Japan's Web Spinners

Netrepreneurs are out to win on a global scale--and bring profound change to Japan's business culture

It looked like a scene out of Japan's Roaring Eighties. On Feb. 2, several thousand young Japanese stood cheek-by-jowl in the dimly lit Velfarre, Tokyo's hottest disco. The suit-clad professionals hadn't come to dance 'til dawn. They were here to absorb every precious syllable from the mouth of Masayoshi Son, 42, founder of Softbank Corp. and longtime evangelist for the Way of the Web. "The most amazing opportunities await you," Son told the mesmerized crowd, exhorting them to find an inner dream, pin it to a business model, and quickly seek venture funding. The hidden subtext: Don't miss the boat. "Japan is going through its biggest social upheaval since the Meiji Restoration [of 1868]," Son intoned.

The comparison is apt. For the first time since the Meiji period, when thousands of new businesses were spawned in a rush to modernize, the country is marshaling its resources to catch up to the West and build a New Japan. Its young elite are starting to migrate from Old Economy banks and trading houses to Internet ventures--startups whose technical resources and pluck almost make up for their lack of cash flow. Smart, aggressive Japanese techies versed in software and network engineering are burning midnight oil in "Bit Valley," a maze of small office buildings that stretches away from Tokyo's Shibuya Station. And orchestrating this migration, in myriad unseen ways, are a half-dozen native-born empire builders and investors--you might call them the Sons of Son. They have found Internet religion, and they have the brains and the bucks to make it stick.

If this were just a brigade of bowing, name-card-shuffling Son-clones, the rest of the world might not need to take note. But economists and market analysts say something much more important is brewing at high-level gabfests and gatherings like the Velfarre disco event. Money and power are coalescing in a new, uniquely Japanese way. Softbank's startup investments of about $400 million in Japanese Net companies are valued, on paper, at about $50 billion. Now Son, with a 38.2% stake in Softbank that's worth more than $60 billion, is poised to break into the banking business. Then there's Yasumitsu Shigeta, 35, the hard-charging founder of Hikari Tsushin Inc., a mobile-phone retailer turned Net investor. With backing from private investors, he has built a $300 million venture-capital war chest, with plans to launch an even bigger one, worth $500 million, in March. Trans Cosmos Inc., a systems integrator that helps U.S. ventures set up in Japan, created a $100 million fund late last year, targeted at Japanese startups. And there's Masatoshi Kumagai, who has $40 million for acquiring ventures to expand his interQ group. "The Internet is about to revolutionize Japan," says Hikari's Shigeta. "We're investing in startups with the aim of becoming a dominant force."

Some observers use the word keiretsu to describe these growing families of Net companies. But Son, Shigeta, and others say these business hybrids bear closer affinity to the family-run industrial combines, called zaibatsu, that were broken up after World War II. Still others like the new coinage "Net-batsu." Whichever term you prefer, these new Net builders are a breed apart from traditional Japanese corporate groups and could bring profound changes to local business culture and society. The government is beginning to recognize their importance and is easing regulations to give the ventures more room to maneuver. One thing is certain: If you want know where Japan's Internet is headed, these are the people to ask.

To be sure, the new Net builders won't have the field to themselves. Sony, Fujitsu, NTT, and even carmakers such as Toyota are charting their own Net strategies. Foreign companies, such as Microsoft, AOL, and Amazon.com, want pieces of the pie--as do U.S. and European venture capitalists. In the past half-year, J.H. Whitney, Hambrecht & Quist, and others have funneled more than $1 billion into Japan.

BARELY KNOWN PIONEERS. Still, at this moment, there is a shimmering opportunity for pioneers whose names and companies are barely known today--just as Son and Softbank were barely known in the mid-1990s. "This is an opportunity that occurs only once in 100 years," says interQ founder Kumagai, 36. "It's our chance to create new businesses."

The model for nearly all the budding Net builders is Masayoshi Son, who oversees the world's largest conglomerate of Net-related companies. His Softbank Corp. has equity holdings in more than 300 ventures--160 in the U.S., 120 in Japan, and the rest in Europe and Asia. Five years from now, he sees himself at the helm of a Net-batsu spanning 800 Internet ventures scattered through the Americas, Europe, and Asia.

While Son's roots are in software distribution, his riches all flow directly from the Net. And so, he believes, does the future. So, while U.S. dot-coms are stocking up on physical products and distribution channels, Son has started to shed some of his non-Net assets, such as the Ziff-Davis Inc. publishing group. Meanwhile, a consortium led by Softbank has won the right to negotiate the purchase of the failed Nippon Credit Bank, which the government has put on the seller's block.

Son's basic game plan is to import the most successful U.S. Web companies, set them up in Japan, and take them public. The pattern will be repeated in South Korea and other parts of Asia. His first project, Yahoo Japan, turned out to be a high-wire stock market success: Son's stake now is worth some $10 billion. In coming months, he expects to list about 30 Softbank companies on Japanese markets, including Nasdaq Japan. The new bourse, in which Son has invested, will open in June and offer fast-track listing procedures for high-tech companies. Critics complain that this will represent a conflict of interest. They also voice concern about Softbank's $2 billion in long-term debt and its lack of cash flow, issues Son shrugs off.

