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Japan’s Oldest VC Firm Eyes 200% Gain as Unicorns Proliferate

Japan’s Oldest VC Firm Eyes 200% Gain as Unicorns Proliferate

(Bloomberg) -- Japan’s oldest venture capital firm is closing in on a target to triple the value of its investment, a sign of resurgence in the country’s startup ecosystem.

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Jafco Group Co. expects its newest SV7 fund’s total value to surpass paid-in capital by 2.5 times, as more portfolio companies go abroad, fetching higher valuations. The early-stage investor, which also backs unicorn-in-waiting Astroscale Holdings Inc., is pushing to lift the fund’s performance to a 200% return or more, which the 51-year firm sees as a prerequisite to compete for attention with big-league VCs abroad, Chief Executive Officer Keisuke Miyoshi said.


Jafco, which has backed more than 4,100 startups including SoftBank Group Corp.’s earlier iteration, is considering launching a Japan fund of at least ¥100 billion ($640 million), with fundraising to begin as early as next year. Jafco now oversees about ¥466 billion in assets.

The Tokyo-based investor is getting a lift from a growing pipeline of potential unicorns in the country. New pools of younger entrepreneurs and highly-talented workers from big-name firms are joining the ecosystem, bringing with them mindsets that have been lacking in Japanese startups, Miyoshi said in an interview.

“There’s a surge in the number of startups that are targeting market caps from several tens of billions of yen to more than 100 billion yen when they go public,” he said. “Japan is changing rapidly, with transformation occurring everywhere.”

Escalating geopolitical tensions, a cheap yen and low-cost financing are fueling that shift, directing overseas money away from China. At home, Prime Minister Fumio Kishida’s push to funnel more of the country’s savings into investments is beginning to bear fruit. That push includes a goal to encourage billions of dollars of investment into young companies and create 100,000 new startups and 100 unicorns by 2027.

At the same time, more entrepreneurs in Japan are recruiting foreign workers with a goal to expand globally. That’s helping them better assess overseas competition, prompting them to seek bigger growth and loftier valuations and avoid premature IPOs at home, Miyoshi said.

For years, most Japanese startups targeted their home market and struggled to attract global investors. The country’s risk money also was slow to flow into unproven companies, prompting most young companies to go public while still in early stages of growth. Japan’s securities laws make it easy for such companies to hold initial public offerings, contributing to the paucity of private companies that reach unicorn status and limiting VC returns.

A net multiple of 2.5 times at Jafco’s SV7 fund is modest by global standards, but would be among the highest returns at VC funds of comparable size incepted since 2010, according to data as of May last year compiled by private market research firm Preqin. The fund’s life ends in 2032.

“Japanese funds tend to be small in size, with a lot of the investments concentrated in early, seed-stage funding rounds,” said Shinichiro Shiraki, director at Japan Venture Capital Association.

As of October, Japan had seven privately-held companies valued at $1 billion or more, compared with 653 in the US, according to data compiled by CB Insights. China had 172, while India had 71.

Fund performance depends heavily on equity markets at the time of exit. Besides space debris collector Astroscale, Jafco’s also invested in jobs search platform Timee Inc., cooking recipe provider Dely Inc. and recycling tech developer Jeplan Inc.

Founded in 1973, Jafco typically seeks a 10% to 20% stake in companies. It’s now taking a more hands-on approach than in the past to boost returns and has helped companies it backs expand business and hire talent, according to Miyoshi.

“We’ll be using 50 years of Jafco’s networking and know-how to their fullest,” he said. “We want to demonstrate that the startup space is a compelling place to invest.”

--With assistance from Julie Masuda.

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