Tokyo's Valley Of The Netrepreneurs

A new group gives startups a way to swap business tips and nab capital

When Japanese Net entrepreneur Satoshi Koike traveled back to his native Tokyo last February to scout for promising new E-businesses to bankroll, he was disappointed with what he found. A Tokyo convention that showcased new business ventures gave Koike a chance to meet some of Japan's new Web-savvy entrepreneurs. Some had good ideas, he recalls, "but nobody knew how to launch or operate a successful Net business."

So Koike decided to do something about it. In the Tokyo office of Netyear Group, Inc., the Redwood City (Calif.)-based E-business consultancy that he runs, Koike spent the next week working the phones and his personal business contacts in Japan. His goal: to organize a new business-networking group aimed at helping Japan's entrepreneurs get wise about the Web.

The result? Bit Valley, Japan's answer to Manhattan's successful New Media Assn., an organization that brings entrepreneurs together regularly to build the Net economy. Koike hopes the Tokyo group will provide a way for the young innovators behind Japan's new Net startups to trade business tips and nab badly needed venture capital. The organization takes its name from the English translation of Shibuya, the hip Tokyo neighborhood where many of Japan's Netrepreneurs are headquartered. Shibuya means bitter valley--but Koike and founding members recently shortened it to the more digital-sounding "bit valley."

The group is causing quite a stir among Japan's digerati. Since its first meeting in March at a French-style cafe in Shibuya's Bunkamura theater and art center, Bit Valley's roster has grown from 100 to more than 700, representing some 300 Net businesses, including the Japanese offices of Microsoft, America Online, and others. "Japan desperately needs a breakthrough movement to make way for an Internet boom," says Koike. "We're hoping that Bit Valley will help spearhead some of these changes."

The odds are promising. Suddenly, Japanese consumers and businesses are waking up to the potential of the Web. While the country still trails behind the U.S. in developing E-commerce, the importance of building a Net-bolstered economy has not been lost on the nation's traditionally conservative bureaucrats, politicians, and economic planners. Says Iwao Nakatani, an academician and deputy chairman of the government's Economic Strategy Council: "The government here still tends to support traditional industry, but it's well aware now that the robust growth of the U.S. economy is the result of E-commerce."

At the forefront of this new consciousness are tomorrow's consumers: Japanese high-school and university students who can zip off short E-mail messages on their tiny Internet cellular phones. This information-savvy generation is fueling demand for handheld computers and other Net-ready communication devices. And it's gaining new clout here. "Japan is a few years behind the United States when it comes to E-business," says Taizo Son, 26, who founded online systems integrator Indigo Corp. in 1996 while an economics student at the University of Tokyo. "Now, though, the younger generation is starting to pop up" in a business world which, for decades, has been ruled by older men whose climb to the top was dictated largely by seniority.

The business world isn't the only place where behavior is changing. According to a new survey released last month by Japan's Ministry of Posts & Telecommunications, some 17 million Japanese, or 13.4% of the population, now log on to the Web. That's more than the 12.9 million users logged on throughout the rest of the Asia-Pacific region, including Hong Kong and Australia. Access Media International, a Japanese Internet consultancy, estimates that the number of Internet users in Japan has jumped from 1.5 million people in 1995 to 14 million in December of last year--with 18 million expected by December. "We're seeing a shift from early adoption of the Internet to mass penetration," says Joichi Ito, chairman of Infoseek Corp.'s Japan operations. His prediction: 40% of Japanese households will be online in the next few years.

And Japanese aren't simply surfing anymore: They're starting to shop. E-commerce, both retail and business-to-business, hit the $58 billion mark here last year--double the 1997 amount. It's expected to grow to $129 billion in the next three to five years--far less than the $366 billion forecast for the U.S. but nearer to the $179 billion expected in Europe.

All of these numbers add up to high hopes for Bit Valley entrepreneurs. And for the first time since World War II, Japan's famously conservative politicians and change-averse bureaucrats now agree: Japan needs to nurture risk-takers if it hopes to be competitive in the Net Age. As a gesture of support to new startups, the government has recently approved a plan to extend more grants and financing to new ventures.

There's yet another reason for Bit Valley optimism. Thanks to the recent recession, large Japanese companies are no longer able to lure the nation's best and brightest with promises of lifetime careers. The result: Students and managers alike have decided to take a chance on exciting new jobs with risky startups--and the changes are unleashing experimentation and creativity.

