those growth-minded individuals who are not afraid to disrupt the status quo and can coexist with the new technology will always come out on top.

This guest post is authored by Cherubic Ventures. Founded in 2014, they are an early-stage venture capital firm that’s active in both the US and Asia, with a total AUM of 400 million USD. Focusing on seed stage investments, Cherubic aims to be the first institutional investor of the next iconic company and back founders who dare to dream big and change the world. Their team sits across San Francisco, Singapore, and Taipei.

The Japanese translation of this article is available here.

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ChatGPT has triggered a wave of generative AI products, which is creating huge ripples in the tech space. In just one week, the number of ChatGPT users exceeded one million, making it the fastest growing software in history, surpassing both Twitter and Facebook. New AI tools in areas like copywriting, coding, interior design, are popping up one after another, and generative AI is already the darling of the venture capital world.     

According to CBinsight data, the amount of financing related to generative AI in 2022 will exceed 2.6 billion US dollars, almost double the amount of 2021. Tech giants like Microsoft and Google are rolling out new AI products in a display of strength to see who will own the last word in the AI era.  

But this surge in generative AI reminds me of the launch of location-based services 15 years ago. 

Location-based technology dominated the entrepreneurial conversation in those years, propped up by the launch of the iPhone in 2008. New products leveraging the technology in areas such as social media, shopping, and dating emerged one after another, each of them aiming to be the next big platform for the time.   

Let’s look at Foursquare as a prime example of where the “location-based wars” started and how they’re going. We all remember the check-in and location sharing for badges functions, which helped the app break one million users in just one year after its launch, overtaking Twitter, which took two. This led to Foursquare attracting $70 million in VC funding. Internet giants like Facebook, Google, Groupon, and Twitter all followed suit, aggressively acquiring location-based tech startups to offer similar services. Those startups have all since changed their business models or disappeared. And the originally consumer-facing Foursquare is now a data analysis provider for enterprises.    

The lesson is that new tech always creates huge opportunities and triggers entrepreneurship, but only a few startups can survive till the end. So what mindset should we adopt around generative AI?   

As time passes, startups built entirely on new tech will lose their advantage as soon as the barrier to implementing that technology is lowered. So will it be when AI eventually becomes a commodity that any company can integrate into its services with just a few lines of code. That’s exactly what happened with location-based services. At times like these, it’s those startups that can solve the most user pain points and retain those users that will make it through the night.  

In the face of new technologies, founders need to go back to the essentials of entrepreneurship and first ask themselves what pain points they can solve and in which industries. Only after they have taken these first two steps should they ask: “What role can the new tech play in this use case?” Location-based technology enabled Uber and Google Maps to exist, but neither company defined themselves as “location-based services companies”. They started from the perspective of which transportation pain points needed fixing. 

Whether you are a founder or an investor, as long as you can return to the essence of the problem every time a new technology arrives, the answers to these questions will become clear.

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.

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One key component of our investment thesis at Shizen Capital is our view on exit opportunities for early-stage startups in Japan. We believe that Japan has now reached an inflection point, and that corporate M&A for Japanese startups is poised to go intergalactic.

Historically, an IPO has been the most common and viable way for VC-backed startups in Japan to exit. The Mothers market of the Tokyo Stock Exchange (now re-branded as TSE Growth) functions so well that even microcap companies in the $10 million valuation range could go public. This has proven to be a double-edged sword, a topic on which I should probably elaborate in a longer post.

(TL;DR: The main benefit accrues to VC funds by providing them a convenient path to exit, but not without drawbacks: such as curtailing ambitions of private companies, creating misalignment risk with IPO preparation service providers, forcing a generation of entrepreneurial founders into becoming public company administrators, and depriving Japan‘s VCs of the opportunity to learn one of the most important skills of being a good VC, which is positioning a startup for M&A).

Paradoxically, all of our exits from our Japan funds have been via M&A, including my own personal career high. Although our particular track record in Japan seems to represent an exception, we believe that M&A transactions of Japanese startups is about to increase exponentially. We see three principal drivers at play here:

1. Shift in sentiment among founders

We’re observing an unmistakable shift in perspective among founders in Japan that selling their company via M&A is no longer an admission of failure. If you’re surprised when reading that last bit, I too was surprised myself. One of my innumerable discoveries upon launching my first fund in Japan was how Japanese founders had been educated to view an IPO as their proof of success, and that selling their company to another firm implied that they couldn’t make it. At minimum, M&A was viewed as a Plan B at best.

Fortunately, this attitude is changing. While it’s impossible to pinpoint the specific reasons for this shift in mindset, I suspect a couple of contributing factors. Japan may well have reached a critical mass of startup founders who have pursued the IPO path. These founders now manage listed companies — with all the accompanying obligations of compliance and investor relations that a public listing entails — and they are unhappy in their newfound managerial roles, with daily responsibilities far removed from life as a startup entrepreneur. Anecdotally, we have spoken with a handful of such individuals who have confided in us that they are miserable, that they reminisce nostalgically for the days when they could simply tinker and build in harmony with their intrinsic motivations as “0-to-1” entrepreneurs.

Another potential contributor to the changing perceptions is the increasing number of foreign entrepreneurs in Japan, who do not carry the same emotional baggage related to M&A and are setting the example.

2. A tax break for corporations that acquire domestic startups

As part and parcel of the Japanese government’s startup nation agenda, a new tax policy will grant Japanese corporations a tax break in acquiring domestic startups. Under this new scheme, corporations will be able to deduct 25% of their acquisition price from their taxable income up to ¥5 billion (~ $40 million) per transaction and up to an aggregate of up to ¥12.5 billion (~ $100 million) in tax deductions every year.

This new tax deduction could help surmount the “not-invented-here” syndrome prevalent in many Japanese corporations, who in reality are desperate to complement their laudable in-house innovation efforts with innovation from outside the corporate walls. This has the potential to shake up internal corporate incentives. Once a few initial corporations take advantage of the tax deduction, others will likely follow suit, and increase their own M&A activities in emulation. [Note: there remains a minor issue related to goodwill depreciation but this is under review.]

3. A new macroeconomic paradigm of inflation

Inflation has arrived in Japan too. Although not quite yet as severe as the other G7 countries, Japan has recently printed a 41-year high in inflation at nearly 4.3%. Accordingly, we are detecting a growing sensitivity among corporate executives to this new inflationary environment. With over $3 trillion worth of cash in aggregate on their balance sheets (yes, that’s trillion with a ‘T’), corporate Japan faces an increasingly obvious choice: ramp up investment in long overdue digital transformation, or dither while inflation erodes their capital.

Taken together, we believe that the above factors will drive a virtuous cycle. Increased M&A for early-stage ventures in turn will provide a new generation of founders with a taste of company-building accompanied by modest wealth creation. If the experience of European ecosystems is any guide, this first step will likely motivate a subset of these successful founders to jump back into entrepreneurship and to aim even higher. Others may become early-stage VCs themselves, another boon to a startup ecosystem in which few VCs today possess startup experience.

In our view, this context augurs well for early-stage venture investing in Japan overall.