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Japanese sneaker marketplace reaches $340M valuation after raising funds from SoftBank

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This is the abridged version of our original article in Japanese. Tokyo-based Soda, the Japanese startup behind a marketplace specializing in sneakers and streetwear called SNKRDUNK (pronounced as Sneaker Dunk), announced today that it has secured an undisclosed sum in a series D round from SoftBank Vision Fund 2 (SBVF2), which brought the company’s valuation up to 38 billion yen or $340 million US. This follows the company’s series C round back in July where it secured 6.2 billion yen (about $54 million US), meaning that their valuation became 1.6 times in just 4 months. The previous round was led by Korean tech giant Naver’s Kream with participation from Altos, SoftBank Ventures Asia, JAFCO Group, and existing investors including basepartners, Coloplast Next, and The Guild. The funds raised in the latest round will be used for expanding into the Asian markets such as Singapore, Australia, and Hong Kong in addition to strengthening business expansion effort in Japan, AI-based logistics, authenticity assessment, and customer support. This is SBVF2’s second investment in a Japanese startup following cash injection into biotech startup Aculys Pharma. SoftBank Vision Fund 1 (SBVF1) had been investing 100 billion yen in each startup on average, mainly focused on…

This is the abridged version of our original article in Japanese.

Tokyo-based Soda, the Japanese startup behind a marketplace specializing in sneakers and streetwear called SNKRDUNK (pronounced as Sneaker Dunk), announced today that it has secured an undisclosed sum in a series D round from SoftBank Vision Fund 2 (SBVF2), which brought the company’s valuation up to 38 billion yen or $340 million US.

This follows the company’s series C round back in July where it secured 6.2 billion yen (about $54 million US), meaning that their valuation became 1.6 times in just 4 months. The previous round was led by Korean tech giant Naver’s Kream with participation from Altos, SoftBank Ventures Asia, JAFCO Group, and existing investors including basepartners, Coloplast Next, and The Guild.

The funds raised in the latest round will be used for expanding into the Asian markets such as Singapore, Australia, and Hong Kong in addition to strengthening business expansion effort in Japan, AI-based logistics, authenticity assessment, and customer support. This is SBVF2’s second investment in a Japanese startup following cash injection into biotech startup Aculys Pharma.

SoftBank Vision Fund 1 (SBVF1) had been investing 100 billion yen in each startup on average, mainly focused on US-based unicorns which are valued over $1 billion. However, the average ticket size of the second fund (SBVF2) has been reduced to 20 billion yen ($177 million), and some of Japanese startups have been gradually becoming the fund’s potential investees.

In an interview with Forbes Japan, SBVF2’s managing partner Kentaro Matsui shared his fund’s five investment principles: 1. market size, 2. innovativeness of services, products, and technologies, 3. accelerating growth through AI (artificial intelligence) and data utilization, 4. entrepreneurs and management team with a clear vision, and 5. sustainability of the business and a clear path to profitability.

In the statement, Soda claims AI-based logistics as one of what the fund is used for. By optimizing the logistics process leveraging cutting-edge technologies, the company expects to allow customers to experience the new standard of trading – sell today, receive tomorrow. It’s unnecessary to say technology is the key to breakthroughs here.

According to the SoftBank Group’s financial results for the second quarter ending March 31, 2022, SVF1 and SFVF2 have 81 and 157 portfolio companies respectively.

Venture Capital: why AUM is the wrong metric

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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…

mark-bivens_portrait

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.

Image credit: Pixnio

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?”

