Report No.14
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Japan Entrepreneur Report No. 14 December 2003
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- Is Japan's third venture "boom" over?
- Mark Colby wrestles with Japan's medical system
- SunBridge moves outward, upward
- Life's two toughest problems
- Bits and bytes
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Is Japan's third venture "boom" over?
Many think so. Japan's economy showed unmistakable signs of bottoming
out this summer and now appears to be slowly rebounding. With earnings
at large corporations recovering, many observers say ventures are now
far less attractive to new college grads and experienced businesspeople
alike. Besides, the Internet bubble popped more than three and a half
years ago. Is the boom really over?
In a word, no.
Japan experienced three distinct venture "booms" over the past three
decades. The first, from 1970 to 1973, was triggered by newly relaxed
monetary policy. It focused on construction and real estate investment,
but the first oil shock brought it to a grinding halt.
Newly relaxed standards for over-the-counter stock market listings
ignited a second venture "boom" in 1983. This produced Japan's first
venture capital firms, companies that invested heavily in high-
technology firms in the bio-medical and electronics sectors. But the
dramatic rise in the value of the yen beginning in 1985 rained on that
parade.
Japan's third venture boom began around 1993, when the role of startups
in the U.S. economic recovery became widely recognized, and the
Internet's possibilities started to intrigue domestic entrepreneurs. If
we equate this third boom with the Internet bubble, then it clearly
ended in March of 2000 when the NASDAQ started to melt down.
But as the word "boom" implies, these three phenomena were "explosions"-
-temporary events with abrupt and unmistakable endings. The first two
were relatively short-lived and had little lasting impact. But the
third venture revival--still underway--is different.
That's because the third revival ushered in a new era of fundamental
change. The force of the Internet, combined with other factors, caused
Japan to alter some business basics: METI revised the Commercial Code,
and tax reform, though slower, is underway. So is regulatory reform in
health care, finance, real estate, and other sectors. Companies have
undergone massive restructuring. And while those who declare "boom
over" correctly point out that most of this restructuring is now
complete, longheld assumptions about lifetime employment are quite dead.
That's a huge social change for Japan.
The reemergence of a strong traditional corporate sector doesn't throw
cold water on venture activity; in fact it's just what ventures need.
Large corporations often create brand new markets, even if they are
initially clueless about how those markets might develop. DoCoMo
brought i-mode infrastructure into the world, at first assuming
subscribers would want stock quotes, train timetables, and personal
telephone directories on their cellphones. It took small, independent
ventures to imagine and create the previously unthinkable applications
that really drove the market: cartoon screensavers, pop song ring tones,
and e-mail newsletters.
So now more than ever is the time to start a new business in Japan.
That's why I love the English slogan I stumbled across at intellectual
property attorney Takao Yanagino's Web site: Don't be afraid of being a
venture! Be afraid of being a bencher!
But enough theorizing--on to the ventures. This month, JER
correspondent Carl Kay leads off with the third in his series of
interviews with foreign entrepreneurs making their marks on Japan's
"invisible" economy--the unglamorous domestic sectors that make up 90
percent of GDP, yet are largely unseen by the outside world (see Part II
at <www.japanentrepreneur.com/200311.html#2>). In Part III Carl
spotlights Mark Colby, judo expert and heavyweight navigator of Japan's
health care maze.
Next, learn about JER sponsor SunBridge's move to new Tokyo digs, and
success factors spurring the company's new cycle of profitability.
Finally, we close 2003 with a Quote of the Month and a couple of
announcements. Happy reading!
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Mark Colby wrestles with Japan's medical system
Twenty-five years ago Mark Colby came to Japan to study judo, and today
his career finds him in constant combat--not with opponents in the dojo,
but with the outmoded practices of the Japanese health care system.
Following dental school studies in the U.S., he launched his career with
a drug maker and eventually transferred to Tokyo. Since leaving his
position at a leading U.S. pharmaceutical firm to strike out on his own
at the peak of Japan's economic bubble, Mr. Colby has artfully fought to
build five businesses in the health care sector, all under the umbrella
of Colby Group International, Inc., or CGI (www.colbygroup.com), a
holding company poised to reach consolidated sales of approximately U.S.
$7 million this year. It is probably safe to say that Mr. Colby is one
of just a handful of foreigners who truly knows how the Japanese medical
establishment really works. He has even published a book on the subject,
and a leading publisher is now reviewing his completed manuscript for a
second book.
Like many foreign entrepreneurs in Japan, Mr. Colby first found
opportunity serving his own countrymen living abroad. In Mr. Colby's
case, his first customer was the U.S. military, which due to import
regulations was unable to procure supplies needed for its medical
diagnostic test labs in Japan. Mr. Colby navigated his way through
bureaucracies on both sides of the Pacific to establish a system that
met everyone's requirements. Thirteen years later the company still
generates profits for CGI.
"Sales are about $5 million year. It's not growing much, but it is
stable and profitable. What's more, it meets an important need, and is
not easily copied," says Mr. Colby.
