PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | YOSHITAKA KITAO

Additional Info: Policy Statements Speeches Photos Speakers & Noted Participants Featured Biographies Registration Media Information Conference Statement Regional Vitality in the 21st Century April 6-10, 2001 — Tokyo, Japan Mr. Yoshitaka Kitao President & CEO Softbank Finance Corporation, Ltd. Thank you very much for the very kind introduction. Since we are blessed with the simultaneous translation, the interpreter's English seems to be more fluent than my English so allow me to speak in Japanese and I ask the English listeners to put your earphones on. Now let me speak on the topic of this concurrent session. My speech will be divided into two parts; firstly I will speak on the environment surrounding the venture capital and will do a slight comparison on Japan and the United States. And then in the second part, based on the differences between our two countries, I will speak on our company, Softbank Investment, and brief you on what kind of activities that we are involved in in Japan. First, let me speak on the climate surrounding us. You are now seeing a diagram that compares the opening up or start-ups and closures of enterprises. The upper two lines indicate the United States, the top one is start up in the US and the second line from the top is the closure of companies in the US. The bottom two lines represent Japan; the top pink one represents the closure of venture companies in Japan and the yellow line at the bottom represents the start-ups of venture companies in Japan. As you can see, in terms of both start-ups and closure, the levels are higher in the United States and the higher ratio of start-ups over closures has been sustained in the United States. As you can see, the pink line has overcome the yellow line in Japan in the recent years, now why are we seeing this phenomenon? First, we have very few entrepreneurs with entrepreneurship or with that spirit. For one thing, there is the culture background as one factor. In Japan, I'm not sure whether this phrase can be effective translated, there is an old saying that says that "As long as you join a big grand organization, establishment, a company, you don't have to worry and you can continue your career until your legal retirement." So in order to put yourself into that situation, you want to go into a good college, to go to a good college you want to go to a good high school, in order to go to a good high school, you want to go to a good grammar school. Even in education, there is intense competition in Japan because of this context. And those who fail the University entrance exams like high school graduates, there is only the avenue to go to an SME. That person is not afforded the opportunity to work for a large corporate and if you are a junior high graduate, you cannot even join an SME. That's the current situation. Now fund raising is a very difficult task for Japanese venture companies, bank borrowings, bank loans require collateral even today and there is still that principle of requiring collateral on the part of the banks for financing. For example, say you try to explain there is growth prospect and free cash flow growth, would a bank lend money to that venture capital because of such presentation, it would be a very rare case. Later, I will touch upon the Japanese situation on the part of venture capital but there is a shortage of fund and there is diverse target for investment so there is no efficiency. And until very recently, we were out of tax system for angels and that was one of the factors that troubled financing but since April 2000, there has been a significant improvement in terms of the angel tax incentive but there are a few improvements that need to be made. For example, target companies, in the United States small companies are covered by the tax incentive scheme, however in the case of Japan, only research and development oriented companies can apply for tax incentive. In other words, unless you use a large amount of your sales on R&D, you cannot use the incentive and subsidiaries of large groups or companies are outside the scope of the venture tax incentive. Also venture capital itself in terms of number of funds and the amount of funds is very small compared to the United States. Here we have a comparison of the amount of investment, venture capital investment, blue represents the United States and the pink line represents Japan. This is a bit out dated data but from 1994, in the United States, growth had continued but in Japan, we saw a peak in 1996 and thereafter, we've been seeing a declining trend. In ball park figures, the US volume is about double the amount of Japan but as you can see in terms of dollar basis, the amount of investment made by the Americans is 18 fold that of Japan and there is the lack of comprehensive venture infrastructure. In other words, for venture capital to provide risk money, you need infrastructure, that alone is not going to foster venture capital, it's not going to let the company go on an IPO, other supporting services such as consulting and legal services are necessary to bring that entity to an IPO. And in the case of the United States be it the legal area, or accounting, or technology or IPO consulting itself, such peripheral support services are provided and there are many incubators in the United States. So in that sense, there is already a well-developed infrastructure and I call that the venture's infrastructure, already fostered in the US society. However, unfortunately, in Japan, we have yet to see the development of such infrastructure. Further, in terms of allocation of funds, in the case of Japan, this is by the way data on 1999, April 1999 - March 2000, and the share by sector in terms of investment. Internet related sector accounts for only 15 percent of the total amount and the sectors are diversified in terms of investment. But let's look at the fourth quarter 2000 US situation. The Internet related sector accounts