Japan’s space debris remover Astroscale secures $109M, brings valuation to $295M

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Tokyo-based Astroscale Holdings, the Japanese startup offering space debris removal services, has secured approximately 12.4 billion yen (about $109 million) in a Series F round, which brought the startup’s valuation to 33.4 billion yen (about $295 million). This follows their series E round back in October of last year. Investors participating in the latest round are: DNCA Invest Beyound Global Leaders Environmental Energy Investment Siniphian AXA Life Insurance Innovation Engine OPS Seraphim Space Investment Trust Solaris ESG Master Fund Chiba Dojo Nomura Sparks Investment Prelude Structured Alternatives Master Fund Yamauchi-No.10 Family Office (the family office of Nindendo’s founder) Y’s Investment According to the company, the funding will enable the company’s global growth, including the development of technology for safe and cost-effective on-orbit services and the expansion of its own facilities for mass production in Japan, the UK and the US. Since its Series E round back in October of last year, the company’s workforce has grown by more than 60 percent, reaching about 250 employees globally. The company successfully launched and put into orbit the ELSA-d space debris removal satellite in March, and this month, followed by introducing its docking plate this month, which is designed to be pre-loaded onto…

ELSA-d
Image credit: Astroscale Holdings

Tokyo-based Astroscale Holdings, the Japanese startup offering space debris removal services, has secured approximately 12.4 billion yen (about $109 million) in a Series F round, which brought the startup’s valuation to 33.4 billion yen (about $295 million). This follows their series E round back in October of last year.

Investors participating in the latest round are:

  • DNCA Invest Beyound Global Leaders
  • Environmental Energy Investment
  • Siniphian
  • AXA Life Insurance
  • Innovation Engine
  • OPS
  • Seraphim Space Investment Trust
  • Solaris ESG Master Fund
  • Chiba Dojo
  • Nomura Sparks Investment
  • Prelude Structured Alternatives Master Fund
  • Yamauchi-No.10 Family Office (the family office of Nindendo’s founder)
  • Y’s Investment

According to the company, the funding will enable the company’s global growth, including the development of technology for safe and cost-effective on-orbit services and the expansion of its own facilities for mass production in Japan, the UK and the US.

Since its Series E round back in October of last year, the company’s workforce has grown by more than 60 percent, reaching about 250 employees globally.

The company successfully launched and put into orbit the ELSA-d space debris removal satellite in March, and this month, followed by introducing its docking plate this month, which is designed to be pre-loaded onto low-Earth orbit satellites, one of the main possible sources of space debris.

Japan music marketplace Audiostock secures $5.8M for global subscription service

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Okayama, Japan-based Audiostock, the Japanese startup behind a marketplace for music composers and sound creators under the same name, has secured 670 million yen (about $5.8 million) in its latest round, according to Nikkei’s report on Wednesday. Participating investors include Susquehanna International Group, Ceres (TSE:3696), and HBCC Technology Investment. This follows the company’s series B round back in July of 2020 and previous funding from Link-U and CiP Council in April of 2020 as well as previous rounds in March of 2018 and October of 2012. The company has partnered with overseas companies to sell foreign-branded background music and sound effects to the Japanese market. With the latest round, the company is planning to sell Japanese music and sound effects to the global market on a subscription basis. Previously known as Cleoguga, Audiostock was founded in October of 2007 and subsequently launched the music marketplace in 2013. The company claims that it has attracted over 10,000 amateur composers and has helped promote games and music artists.

Image credit: Audiostock

Okayama, Japan-based Audiostock, the Japanese startup behind a marketplace for music composers and sound creators under the same name, has secured 670 million yen (about $5.8 million) in its latest round, according to Nikkei’s report on Wednesday. Participating investors include Susquehanna International Group, Ceres (TSE:3696), and HBCC Technology Investment.

This follows the company’s series B round back in July of 2020 and previous funding from Link-U and CiP Council in April of 2020 as well as previous rounds in March of 2018 and October of 2012.

The company has partnered with overseas companies to sell foreign-branded background music and sound effects to the Japanese market. With the latest round, the company is planning to sell Japanese music and sound effects to the global market on a subscription basis.

Previously known as Cleoguga, Audiostock was founded in October of 2007 and subsequently launched the music marketplace in 2013. The company claims that it has attracted over 10,000 amateur composers and has helped promote games and music artists.

