Jun Hosoya

A reporter in action at the Paralympics 

This past August and September, Tokyo hosted the Paralympics as well as the Olympics. During the Olympics, I was fed up with the extreme heat in Tokyo, but now it has cooled down and autumn has arrived. In Australia, spring is just around the corner, while in Japan, autumn arrives with the chirping of bell insects. Although it may sound a bit contrived, I would like to write about the relationship between the Paralympics and the autumn insects.

This is the first time that I have watched the Paralympic Games, including the opening and closing ceremonies, on TV in such detail, and even though it was a corona pandemic, I was able to take advantage of the host city. There, I noticed a young and energetic reporter who always appeared in between the competitions. Her name is Ms. Yuki Goto, and she was selected through an open competition for people with disabilities. She had a hearing impairment and was wearing a device from her ears to the back of her head as she explained that she had undergone cochlear implant surgery. It was no coincidence that I was interested in her because we were considering investing in Hemideina, a company that is developing technology to radically improve the cochlear implant, an invention that was put to practical use in Australia more than 40 years ago.

The cochlear implant is an amazing invention when you think about it. When the cochlea is damaged, an artificial organ is implanted to replace or support the function, and the original sound signals are transmitted from outside the scalp using radio waves. In recent years, the direct connection of computers to the brain has been attracting attention, and this cochlear implant may be a forerunner in sending electrical signals to the brain as information. The cochlear implant, however, relies heavily on the brain’s creativity to compensate for the limited amount of information, which requires more than six months of rehabilitation. Just like para-athletes who use prosthetic legs, it is possible to improve their abilities through their own efforts, and it is not hard to imagine the hardships and hard work that Ms. Goto and her family have gone through so far. However, even though improvements have been made over a long period of time, the limitations of the architecture, which has remained basically unchanged since the beginning, have left many shortcomings, and new innovations have been needed.

An insect called Wellington Tree Weta, endemic to New Zealand, gave a scientist a hint 

According to Wikipedia, a Weta is “a giant flightless cricket”, and the picture gives a very different impression from the insects that produce the beautiful sounds that symbolize autumn in Japan. However, research by Dr. Kate Lomas, co-founder of Hemideina (which is another name for Weta), has shown that they have a very sensitive hearing mechanism. She intuited that the structure’s ability to mechanically process sound, including wavelengths much longer than the size of an insect’s eardrum, could provide a clue to the miniaturization of the cochlear implant. In addition, the existing methods of electrically extracting specific frequencies leave out a lot of information, and in a simple explanation, it is not possible to reproduce “pitch, intensity, timing, and other elements necessary for music. Inspired by Weta, the company’s approach of analog filtering has the potential to achieve a breakthrough in this respect as well. Analog speech is rich in information and may be able to convey the fine nuances that normal hearing people usually get, and above all, it may greatly reduce the difficulty of rehabilitation.

Australia, the country that introduced the cochlear implant to the world in the past, is now working with NatureTech, a company derived from an insect endemic to New Zealand, to create the next generation of inventions. I think this symbolizes the best part of Australian technology investment.

Recently, on September 17, a new tech startup was added to InterValley’s portfolio. It is Quintessence Labs (QLab), a developer of quantum encryption technology. The Canberra-based company has more than enough experience to be considered a startup, and we feel fortunate to have synchronized the timing of our funding with QLab’s funding opportunity.

Our encounter with the company dates back to 2014, when the InterValley fund was not even in existence. Back then, Yasu was (and still is) a member of the Expert Network, the Australian government’s official start-up support staff (probably the only Japanese member), which led to our encounter, but even with or without the fund, the current situation is very different in two ways.

One is the global technological evolution. Two years have already passed since Google announced that it had demonstrated quantum supremacy, which is said to have dramatically raised the development stage of quantum computers. Although it is still expected to take some time before full-fledged practical application, examples of applications in encryption are already taking shape.

The other point is that the need for more advanced cyber security is growing in relation to the rise of China, which is fighting for technological leadership, and the worsening relationship between the U.S. and China. Cyber-attacks at the national level have led to military tensions and are changing the way networks, including satellite communications, are managed. There is a sense of crisis that we are on the verge of a time when conventional encryption will be rendered meaningless by the dramatic advances in computing power. I believe that these two changes in the situation have provided a clear answer to the question “Why now?”