for a huge $13.7 billion or 70 percent of total venture capital investment. In other words, in the case of the United States, much money goes to the highest growth sector but in the case of Japan because there is too much diversification between venture sectors, there is too much allocation. Why is this phenomenon occurring? Most Japanese venture capitals have banks or security brokerages as parents and the parents would succor their employees to those venture capitals and most of those employees have no knowledge what so ever on IT nor the Internet. For example, do they understand the Internet business model or do they understand the Internet technology? The answer is no, there is hardly any human resources in venture capitals that understand those areas. That's the reality of venture capital related to huge banks and security brokerages. Now based upon such comparison between our two countries, Japan and the United States, then what's the role of our company, Softbank Investment in the midst of this climate in Japan? What kind of activities are we involved in? There are three major areas of activities. First, creation of new industry through concentrated investment in Internet companies; second, high level incubation activities through the provision of venture infrastructure; and thirdly, contribution to the upgrading of IT level in Japan through the promotion of alliance coordination between large Es and small Es. First, let me speak on the creation of new industries through our concentrated investment in Internet companies. Through our company, Softbank Investment, we have established a fund of $230 billion on book value basis, most of this is invested in Internet companies in a concentrated manner. Further after the initial investment in the interim until IPO, when the company runs into shortage of funds and requests us to make further investment, and in fact that occurs very frequently, in that case we have another company called Softbank Frontier Securities Company that deals with private equity and this company provides the secondary and primary market for private equity. So while we provide seed money through Softbank Investment, through Softbank Frontier Securities, we also have access to the second round, third round funds that would be required up until the IPO and at the time of IPO, E-trade Japan which is also one of the companies in our group would provide for services and the company will finally IPO on NASDAQ Japan. So we can provide this whole flow of services within our Softbank group. Now this diagram represents the figures of recent IPOs in the IT area in each market, as you can see a total of 252 companies went public in the year 2000 and 88 companies or about 35% was IT related or Internet related. On Mothers and NASDAQ Japan, the new market represented on the second bar from the right, Mothers was established and then thereafter NASDAQ Japan was established in June 2000, in these two markets represented on this bar, of the 63 companies IPOed, 50 were IT related or Internet related. So in that sense, you can obviously see that we are concentrating our investment in Internet and that has brought about significance. Now the second area of our activity is advanced incubation activity through the provision of venture infrastructure. We are providing a variety of venture infrastructures and our group companies as well as our affiliates and our partners provide a variety of services in this context. For example, there is a company called Capital Dot Com, our partner, this is a company that provides IPO consulting. E-Research another affiliate is involved in market survey, Online IR is another company that provides support in investors relations and consulting, E-trade underwrites shares, digicode, has market by technology and by making use of that technology, it bridges the gap between the real world and the virtual world such technology is provided. Another company, OfficeWork provides for accounting services. So from various angles, we are supporting venture companies through diverse activities and services. Further, our portfolio companies, there are 346 companies in total, mainly Japanese Internet companies, we have established a so-called venture consortium. And the members of the consortium or portfolio will mutually seek synergy and further within our Softbank group we have such companies as E-commerce and Yahoo and these companies are providing supporting infrastructure to these companies. The third area of activities is contribution to the upgrading of IT level in Japan through the promotion of alliance coordination between large Es and small Es. Now compared to US large corporates, Japanese large corporates are lagging behind in terms of introduction of IT. Naturally Japanese large corporates have resources, brand, financing, they also have excellent human resources but these resources sometimes become a drag on advancement of IT. And what promotes IT is fusion between the large corporates and venture companies. Ventures have agile business models and they are speedy in making managerial decisions, they also have the expertise on Internet. So by putting together the large Es and small Es and establishing alliances in between, we can upgrade the level of IT. Next to myself is Mr. Tasaka, representative of Sophia Bank but he has been taking the initiative in establishing the Sophia consortium. There are currently 58 members, large corporates like NTT Data, Toshiba, NEC, these are some of the members of the Sophia consortium and we try to connect the small Es to these big or large Es and that's become one of our biggest challenges. Our job is to provide risk capital, not only that but also to provide knowledge and know how and at the same time to provide strategy. So this CSK provision is our job and by so doing successfully, we will be able to become the creator of new industry in the 21st century mainly centering on the Internet. Thank you for your kind attention, this concludes my presentation.