Blogging as a recruiting tool

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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. During a return visit to France last month, I caught up with a successful French entrepreneur (whom I wish I would have backed on his first venture, but that’s another story). Anyway, he opened the conversation with flattery, claiming that I had inspired him. So of course I’m growing suspicious at this point, either expecting a punch line or reconsidering my assessment of his sound judgment. But he wasn’t joking. Rather, he stated that a blog post I wrote several years ago inspired him to adopt a habit which has now given his company a competitive advantage in recruiting talent. Specifically, he was referring to something that I had written way back in 2013: The importance of blogging for entrepreneurs….

mark-bivens_portrait

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.

Image credit: Pxfuel

During a return visit to France last month, I caught up with a successful French entrepreneur (whom I wish I would have backed on his first venture, but that’s another story). Anyway, he opened the conversation with flattery, claiming that I had inspired him. So of course I’m growing suspicious at this point, either expecting a punch line or reconsidering my assessment of his sound judgment. But he wasn’t joking. Rather, he stated that a blog post I wrote several years ago inspired him to adopt a habit which has now given his company a competitive advantage in recruiting talent.

Specifically, he was referring to something that I had written way back in 2013: The importance of blogging for entrepreneurs.

As I posited back then, regular blogging is about far more than shameless self-promotion; it’s about communication of thoughts, transparency in opinions, and beta-testing ideas with the sounding board of your readers. Regular blogging exercises the muscles of intuition and creativity. It facilitates achieving clarity in your mind’s eye, and it establishes you as a thought leader in your domain.

The fifth benefit I had cited in particular has proven especially relevant to this French entrepreneur I caught up with. Consistent blogging over the years is paying dividends to him now as his most effective recruiting tool.

The market for hiring talent, especially software developers, is insanely competitive right now across Europe, he told me. Startups are finding themselves outbid for developers by deep-pocketed incumbent companies, or increasingly, by other startups who have recently closed on massive fundraising rounds.

By having established his voice over the years through blogging, this guy inadvertently compiled a loyal following of readers who subscribe to the narrative of his ambition. Now, when he posts a job opening, he benefits from a ready-made audience. Better yet, candidates from this audience often prove to fit well culturally, because they’ve already been indoctrinated into his company’s vision over the years.

Blogging is playing a long game. The fruits of it do not appear immediately, causing many people to abandon it prematurely. Yet this entrepreneur is now reaping the rewards of his long-term investment. Given today’s war for talent, by accelerating the recruiting process and attracting individuals who are already on board with his project, the returns are astronomical.

Granted, the world has changed in the 8 years since I originally wrote that piece on the powers of blogging. There are other ways to evangelize and build a following as an entrepreneur. Podcasting, for example.

Creating something that does not rely on the approval of others can offer limitless upside. Naval Ravikant refers to this concept as permissionless leverage.

I like this articulation and will adopt it too.

Japan’s sticker character production Quan to merge with cartoonist agency Wwwaap

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See the original story in Japanese. Tokyo-based Quan, the Japanese startup producing characters like Betakkuma and Business Fish for messaging stickers, has announced that it will merge with Wwwaap (pronounced ‘warp’), an agency of cartoonists and influencers. The two companies will be merged by January of 2022 to establish a new company called Minto. Quan’s CEO Kazuhiro Mizuno will be appointed as the CEO of the new company while Wwwaap’s CEO Genta Nakagawa, Wwwaap’s director Nobuyuki Takahashi, and Quan’s director Jun Oagawa will join the new company’s director board. In the U.S., influencing creators such as YouTubers, Instagramers, and Tiktokers are expanding their fan base all over the world, which has grown the creator economy up to over $104 billion US. Meanwhile, Japan’s creator economy is centered on two-dimensional content, mainly on manga and anime illustration. Webtoons originally from South Korea has recently spread into the Japanese market, which lets Kakao Japan operating the Piccolo manga app become valued over $7 billion US by riding on the wave. We won’t go into detail about Quan’s business here because we’ve covered them many times while Wwwaap was founded in 2016 by Nakagawa, who started a manga editing team and an app…

Nobuyuki Takahashi (Co-CEO of Wwwaap), Kazuhiro Mizuno (CEO of Quan), Genta Nakagawa (Co-CEO of Wwwaap)
Image credits Quan, Wwwaap

See the original story in Japanese.

