Startups Turn to Japan for Cash
As US venture capitalists clutch their purses, high-tech firms find Tokyo ready to take risks. SILICON VALLEY
WHEN Tu Chen left Xerox in 1983 after 17 years as a technology researcher, his dream was to build his own electronics firm. Just six years later, Mr. Chen's Komag Inc. is a major producer of high-capacity storage disks for computer systems, with more than 1,300 employees. But Komag's sprawling complex here and Chen's infectious enthusiasm for his technologies obscure the obstacles he overcame. The company almost didn't make it.
Like so many Silicon Valley ``startups,'' Komag quickly exhausted the money staked by venture capital investors, and they were unwilling to provide much more. So Chen turned to Japan. On his first visit in 1984, he raised more than $4 million, including $1 million from Kobe Steel. Since then, Asahi Glass has purchased 20 percent of Komag, a tie-up that includes technology-sharing and a joint venture in Japan.
Komag is not alone. Over the past few years, dozens of America's brightest high-tech startups have sold a piece of their action to investors from Japan. Along with plentiful supplies of patient capital, the firms get access to Japanese manufacturing expertise, and an entree to growing Asian markets.
The biggest investors are trading companies and large industrial corporations anxious to diversify. Unlike traditional venture capital investors, the Japanese are not motivated by the prospect of capital gains. Corporate ``partnerships'' involving technology transfer and joint product development are the goal.
Some of the companies make direct investments in startups. In the last three years alone Kubota has spent over $120 million on six electronics startups, and technology from those firms has enabled the giant tractor maker to begin assembling sophisticated minisupercomputers in a new $200 million factory in Japan.
Nippon Steel, in addition to investing directly, has established its own $15 million venture capital fund, which is managed by Boston-based Advent International. Funds from the big steel maker's ``Adventact'' have thus far gone to 10 biotechnology and electronics startups.
Mitsui & Co., one of Japan's giant trading companies, cofounded Connecticut-based Orien Ventures, a $77 million venture capital fund. Mitsubishi International, another trading company, has invested in 10 venture capital funds, while financing some high-tech firms directly.
``We're looking for revolutionary technologies that within a few years could have a major impact on our business,'' says Yoshito Nakamura, director of Mitsubishi's Technology Affairs Department.
There are no official statistics on the number of these deals. But Venture Economics, a Massachusetts-based consulting firm, estimates that in 1988 and the first six months of 1989, Japanese industrial corporations invested $380 million in 64 startups (see graph). Almost half the deals involved California firms, mostly in computer-related fields.
The door has been opened to Japanese investors partly because of structural changes in the United States venture capital markets that have left many electronics startups starving for cash. Due to brutal market conditions, profits for startups are way down, and venture fund managers have started lending more to established firms.
The bleaker outlook for earnings has also made it difficult for startups to issue stock to the public, exacerbating the cash crunch. In 1988, only 33 venture firms went public, down from 81 in 1987 and 121 in 1983.
``The difficulty in going public has accelerated the trend toward corporate partnerships,'' says Mark Radtke, Vice President of Advent International.
Under these circumstances, ``partnerships'' with Japanese firms are too attractive for many startups to turn down. Japanese corporations, since they are swollen with cash and anxious to diversify, are willing to take big risks on promising startups. And the marketing networks and manufacturing skills they offer are very alluring because they enable startups to capitalize on their technological edge by speeding new products to the market before larger competitors have a chance to catch up.
Kubota has been the most aggressive in pursuing ``partnerships,'' in the hope of finding a niche in the computer market and generating half of its revenues from electronics by the mid-1990s.
Kubota paid $25 million for a 24 percent stake in MIPS Computer Systems, a maker of reduced instruction set computing (RISC) microprocessors, and $65 million for a 44 percent stake in Ardent Computer Corp., a maker of minisupercomputers. Ardent recently absorbed one of its leading competitors, Stellar Computers, which left Kubota with a 22 percent share but a very strong position in the industry.
Kobe Steel, through its Kobe Development subsidiary, also has a very strong presence in Silicon Valley. As part of its metals business, Kobe is already one of the world's leading suppliers of aluminum plates that are transformed by firms like Komag into magnetic storage disks.
Kobe's diversification into electronics centers on products used in the manufacture of computer memory systems. Kobe recently purchased 86 percent of QC Optics, a Boston-based maker of laser inspection machines used to check for defects in magnetic disk.
For Mitsui, Orien Ventures provides a window to promising technologies, which the trading giant uses to promote ``partnerships'' between US startups and Orien's Japanese investors.
``Capital gains are important, but we really want to nurture technology and partnerships,'' says Kazutoshi Muramatsu, a Mitsui employee now working as vice president of Orien.
In addition to $8.5 million from Mitsui, Orien has received funds from Nippon Steel, Shimizu Construction, Sapporo Breweries, and US firms like Dow Corning.
The Japanese investments have raised concerns that the US leads in advanced technologies like supercomputers may be going the way of consumer electronics. Through technology licensing and other short-sighted deals, the US lost leadership in many technologies to Japan over the last two decades. Some experts also warn that through excessive technology transfer, today's ``partner'' can become tomorrow's competitor.
But the Japanese companies deny they are seeking to dominate their partners. Naohisa Matsuda, a vice president of Kubota, says it would take 20 years to develop the design skills of Ardent and other major computer makers.
``We are only manufacturing the machines,'' he says. ``All of the designs are done in the United States.''
Still, the image of unscrupulous Japanese corporations using cooperative agreements to acquire technology and undermine their US partners remains widespread. ``Some big Japanese firms will just swallow you if they can,'' says Komag's Chen.
Adds Masazumi Ishii, a Silicon Valley consultant: ``In the past a lot of Japanese companies did things that lacked integrity.'' But Mr. Ishii says that image is 10 years old, and in recent years the Japanese ``have become much more sophisticated.'' Komag's Chen says that good Japanese partners can be found.
Either way, experts expect that Japanese capital will continue to fill a void in Silicon Valley. US capital markets are shunning high-tech firms at just the time that Japanese corporations are anxious to find US partners. Large US companies have equal chance to back US startups, but usually decline.
``I went to Corning and other companies before Japan,'' says Chen. And many semiconductor startups that can't afford to build factories reluctantly utilize the foundries of their Japanese partners for chip production.
``It limits job creation in this country but we have no choice,'' says Robert Barker of Waferscale Integration, a Fremont, Calif., firm with ties to Sharp and Kyocera. ``Japanese producers have delivered for us and US producers have not.''