As one of the few Silicon Valley investors active in Japan, founders with global ambition naturally gravitate to our inbox. We’re not only honored to be approached, but also excited to see that there are more founders these days that have goals beyond Japan.
Among the many questions asked about how to set the company up for global success, a question that often comes up is, “how can we raise money from Silicon Valley?” Keep in mind that there is plenty of money to be raised locally these days. What these founders are really looking for is not money, but validation from a well-known Silicon Valley investor. The thinking is that this will give them global recognition, which will contribute to PR, hiring, business development, and fundraising in the long run. Whether they actually need that validation for their company to succeed is up for debate.
There are two points that often come up in these conversations. One starts with the thinking that if they want to raise money from Silicon Valley, they need to incorporate in the United States. This is outdated and misguided. When there was less money available in Japan for the seed stage, some companies that gave up on raising locally went to the Valley. What they found was that seed stage investors rightfully did not want to spend too much time and money on legal documents, so they preferred to go with a structure and jurisdiction they knew. This set an example for other companies that followed, and Delaware incorporation with a Japanese Kabushiki Gaisha underneath became a trend that many advisors encouraged.
But this approach is no longer relevant. There is much more local capital available for seed stage companies now, so if you are unable to raise your seed round then going to the Valley won’t help you. And if you do need to bring on a Silicon Valley investor, we have localized our investment contract in both English and Japanese for you to freely use.
For later stages it is even less relevant. These investors are used to spending money on legal documents when writing multi-million dollar checks. So whether your company gets funding from Silicon Valley has little to do with it being incorporated in Japan. If you were operating in countries like Venezuela or Chad, then I understand why incorporation matters. But in a stable country this is not a serious bottleneck. In fact, incorporating in the US while operating in Japan is going to be nothing but a pain. At the most benign level, it will be harder to open a bank account or rent office space. Where it really gets thorny is when you decide you want to convert to a Japanese entity in order to IPO in Japan (usually because you realize that the bar to go public in the US is too high). Any US shareholder with appreciation in their investment based on valuation at time of inversion could be taxed by the US. There’s is even more to consider but I won’t go into detail here. The point is that there is a lot of downside with little to no upside.
The second point is how to actually get people’s attention. The harsh reality is that no one cares until they do. Many didn’t care about investing in China until the hits like Baidu or Alibaba came out. The same was true for India and Southeast Asia. Most investors in Silicon Valley simply won’t take Japan seriously until the big hits emerge, so it is not worth trying to convince them directly. The way to convince them indirectly is to convince someone they respect. There are some that care about Japan because of a connection to Japan. They may have lived in Japan, married a Japanese, or are simply Japanophiles. You should start with them because at least they’ll listen. And if they have clout, convincing them will convince those around them to take you seriously. Remember that this industry is all about relationships, and warm introductions matter. Also remember that investors are sheep. 80% of your investors will invest because of the other 20%.
Ultimately, raising from Silicon Valley is not the key to a company’s success. But I do agree that getting a well-known investor on board can help. So when it comes to our companies, we’re working on making this happen for them.
Thanks to Matthew Romaine of Gengo for reviewing and providing feedback.
Founding Partner & CEO @ Coral Capital