Tokyo-based Quan, the Japanese startup producing characters like Betakkuma and Business Fish for messaging stickers, has announced that it will merge with Wwwaap (pronounced ‘warp’), an agency of cartoonists and influencers. The two companies will be merged by January of 2022 to establish a new company called Minto. Quan’s CEO Kazuhiro Mizuno will be appointed as the CEO of the new company while Wwwaap’s CEO Genta Nakagawa, Wwwaap’s director Nobuyuki Takahashi, and Quan’s director Jun Oagawa will join the new company’s director board.

In the U.S., influencing creators such as YouTubers, Instagramers, and Tiktokers are expanding their fan base all over the world, which has grown the creator economy up to over $104 billion US. Meanwhile, Japan’s creator economy is centered on two-dimensional content, mainly on manga and anime illustration. Webtoons originally from South Korea has recently spread into the Japanese market, which lets Kakao Japan operating the Piccolo manga app become valued over $7 billion US by riding on the wave.

We won’t go into detail about Quan’s business here because we’ve covered them many times while Wwwaap was founded in 2016 by Nakagawa, who started a manga editing team and an app marketing team at a major digital ad agency. With more than 250 creators, mainly manga and anime creators attracting fans through social network channels, the company has successfully monetized their content by making companies to use them for promotion. It claims that 80 to 90% of the manga illustrations used in Twitter ads in Japan are created by them. In other words, they can be called a multi-channel network for manga artists.

Nakagawa says,

In this industry, even if you are extremely talented (as an artist), you can’t make a living. While there are many people quitting, we have succeeded in monetizing their works to tell them how much we can pay them if they have a certain number of followers. We have over than 250 manga artists having 10,000 followers, and some of them are housewives earning 10 million yen ($8.8 million US) a year.

By joining forces, the two companies are expected to create several complementary relationships. It allows Quan to distribute Wwwaap’s creators’ works through Quan’s vast region-wide network in Asia while Wwwaap will be able to expand its sales channels. In addition to their own characters, Quon will be able to play a trader role in the distribution of third-party content.

Mizuno says,

Whether it’s webtoon or animation, there are so many small productions are working here. It is true that this has created diversity, but in order to be strategic and dynamic business, a certain level of scale is necessary. If we only had our own characters, we would not be able to cover all the demands form clients. After subsiding the pandemic, it would be especially difficult to differentiate ourselves from other competitors from the rest of the world.

Some of characters and manga titles by Quan and wwwaap
Image credit: Quan, Wwwaap

Mizuno’s and Nakagawa’s different areas of expertise will complementary work. Despite several business models in hand Quan has been focused on monetizing by character merchandising as well as promotion use for companies in Asia after gaining popularity of unique characters through the use of free messaging stickers. Having successfully established his own business in Japan, Nakagawa expressed confidence in the business potential after the merger in terms of diversifying revenue stream in the region.

