Japan's New Entrepreneurs Dr. Daniel J. Isenberg Triangle Technologies Ltd. October 29, 1999 Presented at the Nippon Systemware Seminar, "The Future Networked Society"

My good friend, Naoto Tada, honored guest, George Gilder, other distinguished friends and colleagues. Thank you for inviting me to provide some commentary to George Gilder's customarily insightful illuminations.

To understand my own perspective, let me comment that since leaving the Harvard Business School in 1988, I have been an entrepreneur and a venture capitalist. It is in this context that I want to relate George Gilder's comments today largely to what he wrote 15 years ago about entrepreneurship.

Prior to my comments, I would like to take a brief survey. How many of you in the audience use email? (about 100%). How many of you use the Internet to surf? (about 80-90%). How many of you have made a purchase over the Internet using your credit card? (about 10%). I will refer to this later.

1984 George Gilder wrote, "The single most important question for the future of America is how [America] treats [its] entrepreneurs" (The Spirit of the Enterprise).

Fifteen years later, Gilder's statement can be applied to Japan - the single most important question for the future of Japan is how Japan treats its entrepreneurs. Having been to Japan 70 times in the past 10 years, I believe that Japan is on the verge of experiencing an entrepreneurial renaissance.

My goal today is to share with you some of my observations and assessments regarding this underground movement, this entrepreneurial revolution that is just beginning to be felt.

Japan has deep reservoirs of entrepreneurial talent, as evidenced by its long legacy of entrepreneurship, particularly during times of social turmoil. The most noteworthy, perhaps, was the beginning of the Tokugawa period, during which commodity exchanges, retail, textile, financial services were created. Following came the Meiji Restoration, and then the post WW2 devastation, which witnessed the rise of the Ibuka, Matsushita, Honda, Hattori, Inamori, Tateisi, Kashio- although many of them began their businesses in the pre-war era, the 1950's ushered in a period in which their struggles would go hand-in-hand with unparalleled economic growth.

This post War generation of entrepreneurs has been described by George Gilder in his chapter, Japan's Entrepreneurs, which he wrote in 1984.

Now Japan is beginning an Internet driven renaissance which will be powered by Internet based connectedness described so well today by George Gilder. Japan's present entrepreneurial renaissance is accompanied by circumstances which are both happy and sad.

On the sad side, the Japanese economy and society have been suffering this past decade. The painful circumstances include the undermining of the financial system's asset base, the subsequent collapse of the banking system, the prolonged profitability crunch, the erosion of the social contract between employee and employer are graphically evidenced by the homeless surrounding Shinobazu no Ike and Shinjuku station.

Other circumstances have been more positive: the liquidity in the US spilling over into venture capital formation in Japan; the exuberant proliferation of the Internet; even the Internet's slow destruction of the hierarchy; the talk of a new NASDAQ; the new wireless technologies which are being developed in Japan. Japan's entrepreneurial renaissance, which is just starting, even is giving birth to its own MOTHERS (the new stock exchange sponsored by the TSE).

Underlying the entrepreneurial rebirth is the bandwidth revolution that George Gilder has so eloquently commented on, because it totally changes the rules by which we live. The Internet puts an unprecedented access to information and an unprecedented ability to innovate in the hands of millions. By making the network "stupid" (Dr. David Isenberg, www.isen.com ) - ignorant of social status, wealth or power of the end user - the clients are made smart, and innovation is driven from the network's core to the network's edges. Interestingly, some of the characteristics of the Internet stand in direct contrast to the corporate culture in Japan, and this will need to be dealt with.

The future networked society is a society of entrepreneurs. With fits and starts, hesitancy and ambivalence, Japan is joining this networked society, and, I believe, will eventually play a leadership role.

Japan's new entrepreneurs come with ideas, enthusiasm, a sense of opportunity, as well as a deep disillusionment with the establishment status quo. Only a few of them have relevant experience; only a few know how to write business plans; only a few have experience marketing; but a handful understand how to raise capital. Only a few of them have truly grand ambitions.

Japan's new entrepreneurs are largely unrecognizable, so you may not notice them. Japan's new entrepreneurs may look like the salary man. Japan's new entrepreneurs may act like the senior executives of the large corporations. They may seem similar to their entrepreneurial elder brothers of 10-20 years ago in Japan who started their companies under corporate umbrellas, with almost no capital, with long-term service contracts from one or two corporate customers to sustain their first years.

But fundamentally, these new entrepreneurs are different.

The names of Japan's new entrepreneurs will be different - IIJ's Koichi Suzuki, NetYear's Sonny Koike, J@pan.Inc's Terrie Lloyd, Digital Print's Hiroto Ebata, Nihon Tsushin's Seiji Sanda, NetAge's Kiyoshi Nishikawa, Monex's Oki Matsumoto, GOL's Roger Boisvert, InterQ's Masatoshi Kumagai, and others.