More important, the military provided Mr. Colby with the idea for his
second business. The U.S. bases in Japan wanted to outsource some tests
to local labs but found none that met U.S.-accredited quality standards.
Mr. Colby consulted with a large Japanese lab and helped it pass the
strict accreditation test needed to win the military account. Soon other
lab customers, including university hospitals, started to demand work
performed to the same standard, and CGI found itself flooded with
requests for help from other Japanese labs looking to win accreditation.
"Labs are one area of the Japanese health care system where competition
has been encouraged, so the economic incentive to win customers through
improved quality was there," Mr. Colby says. "Working with the leading
U.S. standards body in the field, we created the only training program
available in Japan that leads to the accreditation, which we've sold to
some of the nation's largest laboratories. As a result, about 35% of all
lab samples processed in Japan are now handled by accredited
facilities."
Having learned from his second business the power of establishing a new
industry benchmark, Mr. Colby moved to address another area where Japan
sorely lacked needed standards: hospital infection control, where Japan
is infamously behind its peers in the developed world. Working with the
U.S. Center for Disease Control and Johns Hopkins University, he
developed a standard for Japanese hospitals that is gradually becoming
accepted through CGI's tireless proselytizing. As with lab accreditation,
the hospital infection accreditation business involves selling training
materials, consulting services, and software used to implement and
monitor the standards regime.
"So far over 10,000 people have completed or are undergoing our training,
and we are gradually building the list of accredited hospitals," Mr.
Colby estimates. Still, he reckons it will take "five to ten years" for
Japan's change-resistant health care system to fully adopt the standard.
Yet Mr. Colby believes Japan's health care system is in the midst of a
dramatic sea change.
"Japan is moving from a 'fee-for-service' model, whereby each service
performed is reimbursed by insurance, to a system of 'prospective
payments', whereby a fixed fee is paid based on the patient's diagnosis,
regardless of the actual treatment the hospital chooses to administer,"
he says. This helps cut costs and drive efficiencies, but the system
lacks a critical element: physician oversight.
"Under a managed care or prospective payment model, there is a natural
tendency to cut corners, which can lower the quality of care delivered.
In other countries that have made this transition, there is a strong
system of accreditation and professional oversight of physicians to make
sure a proper level of care is maintained despite cost controls," he
points out. "Japan is very weak in this oversight area and urgently
needs to address this element to balance the cost reform it is carrying
out."
Mr. Colby's most recent venture focuses precisely on this issue. "New
rules in Japan require all physicians who advertise themselves as having
a specialty to join a government-authorized professional society, and
the societies must require their members to meet a minimum continuing
education requirement each year," he explains. "Mind you, the change is
just a small step: all doctors in Japan can still perform brain surgery
or any procedure they want, without any continuing education, as long as
they don't advertise themselves as specialists in that area. Also there
is no set number of credit hours the societies must require--they simply
have to have a requirement, at whatever level they choose."
CGI is now signing contracts with professional societies to deliver and
administer this newly required training function on their behalf on an
outsourced basis. Given the lack of teeth in the new requirements, many
in the industry are calling Mr. Colby "nuts" for investing so early in
continuing medical education, or CME, services. But given his track
record, "visionary" might be the more appropriate label, though even Mr.
Colby himself concedes, "only time will tell."
Mr. Colby is full of advice for would-be foreign entrepreneurs in Japan.
"Being a foreigner can work in your favor. You are allowed to rock the
boat in ways the Japanese can't," he says. For example, large Japanese
companies concerned about the high cost of health insurance for their
employees are asking the American Chamber of Commerce Health Care
Committee, chaired by Mr. Colby, to push for health care reform and
cost-cutting. That's something the companies can't do themselves, Mr.
Colby says, because they don't want to openly oppose their unions, who
zealously fight to retain all current health benefits.
Mr. Colby urges would-be entrepreneurs to monitor government policies
and regulations closely, paying special attention to signs of possible
change. He also advises working to clearly understand who benefits and
who loses as a result of each change. "Newly introduced standards offer
phenomenal business opportunities, but standards are only widely
accepted when there is a clear economic incentive," he notes.
One area where Mr. Colby predicts the government is unlikely to act
quickly is lowering immigration barriers to foreign nurses and
caretakers for Japan's rapidly aging population, despite a looming huge
shortfall of such workers. "The government is sacrificing the very
generation that rebuilt the nation from the ashes of World War II. There
simply won't be enough people in the system to provide them with an
adequate level of care," he says.
Still, even this challenge may offer entrepreneurial opportunities.
"There are loopholes that could be exploited to bring in foreign
caretakers for limited periods of time," Mr. Colby says. "Also, there
are no barriers to offering elderly care services outside of the elderly
care insurance system, as long as the patients pay with their own money.
So truly top class, home-based elderly care service aimed at the
wealthier elderly population, using Japanese staff, is potentially a big
market."