Japan’s Flatt Security nabs $1.8M to help developers fix security issues in codes

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Tokyo-based cybersecurity startup Flatt Security announced on Monday that it has secured about 200 million yen (about $1.8 million US) in equity and loans from B Dash Ventures, FinTech Global, and an unnamed business company. For the startup, this follows their $2 million funding back in July of 2019. The latest round brought their total sum of funding up to date to 450 million yen (about $4 million). Under its previous name of Flatt, the company was founded in May of 2017 with most of its members from millennials attending the University of Tokyo. Initially, they had been developing a live commerce app called PinQul but subsequently pivoted to the cybersecurity business and rebranded themselves in 2019. Flatt Security currently provides vulnerability assessment service as well as a secure coding learning platform for web engineers called Kenro. The company is launching a new product called Shisho for the global market, aiming to eliminate the gap between product development and cybersecurity measure within a team. In the app development, we see sometimes a trade-off between security and usability, and also that between ensuring safety and enriching functionality. The company’s solutions are designed to bridge the gap between app development engineers and…

The Flatt Security team
Image credit: Flatt Security

Tokyo-based cybersecurity startup Flatt Security announced on Monday that it has secured about 200 million yen (about $1.8 million US) in equity and loans from B Dash Ventures, FinTech Global, and an unnamed business company. For the startup, this follows their $2 million funding back in July of 2019. The latest round brought their total sum of funding up to date to 450 million yen (about $4 million).

Under its previous name of Flatt, the company was founded in May of 2017 with most of its members from millennials attending the University of Tokyo. Initially, they had been developing a live commerce app called PinQul but subsequently pivoted to the cybersecurity business and rebranded themselves in 2019.

Flatt Security currently provides vulnerability assessment service as well as a secure coding learning platform for web engineers called Kenro. The company is launching a new product called Shisho for the global market, aiming to eliminate the gap between product development and cybersecurity measure within a team.

In the app development, we see sometimes a trade-off between security and usability, and also that between ensuring safety and enriching functionality. The company’s solutions are designed to bridge the gap between app development engineers and security management engineers, who are often completely separated in doing their jobs each other.

Shisho
Image credit: Flatt Security

In addition to general cloud configuration and app diagnostics, Flatt Security offers diagnostics specific to the users of Firebase, one of popular no-code backend environment tools. When Japanese accounting company Freee acquired bookkeeping app Taxnote in June, Flatt Security’s diagnostics were adopted for evaluation upon acquisition and throughout subsequent operations.

The company has been focused on consulting and a learning platform but is aiming to expand its business with greater scalability by launching a security product for developers around the world.

In Bridge’s interview with Flatt Security’s Chief Creative Officer Keijiro Toyoda, he says,

Shisho’s goal is to create security tools that are easy for developers to use. Previous tools did not support modern technology stacks and did not support the latest diagnostic methods. […]

We would like to eliminate the gap between operating companies and security vendors which we have seen in the system development. First of all, we will closely work with ecosystems of developers, and eventually create a system that can suggest code fixes with just a single click.

Flatt Security hopes to expand Shisho’s global reach by penetrating the developer community. In order to achieve this, the company has released the vulnerability detection and correction engine, which is the technical core of Shisho, as open source software, and also released the SaaS-based beta version of the product earlier this month. They plan to use the revenue from existing businesses and the funds from the latest round to accelerate the launch of the new product.

Why I tend to prefer equity rounds over notes

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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. All but two of my last 10 investments have taken the form of straight equity. Furthermore, all of the deals in which Shizen Capital was lead investor over the past two years have also been for equity rounds. In this post I will lay out the reasons that I prefer equity rounds to convertible notes or SAFE notes in early stage venture investments. For simplicity here, I will use the generic term note to encompass any type of non-equity instrument that is convertible into a startup’s equity in the future based on certain conditions. This includes therefore classic convertible notes as well as SAFE and JKISS notes. [Note: there are some key distinctions in the implementation; notably, SAFE and JKISS…

mark-bivens_portrait

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.

Modified from a Pixabay image

All but two of my last 10 investments have taken the form of straight equity. Furthermore, all of the deals in which Shizen Capital was lead investor over the past two years have also been for equity rounds. In this post I will lay out the reasons that I prefer equity rounds to convertible notes or SAFE notes in early stage venture investments.