It took almost five years to realize the investment due to the fact that it took a longer time to establish this fund, but in the end, I think we were able to make the investment at the most necessary time. It is always difficult to determine the right time to invest in deep tech startups with high technological challenges, and I have in fact had a difficult experience in the past. However, Australian startups have been around for a relatively longer time (QLab was founded in 2008), and I feel that they have the advantage of taking their time to determine the right time to take off. This is definitely an advantage over the US and Japan in the startup scene.

From the perspective of national security, countries in Europe, the U.S., and China are all competing to develop Quantum Key Distribution (QKD), and in Japan, too, with NICT leading the way, major companies such as Toshiba, NEC, NTT, and Mitsubishi Electric are in the race to develop it. Since breakthroughs are required in both hardware and software, the hurdles for startups to succeed in this field are very high, even from a global perspective. The fact that Australia is home to a valuable company such as QLab that is at the forefront of such technology is one of the points that has attracted my curiosity as an investor most. 

I have been in the “VC industry” since 1988, which can be said to be a pre-modern era. The reason for the parentheses is that I have to admit that there was a huge gap between the situation in Japan at that time and the US-born VC profession, but on the other hand, I was very fortunate to be closely involved with the US at that time and to be exposed to the prototype of venture capital investment. Nowadays, the environment surrounding startups has become much more widespread and the amount of money invested in them is enormous. However, as if in response to the “lost time” after the bursting of the real estate bubble in Japan, even now, more than 30 years later, I feel that we are still not quite able to catch up in essence. 

When Yasu and I developed the idea of establishing InterValley Ventures in 2016, there were two things that we were focused on: Investment Thesis. One is to Think Different, which is exactly the same as when you start a startup, you need to be clearly differentiated. You need to have a logic that makes sense to you at the same time.

The other question is how to contribute to the internationalization of Japanese startups. I would like to consider the latter first here. 

Until just a few decades years ago, the only Japanese ventures that succeeded in internationalization were Honda with its Super Cub and Sony with its transistor radio. This was during the post-war period and the high growth period of Japan in the 60’s, but at the same time, there were no representative examples after that. Needless to say, it is Mr. Son who has made a name for himself overseas since then. However, Softbank itself has been changing its business rapidly through acquisitions, so it is uncomfortable to lump it in the category of internationalized startups. There is no doubt that Mr. Son is an outstanding global manager, though.

Of course, everyone from Rakuten to Mercari is boldly attacking, but the fact is that the absolute number is still small. Why is that? I can think of a number of short-sighted reasons, but one thing I can say without a doubt is that this situation is extremely important for curbing the sinking of Japan in the mid-to-long term, which is beginning to be seen in various situations. 

Has the VC market gone international? 

Recently, it is said that foreign funds have started to come into the Japanese independent VC market as LPs. This is certainly a big step forward. In the past, Apax Globis Partners, where I was a member, established a fund in 1999, but to be precise, the Globis stand-alone fund after the dissolution of the joint venture can be said to be the forerunner. In any case, the fact that the fund has met the investment criteria of foreign money, including expected returns, is a step forward, and the fact that it has led to a significant increase in the volume of funds is an important perspective. Nevertheless, this trend has only been going on for the past few years, and we are talking about a very limited number of fund managers, so we will have to keep an eye on this trend and hope for the best. 

On the other hand, however, when I think about it, it is a fact that there was a time about 20 years ago when foreign VCs were making inroads into Japan, thanks to the momentum of the Internet bubble. Apax Partners, which had a joint fund with Globis, was one of them. Fortunately, I found a valuable list on the website of NTVP, led by Mr. Muraguchi, which gives a hint of those days. <https://ntvp.com/link_10.html>

Many of the names are very nostalgic for me, as they are both rivals and co-investors. The fact that UTEC is listed as one of the “other VCs” on this site also reminds me of the times. This was a time when the university VC category did not yet exist. 

< List of foreign VCs (2000s)>.