Following in Son's footsteps is Shigeta, who struck gold in Japan's booming retail market for cellular phones. With his cash horde, Shigeta has purchased stakes in more than 70 Internet ventures in Japan, China, and the U.S.--mostly in the past year. Some competitors say its investments are haphazard, while others question whether Hikari has the finesse needed to run such a broad operation. But Mahendra Negi, an Internet analyst at Merrill Lynch Japan, says the scattershot approach works for Hikari: "That increases their chances of hitting on a success."

Close behind Softbank and Hikari is Trans Cosmos. Founded in 1966 as a data-processing venture by Osaka entrepreneur Koki Okuda, Trans Cosmos has grown into a leading network service company, with such clients as Sony, Microsoft, and Apple. It beat Softbank to the U.S., setting up office in San Francisco in 1989. Okuda's aim was not to gamble on future Web stars, but to invest in ventures with the technology it wanted to import into Japan.

Ultimately, Trans Cosmos took equity stakes in more than 50 U.S. Web outfits, including Amazon.com, Autobytel.com, DoubleClick, and Liquid Audio, in their initial stages. And in the past year, it has helped set up more than a dozen joint ventures in Tokyo, including that of online-advertising venture DoubleClick Japan, of which it owns 53%, and Autobytel Japan (16%). Some of these deals have already paid off. Last December, Liquid Audio Japan listed on Mothers, a new over-the-counter bourse in Tokyo, and it has since seen its value triple.

NEW AGE CONGLOMERATES. These New Age conglomerates indeed bear an uncanny resemblance to the old zaibatsu, which started out as retailing ventures, then grew into mighty groups engaged in trading, insurance, and shipping. Organized as family-run holding companies, they invested in new businesses and ballooned in size, until they were disbanded under the U.S. occupation of Japan--only to be reborn as the corporate groups called keiretsu. Now, history could be repeating itself. "The new zaibatsu will transform Japan from an industrial to an information society," says Son.

Investors are betting on this. With so few pure Internet companies listed on Japanese markets, they're falling over themselves to grab the early players. Atop everyone's list is Hikari Tsushin, which is hell-bent on the wireless Internet. Hikari's share price has quadrupled in value, to $2,009, since it made its debut on the Tokyo Stock Exchange's main board on Sept. 2. Its market cap is now $62.1 billion, compared with about $36 billion for NEC.

Everywhere, it seems, the New Japan outshines the Old. As Softbank's share price zoomed from $72 to about $1,500 in the past year, its market cap soared above that of Sony Corp., at $121 billion. Nothing compares, though, with Yahoo Japan--51% owned by Softbank--whose shares go for a whopping $1.4 million, more than 2,000 times projected earnings for fiscal 1999. The scarcity of pure Net stocks accounts for some of this fizz. (Yahoo Japan has issued only 13,000 shares on the Jasdaq.) But the situation should ease later this year, when an estimated 250 Internet or high-tech ventures expect to go public.

TOP DOGS. If the many scenarios sketched by the Net builders sound like a sure bet, they aren't. Even if everything goes according to plan, some experts doubt there will be room in Japan for more than three or four dominant Net-batsu. One of them will likely be Softbank, says Hiroshi Fujiwara, an astrophysicist-turned-entrepreneur who runs Internet Research Institute Inc. The other two could be Sony and NTT, he says.

That prospect disturbs up-and-coming entrepreneurs, such as Susumu Fujita, president of Cyber Agent. Japan's largest online advertising company, it recently sold stakes to both Hikari (6.6%) and Softbank (2.6%) in hopes of neutralizing the competition. "They are fearsome rivals that could take over my company," says Fujita, 26.

The important thing, at this early stage, is to teach Japan's risk-wary youth how to become entrepreneurs. "We're going to need lots and lots of entrepreneurs to rebuild Japan," says Joichi Ito, 33, chairman of Infoseek Japan, who recently raised $20 million in venture funding from J.H. Whitney & Co. and PSINet Inc. to seed startups.

That could mean more competition down the line for top-tier Net builders, such as Hikari and Trans Cosmos. At the same time, these two must keep an eye on the Net aspirations of blue chips like Sony or Fujitsu. These are Japan's "click-and-mortar" equivalents of Wal-Mart Stores Inc. and IBM, which are now duking it out with U.S.-based dot-coms.

Internal competition aside, other factors could cloud the future for Japan's Net builders. There's a dearth of experienced, flexible managers for fast-changing Net companies. Also, many people ask if the country can reform its rigid political and business structures quickly enough to nurture the Net-batsu. Japanese consumers still pay inflated prices for energy, telecommunications, and other basic outlays. That may be one reason Japan's economy is teetering toward recession.

Japan's Net builders believe they can reverse the slide. And as the revolution they started gathers steam, more men--and women, too--will find inspiration in their successes. That should further undercut Japan's ossified business structures and breathe more life into the manifold Net ventures. At this early stage, Japan is experiencing entrepreneurial drive it has not seen for 125 years. Or at least since the postwar days, when entrepreneurs Akio Morita and Masaru Ibuka founded Sony in a firebomb-devastated Tokyo. If the Net builders keep pushing, the bullish prophecies of the Roaring Eighties could come roaring back: The 21st century may be Japan's century after all.

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