For simplicity here, I will use the generic term note to encompass any type of non-equity instrument that is convertible into a startup’s equity in the future based on certain conditions. This includes therefore classic convertible notes as well as SAFE and JKISS notes. [Note: there are some key distinctions in the implementation; notably, SAFE and JKISS notes generally behave more like warrants than debt, in that they typically do not carry an interest rate nor a maturity date).

My preference for investing with equity rather than a note center on two of the guiding principles we hold dear at Shizen Capital when partnering with founders: alignment and transparency.

First, let’s revisit why notes can seem more alluring than a priced equity round

  1. they are less costly and more expedient to implement from a legal perspective
  2. they sidestep a difficult negotiation over valuation
  3. they can surmount a conflict of interest for investors during an internal round
  4. they grant investors additional optionality and seniority in the financing of the company

Now let’s discuss these characteristics one by one:

True, a note agreement is simply a contract between two parties: the investor (as note-holder) and the startup. At a future point, the note converts into equity or is reimbursed, based on conditions defined in the agreement.

Since no equity is being issued at the time of a note financing, corporate formalities and legal filings are unnecessary. There is no need to update the articles of association, draft a shareholders agreement, or make any formal filings. The investor could even dispense with hiring a lawyer entirely for such a transaction, thus saving fees (the founders could do so as well, though I personally recommend founders seek at least some minimum level of legal counsel). However, once the future hoped-for equity round materializes, all of these aforementioned legal formalities will become necessary.

SAFE notes can be fast but only if the investor moves fast

In theory, transactions with notes (again, including SAFE’s and JKISS’s here) are faster to implement then equity rounds. In theory. If handled deftly, a straightforward equity investment should take a few weeks to implement. A note, in contrast, can be implemented within a few days (especially a SAFE or JKISS, which are based on a standard template). However, I find it cringe-worthy all too often to hear founders lament to me about how their fundraising efforts via a note are dragging out for weeks or months. I admittedly have not performed a scientific analysis on this, but anecdotally my observations are that weeks or months of note discussions are not uncommon in many regions outside of Silicon Valley.

Postponing uncomfortable conversations

Sidestepping a difficult negotiation on valuation can also be an appealing feature of financing via a note, which does not place a price on the equity of the company at the time of the transaction. If a founder and investor cannot agree on valuation at the time of the fundraising, a note postpones this uncomfortable conversation on price.

The distinction between convertible notes and SAFE notes becomes relevant here. While a convertible note often eliminates any reference to valuation, a SAFE note by its very construction usually contains a valuation cap. This valuation cap does not represent the valuation of the company at the time, but it does require some negotiated consensus between the parties, and it also lays the groundwork for future signaling to the market.

Transparency

Furthermore, this is where the principle of transparency comes in. Postponing the uncomfortable valuation conversation is simply kicking the can down the road. Eventually this conversation has to take place, and the stakes will likely be much higher in the future than today. Moreover, numerous other unexpected consequences can arise from this approach. Because I’ve seen this play out across a vast number of companies over the years, often to the detriment of founders, I feel that in the spirit of transparency I have an obligation to alert founders to what I’ve witnessed. [Note: I’ve raised the alarm in detail on this issue here. And here is the Japanese version of the same piece]

Internal rounds

For most professional VC funds, internal rounds can raise compliance issues if not done properly. For avoidance of doubt, by internal round I mean a future financing round of a startup where no significant external parties invest in the company. A VC fund refinancing one of its existing portfolio companies without an external market participant would be required to justify the subsequent valuation if the new round is priced in equity, reflecting an inherent conflict of interest. Employing a convertible note (often structured as a convertible bridge loan in these instances) can surmount this issue

Risk of misalignment

Lastly, financing via a note naturally grants the investor an additional degree of optionality and potentially even seniority in the fundraising.