• Intel Capital
• Investor Growth Capital Asia
• Whitney & Co.
• Warburg Pincus (Japan) Ltd.
• Walden International Japan
• AIG Japan Partners
• HQAP Research (H&Q Asia Pacific)
• The Carlyle Group (VC Group)
• Constellation Ventures, Inc.
• GE Equity Japan
• General Atlantic Partners, Inc.
• Net Capital
• HSBC Holdings, Inc.
• Goldman Sachs Japan Co.
• J.P. Morgan
• JOHO Capital
• Dell Ventures Japan
• Prudential Life Insurance Company
• UBS Capital Japan 

I remember that there were Rothschilds and others, but it is not the purpose of this article to cover them all.

Aside from Intel, which is a pioneer of CVC, I think almost all of them have withdrawn from the market, but at the same time, I noticed that no Silicon Valley VCs have ever come to Japan. On the other hand, as you know, there are some cases of advancement in China. 

It is true that at that time, Japan was also experiencing a global boom in response to the Internet revolution, but in addition to that, Japan had the appeal of technology and pioneering user cases from a foreign perspective. A typical example is mobile Internet communications. Starting with the world-leading i-mode, Japan was clearly leading the world in fostering a user culture that included the integration of digital camera technology and photo mail. However, the paradigm shift to smartphones with the introduction of the iPhone in 2007 and the subsequent Global Financial Crisis (Lehman Shock) did not allow this advantage to last. In my opinion, with the emergence of China, Japan has ceased to be a global benchmark in the field of technology startups. And, even back then, it could be said that the driving force was docomo and the major manufacturers who introduced feature-packed mobile devices to the world, and startups were just a part of that ecosystem. 

After the Lehman Shock, it is true that at least startups expanded their activities in Japan as well, but they were overwhelmed by the acceleration of innovation, especially in the U.S., and somehow managed to optimize their essence for Japan (by imitating it), thus following a path of success that was “closed” to the domestic market. Is it too radical to say that this is a historical perception? And I’ve become convinced that this is the root cause of the pessimism about the rapid internationalization of Japanese startups.

Is PayPal’s acquisition of Paidy the dawn of a new era? 

The VC and startup industries were abuzz with the 300 billion yen (US$2.75 Billion) acquisition price announced on September 8. People are all excited that the time has finally come in Japan when startups are bought at the Unicorn value. I think this is definitely true. In the first place, Japanese companies do not have the will or the means to price their startups like that, but even the reach of foreign companies has been extremely limited. In that sense, this deal is an epoch-making one. However, it is too early to rejoice easily. As some media outlets have pointed out, there are some background factors that should be kept in mind. 

1. At the moment, both the tech giants and the financial markets are flush with money, and it is easy to achieve transaction prices that seem generous from a Japanese perspective.
2. The worsening relationship between the U.S. and China has made it difficult to invest in China, and the relative importance of Japan has increased.
3. As in the case of Google’s acquisition of pring, there is a view that this is just a “buy time to enter the local market” deal that will allow the company to quickly acquire the user base it has already acquired in regulated domestic financial services and save the time and effort of dealing with regulations and customizing for Japan. 

Of course, I’m sure there is some appreciation for the unique technology, such as the Paidy’s screening function. But at this point, I’m not sure if it’s an overwhelming differentiator that can be deployed globally. 

On the other hand, in August, there was the deal of Square in the US acquiring Australia’s AfterPay for US$29 billion. It is also a post-payment (Buy Now Pay Later) fintech company similar to Paidy. While AfterPay’s already established customer base was important, Australia’s population is only one-fifth of Japan’s, and a tenfold increase in price for a market that is one-fifth the size of Japan’s was clearly based on a different pricing logic than that of Paidy, even if we take into account the market share of each service. It is natural to think that Square’s strategy is to make AfterPay a global platform. 

Japan’s startup market is being tested to see if it can go beyond acquisitions as a way to enter the local market and develop into investments in technologies and business models that can be applied globally in the future. 

Now, how can we contribute to the internationalization of startups in Japan?

A new style of “mature” Japan is required to go beyond the growth model of “catching up and overtaking” that has been in place since the Meiji Restoration and the scrap-and-build approach that has survived wars and natural disasters. It may sound like a cliché, but I am convinced that the key is “diversity”. InterValley’s mission is to bridge this gap, which is the reason for its name.