Mr. Colby is clearly bullish on Japan's service sector. "Foreigners
should avoid dealing with 'things', which the Japanese are already good
at making and selling. Services are the way to go. The Japanese
intrinsically undervalue the service sector." That makes the going tough
for entrepreneurs at first, but leaves the path wide open for those
willing to try, and offers the lure of outsized rewards that come after
winning wide acceptance for a service innovation. "If it wasn't hard,
there would already be a lot of others doing it. Be first, find a niche,
and defend it," he advises.
Mr. Colby makes it all look easy, like a judo expert with technique and
style honed over many years of practice. But in fact, he says, "It has
been a hard road and taken a long time. When you're doing new things,
you have to be willing to constantly change your approach. This has been
difficult to communicate to Japanese staff and get them comfortable
accepting." Still, Mr. Colby has made significant progress building his
organization and delegating responsibility, freeing him up to focus on
his self-appointed role as "chief salesman."
And the pot of gold at the end of the rainbow? So far, Mr. Colby has
declined offers to sell parts of his operation. "Talk to me again when
I'm sixty," he says. "Right now I enjoy what I'm doing day-to-day."
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SunBridge moves outward, upward
SunBridge, Tokyo's leading venture capital firm focused on early-stage
technology startups, has moved out--and up. The company relocated to a
new office in Ebisu December 12, after nearly four years in Shibuya's
Mark City Tower.
Why the change?
SunBridge is making a strategic shift away from leasing office space to
ventures, and at the same time locking in a new cycle of profitability,
managers say.
"We discovered two decisive success factors with respect to our
startups: strong management on the venture side, and strong technical
and operational support from SunBridge staff," says SunBridge Executive
Director Shinichiro Ishibashi. "While the 'incubatees' loved the
Shibuya facility and the logistical and social advantages of co-locating
with other ventures, we found no significant positive correlation
between success and whether the venture was located off-site or on-site
in Mark City."
What's more, two large SunBridge incubatees that were using a
significant portion of venture space were poised to "graduate" out of
the facility, making the timing for a move to the new office ideal.
Yet locating in Shibuya's prestigious--and expensive--Mark City Tower
back in April 2000 was well worth it, according to SunBridge Chief
Investment Officer Takaaki Nagayama.
"Renting an entire floor in one of the newest, most prestigious office
buildings in Tokyo drew a lot of attention and put SunBridge on the
media map," he says. "As a brand-new player, it gave us credibility in
a venture capital market that still tends to emphasize physical over
intellectual assets."
Nor did the initial investment in premium office space slow down
SunBridge's financial progress. The company will post positive earnings
for 2003, despite spending most of the year at Mark City. Now that it
is established as a solid player in Japan's venture capital world,
SunBridge wants to keep up the earnings momentum.
"Like Ted Levitt, I don't believe the purpose of a corporation is to
make money, any more than the purpose of life is to eat or breathe,"
says SunBridge founder Allen Miner. "But just as life can't be
sustained without eating or breathing, a corporation cannot sustain
itself without generating positive earnings as the natural, peripheral
result of its primary activity. The move to the new location sharpens
our focus on SunBridge's core competency: using executive-level
technical and operational expertise to attract, select, invest in, and
guide Japan's most promising early-stage technology ventures."
For new SunBridge particulars and a detailed map and directions to the
Ebisu office see <www.sunbridge.com/header/hea20031215.htm>.
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Life's two toughest problems
What are the two toughest things to handle in life? "Failure and
success," said an unknown wise person. Who are we to argue?
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Bits and bytes
"Keeping Six Inches of Water Above Your Head!" is the topic of the next
meeting of the Entrepreneur Association of Tokyo on Tuesday February 3,
2004 (there will be no meeting in January). Speaker Mike Alfant,
President of Building 2 (www.building2.com) and Chairman of the
Technology Committee of the American Chamber of Commerce in Japan, has
real entrepreneurial chops: he started an IT solutions company from
scratch in 1992 and seven years later sold it for $58 million to a
NASDAQ-listed company. See <www.ea-tokyo.com> for details on Mike's
presentation and to sign up for the event.
Last week, after the number of spam messages cluttering my inbox each
day started pushing 100, I decided to take long-delayed action. After
some poking around online, I downloaded and installed Spam Pal, a free,
client-side anti-spam solution (www.spampal.org). So far it seems
miraculous: it immediately caught 99 percent of the incoming spam and
hasn't filtered a single legitimate message so far. This software
appeals to me because I don't want to change mail addresses or use one
of the more drastic authentication solutions that requires turning over
mailbox passwords to a third party and so forth. Hats off to U.K.-based
Spam Pal developer James Farmer (www.twinlobber.org.uk) for his
effective and selfless effort to reduce stress and annoyance levels.
And Happy Holidays to all JER readers! Wishing you the greatest joy and
success in the coming year, I remain,
Sincerely yours,
Tim Clark
Senior Fellow
SunBridge Corp.
Voice (U.S.) 503.235.4419
Fax (U.S.) 503.235.4429
clark@sunbridge.com
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