Let’s start with the notion of seniority (more flagrant in convertible notes than in SAFE or JKISS notes). From an investor’s perspective, sitting senior to all the shareholders in a company offers the best of both worlds: if things go well, convert and reap the upside; if things don’t go well, redeem for your money back plus interest, even if it throws the company into financial distress. Accordingly, the terms of a convertible note document matter. Founders need to review the fine print before entering into one.

The notion of optionality is a bit more nuanced. As a VC, I welcome optionality; in fact I actively seek it out for sound portfolio management. However, I want the founders into whom I invest to fully understand the implications of it in the case of notes. Let’s illustrate with a simple example: the VC invests 50 million yen in a seed round via a SAFE note that contains a 20% discount and a 400 million yen valuation cap. When it’s time for the Series A, the respective interests of the investor and founder diverge due to a slight misalignment. The founder’s proximate incentive is to boost the valuation of the series A higher, and preferably high enough to neutralize the discount, i.e. above 500M¥. In contrast, the investor’s incentive favors a lower valuation, because the lower the valuation of the Series A, the greater the number of shares into which the investor’s note will convert. Had the seed round been raised as a priced equity round rather than via a note, both founder and investor would be aligned in the dilution they would face from the future Series A.

I am not ideologically opposed to investing notes. Here at Shizen Capital we approach every prospective investment as a long-term relationship. Accordingly, we believe that the better we can align incentives and act with transparency with the founders we back, the healthier and more fruitful our collective partnership will be.

SmartRyde helps travelers book airport cabs in 150 countries, nabs series A round

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SmartRyde, the Japanese startup behind a global airport transfer marketplace under the same name, announced that it has secured approximately 180 million yen (about $1.6 million) in a Series A round. This round was led by Angel Bridge with participation from SMBC Venture Capital, Hiroshima Venture Capital, SG Incubate, Yamaguchi Capital, Iyogin Capital, Inventum Ventures, Optima Ventures, and two individual investors: Shoji Kodama(Founder and CEO of Laxus Technologies) and Nobuaki Takahashi (Founder of Phil Company, Representative Partner of NOB). For the company, this follows their seed round in December 2019 when Angel Bridge poured cash injection into the startup for the first time. Originally known as DLGP, SmartRyde was founded in March 2017 by founder Sota Kimura, a student at Ritsumeikan University, after he was ripped off by a cab driver on his way from the airport to the city in Thailand. The company has worked with more than 650 airport transfer cab companies in 150 countries, as well as with more than 25 OTAs (online travel agencies) such as Booking.com, Expedia, Trip.com, Traveloka, and Despega. The company offers airport transfer cab sales service to users purchaing airline tickets through OTAs. The service is beneficial to both OTAs and travelers….

SmartRyde, the Japanese startup behind a global airport transfer marketplace under the same name, announced that it has secured approximately 180 million yen (about $1.6 million) in a Series A round. This round was led by Angel Bridge with participation from SMBC Venture Capital, Hiroshima Venture Capital, SG Incubate, Yamaguchi Capital, Iyogin Capital, Inventum Ventures, Optima Ventures, and two individual investors: Shoji Kodama(Founder and CEO of Laxus Technologies) and Nobuaki Takahashi (Founder of Phil Company, Representative Partner of NOB).

For the company, this follows their seed round in December 2019 when Angel Bridge poured cash injection into the startup for the first time.

Originally known as DLGP, SmartRyde was founded in March 2017 by founder Sota Kimura, a student at Ritsumeikan University, after he was ripped off by a cab driver on his way from the airport to the city in Thailand. The company has worked with more than 650 airport transfer cab companies in 150 countries, as well as with more than 25 OTAs (online travel agencies) such as Booking.com, Expedia, Trip.com, Traveloka, and Despega. The company offers airport transfer cab sales service to users purchaing airline tickets through OTAs.

The service is beneficial to both OTAs and travelers. For travelers, it frees them from the hassle of finding transportation to downtown at the airport. You may know Uber, Grab, and other ridehailing services are not allowed to operate to protect the employment of local cab drivers in selected countries. Furthermore, it may be very helpful to have a driver with your name waiting for you in the arrival lobby, and to have a means of transportation in advance in an environment where you may be less familiar with the language in the destination.