Rakuten Inc.'s 34-year-old Hiroshi Mikitani, a former banker at the staid, ultraconservative Industrial Bank of Japan, now wears blue jeans when he visits the gray-suited bureaucrats at the Ministry of Finance to brief them on E-commerce. Mikitani says many of his consultant and banking friends also are considering the fast pace and intellectual freedom of a Net venture. Bit Valley entrepreneur Kazuhiro Ogura, 24, went so far as to temporarily drop out of Tokyo's Hitotsubashi University to start his business, Horizon Digital Enterprises, Inc., an E-systems integrator. Although the economics major graduated last spring, a year behind schedule--a big no-no in education-obsessed Japanese society--Ogura doesn't regret his unorthodox choice. "I couldn't imagine being in a corporate army," he says.

The upshot of all of this? A rare, favorable climate for small and nimble startups. And Bit Valley companies aren't wasting any time. A flurry of recent business deals promises to position Shibuya, Tokyo's trendsetting playground for teenagers and university students, as Japan's E-business center.

Just ask Ito, who operates Digital Garage, Inc. and is setting an example for the less established entrepreneurs in the Bit Valley movement. He sold his Net search firm's interest in Infoseek-Japan in June and will use the proceeds to launch a couple of online music and concert ticket sites this fall.

`TREASURE.' Nearby, NetAge, Inc. also has a sell-and-invest strategy. Founder Kiyoshi Nishikawa just sold Net Dealers, his online consumer-ratings service for autos. The buyer: CarPoint, Microsoft's online car-locator service, whose Japan operations are 50% owned by Softbank Corp. With the money from the sale, NetAge plans to launch two new E-business startups--retailing and E-systems ventures--in September. "We have to move quickly," says Shigeo Ozeki, 25, who will head one of NetAge's two new E-businesses. "Japan is a treasure mountain waiting to be exploited."

The point isn't lost on American rivals, who see similar opportunities in Japan. Backed by local partner Softbank, both Yahoo! Japan and E*Trade have set up Japanese language sites on the Net. Others, like Internet service provider PSINet, are buying up local businesses to consolidate their presence in Japan. And online auctioneer eBay Inc. has opened a virtual operation in Japan, challenging Net retail mall pioneer Rakuten, one of Bit Valley's most successful ventures.

Rakuten's Mikitani isn't worried. His company also provides auction and hosting services for companies like Japan Airlines and Seibu Department Stores Ltd. He says competition from the U.S. will be good for the local Net industry because it will weed out Japanese startups with flawed business models, making it easier for better-run Net companies to raise capital.

Koike, the founder of the Bit Valley group, knows this only too well, and he's following some of his own advice. Earlier this month, Koike launched an investment company in the Shibuya area that aims to spin off new online business ventures while investing seed money in others. The new firm, Netyear Knowledge Capital Partners, has $3 million in startup capital and expects to raise $20 million from Japanese investors to help build the nation's Internet industry.

To be sure, not everything is roses. For starters, the government's economic planners could do a lot more to lift costly regulations on private enterprises. And some of Bit Valley's entrepreneurs worry that old-fashioned political wheeling-and-dealing could keep new Net companies from emerging as strongly as they might against foreign rivals. Digital Garage's Ito says Japanese politicians, notorious for financial scandal, have expressed a sudden interest in the Web fledglings. "You can see it a mile away," says the U.S.-educated Ito. "The pols are migrating to this industry in order to skim money off Internet stars." Startups also want more deregulation in the stock market. To carry out an initial public offering, a company must show a profit for the previous two business years, at least, before listing--a luxury that expanding Net startups can't afford.

Even here, relief appears to be on the way. Last month, Softbank founder Masayoshi Son, 41, unveiled plans to launch a Japanese NASDAQ by the end of next year, doing away with the stiff IPO requirements of the existing markets. "That means Bit Valley startups like myself will have the opportunity to list," says Indigo's Son, 26, Masayoshi's youngest brother.

Indeed, for the young Bit Valley entrepreneurs gathered in a crowded Shibuya bar one recent Friday night, the future never looked more promising. The changes, for Japan, are revolutionary. True, the odds aren't high that any one of these entrepreneurs would launch a Japanese Yahoo! or another Microsoft. But at least now, for the first time, they have the support to try.