I have been talking with many of these entrepreneurs over the past weeks. Japan's new entrepreneurs, whose predecessors George Gilder wrote about almost 2 decades ago, are the upstarts who see the business chances that free bits and bandwidth will create, who enjoy the corporate chaos that ensues, who revel in the inefficiencies that are being opened up in the economic upheaval.

These tradition breakers are a threat to the incumbents. Two days ago a leading consumer electronics company told me their management must be loyal to their retailers, and so cannot participate directly in e-commerce. Early this week one of the board members in a large trading firm told me the other day that his board would not approve e-commerce in the large commodity trading divisions because they needed to be loyal to their customers and suppliers.

Whereas such news frustrates my friends, it encourages Japan's new Bit Valley entrepreneurs and whets the appetites of the local and foreign venture capitalists, scouring Bit Valley for investible new ventures. Japan's new entrepreneurs revel in the inertia and lethargy of the incumbents.

Japan's new entrepreneurs are dangerous. They prey upon the weak, slow-moving and old-thinking legacy companies. Don't be misled by the fact that Monex's Matsumoto-san walks around in jeans and looks like a teenager. He is out to beat the house of Nomura. Don't be fooled by Koiichi Suzuki's avuncular demeanor. He is a dangerous revolutionary with NTT in his sites.

Don't dismiss these radical revolutionaries. George Gilder wrote, "entrepreneurship is the launching of surprises." We should all prepared to be surprised, and when we encountered surprises, we should not be surprised by them.

The bandwidth revolution which George Gilder described today underlies all of this revolutionary activity partly because the Internet is a disruptive technology which changes the economic fundamentals. The incumbents in Japan had better watch out. Research by Professor Christensen of Harvard has shown us that the first mover advantages in exploiting radically new technologies are overwhelming, giving the first movers 6 to 20 times the revenues of the later entrants.

As a result, in Japan's future networked society, the competition that will really threaten current corporate existence will not come from the traditional battle partners. Barnes and Noble is being attacked and whipped by an upstart - Amazon.com. Who ever heard of them 4 years ago? This past week, two different friends from two different mammoth Japanese manufacturers told me a similar story - their companies rejected early entry into e-commerce because the incumbents were afraid to threaten their distribution channels. Dell Japan, with its well-oiled on-line distribution, is happy about that. So is Hiroshi Mikitani from Rakuten Ichiba. Who? That's what they asked about Jeff Bezos of Amazon four years ago. The most serious threats will not come from Siemens in Munich or from Sony in Shinagawa, but from Aoyama's Bit Alley or California's Silicon Valley or Manhattan's Silicon Alley or Israel's Silicon Desert. Daiei's life threat will come, not from Seiyu, but from Rakuten Ichiba.

As George Gilder has written, "Because entrepreneurship overthrows establishments rather than undergirding them, the entrepreneur tycoons mostly begin as rebels and outsiders." Where are Japan's new entrepreneurs coming from to tap into the opportunity? A very high percentage of them are either ex-patriates, or have significant overseas experience. They don't fit the traditional molds. Several were raised and educated in the US, going to Stanford, Harvard, and other universities, working at companies such as Motorola and Apple, and Goldman Sachs. Some are foreigners who have been living in Japan. Everyone here knows Softbank's Son's background.

George Gilder and others have been indefatigably shining the light for all of us, showing the way to the technologies which disrupt existing industries. I once read a story about Admiral Byrd, who on one of his treks to the South Pole found out that he was making progress traveling 5 miles per hour south on a huge iceberg that was moving north at 7 miles per hour. While the incumbents are increasingly perfecting the means for doing something which is decreasingly worth doing, Japan's new entrants are plotting their revolution.

It is difficult to give advice because we are talking about a fundamental change in attitude. But I have a few thoughts that can be summed up in four words: participation, separation, immigration, and hesitation.

1. Participation. All of us use email, a large percentage surf the Internet. According to my survey a  few minutes ago, not many have gone a step further to make a purchase with their credit cards.  Go ahead, do it. Go into Rakuten Ichiba and buy something. Participate in e-commerce. (Rakuten  is not paying me a commission for this advertisement).

2.Separation. Create independent organizations to exploit the radically new technologies.   Research shows without this, there is little chance.

3.Immigration. The future networked society will be brought into the present by those who are   hosting foreign bacteria. Many of the new net ventures in Japan are staffed with non-Japanese,   funded by foreign capital, and even the headhunters are from foreign search firms.

4.Hesitation. To paraphrase a professor of mine, getting involved in e-commerce is like trying to  paint a mural on the side of a charging elephant - if you don't move quickly, you won't even make  a mark.

I will conclude with a quote from George Gilder, not in 1984 but from earlier this month. Describing the entrepreneurship of the future networked society:
"The radiance of the Net rides on trust: predictable waves … that carry the entropic ideas of enterprise. The Net promotes the ideas that yield more than they cost, the ones that are worth more to others than to the producer…."
I am enthusiastic and optimistic about Japan's new wave of Net entrepreneurs, and with them the full embrace of the future networked society.

Thank you.