Meanwhile, OTAs are a very thin margin business. They are trying to diversify their product lines to car rentals and various activities in addition to airline tickets and accommodations, but price competition among them intensifies as users try to choose the cheapest option by comparing results from multiple OTAs. Furthermore, OTAs can’t sign contract with every single airport cab operator in the world, but having a bundler like SmartRyde simplifies the coordination process and creates an additional revenue stream.

In general, it is difficult to grab the status quo of demographics of visitors because their nationality may differ from their actual place of residence, but SmartRyde asks for a contact phone number at the time of sign-up, and from that country code, they are able to understand which region’s residents are visiting. According to the company, although business travel demand has decreased due to the pandemic, recently there has been an increase in cases of leisure use by families of 4-6 people, and users from the US (19%) and the UK (16%) have been visiting resorts in the Caribbean such as Cancun and Dominica.

The company will use the funds to hire business developers and engineers from around the world, strengthening system integration with OTAs and building a reservation management system for cab operators. In Japan, as you may see from the names of investors participating this round, the company will focus on revitalizing countryside and tourist destinations in collaboration with local cab operators and these VC firms.

Japan’s cloud-based CCTV solution provider Safie hits $1.6B market cap after IPO

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See the original story in Japanese. Tokyo-based Safie (TSE: 4375), the Japanese startup offering cloud-based CCTV solutions, went public on the TSE Mothers market on Wednesday. The company has priced its initial public offering at 2,430 yen (about $22) a share but it hit the highest price of 3,700 yen (about $33) last week which brought the company’s market cap up to over 180 billion yen (about $1.6 billion). In Japan, Safie is this year’s fourth IPO-ed company with a market cap over 100 billion yen (about $900 million) at its opening price, following Taiwanese AI startup Appier, job-placement portal site BizReach’s parent company Visional, and data analysis firm Plus Alpha Consulting. Safie was founded in October of 2014 by Ryuhei Sadoshima (currently CEO) and his two longtime colleagues who all previously worked at Japanese image processing startup Motion Portrait, a spin-off of Sony’s Kihara Research Center. Sadoshima is also known for Daigakunote.com, his previous startup running a university student portal. The company launched a cloud-based CCTV solution back in 2015. Safie has so far secure funds from NTT Docomo Ventures, 31Ventures (by Mitsui Fudosan and Global Brain), Innovation Fund 25 (by Senshu Ikeda Bank and others), Orix, Kansai Electric…

See the original story in Japanese.

Tokyo-based Safie (TSE: 4375), the Japanese startup offering cloud-based CCTV solutions, went public on the TSE Mothers market on Wednesday. The company has priced its initial public offering at 2,430 yen (about $22) a share but it hit the highest price of 3,700 yen (about $33) last week which brought the company’s market cap up to over 180 billion yen (about $1.6 billion).

In Japan, Safie is this year’s fourth IPO-ed company with a market cap over 100 billion yen (about $900 million) at its opening price, following Taiwanese AI startup Appier, job-placement portal site BizReach’s parent company Visional, and data analysis firm Plus Alpha Consulting.

Safie was founded in October of 2014 by Ryuhei Sadoshima (currently CEO) and his two longtime colleagues who all previously worked at Japanese image processing startup Motion Portrait, a spin-off of Sony’s Kihara Research Center. Sadoshima is also known for Daigakunote.com, his previous startup running a university student portal. The company launched a cloud-based CCTV solution back in 2015.

Safie has so far secure funds from NTT Docomo Ventures, 31Ventures (by Mitsui Fudosan and Global Brain), Innovation Fund 25 (by Senshu Ikeda Bank and others), Orix, Kansai Electric Power, Canon Marketing Japan, NEC Capital Solutions, and others.