Key Points for Investment and Co-Creation by the Founder of Japan's Only VC Specializing in Food Tech
~Understanding Entrepreneurs is the Key to Success in Open Innovation
vol.3 Points of startup investment practice①

0)Table of contents

The first Insights from my experience with VC, startups, entrepreneurship and CVC(The time before last)
The second Why are major business companies investing in startups these days?(last time) 
・The third Points of startup investment practice
・The fourth (Planned) Recommendation of hybrid investment 
・The fifth (Planned) Co-creation between major business companies and startups

In the previous issue, I wrote about the importance of open innovation and the characteristics of startup entrepreneurs under the title “Why are major business companies investing in startups these days?” In two parts, this issue and the next, I will write about what and how to do “investment practices” when a major business company actually invests in a startup, including points and advice.

1)Investment department (team) composition

First of all, you need a team (department) that will actually be in charge of startup investment activities. There are cases where a large number of people with concurrent positions are gathered together and each person is assigned 10 to 30% of the work.However, from the viewpoint of speed, responsibility, passion, etc., it is better to form a team with only full-time people (fully committed). We strongly recommend that you do so.For example, it is better to have 4 full-time employees than 10 concurrent employees. For an investment budget of 1 billion to 1.5 billion yen, the investment team can be managed by four full-time people. If the budget is 3 billion yen, it will require about 6 to 10 people. The member structure (for example, in the case of 4 people) is 1 person in charge of investment and team manager, 1 person in charge of investment, 1 person in charge of co-creation, and 1 person in charge of management.

What is required of an investment manager (venture capitalist) is (1) numerical and analytical skills and (2) human charm. As part of my job, I need to analyze the financial statements of investees, so I think experience in accounting and IR departments, as well as experience working at a consulting company, will be useful. People who don’t have a warm heart, can’t listen to what others have to say, and are the type of people who only tell the truth are not suitable for becoming investment managers (venture capitalists) because they won’t be able to build good relationships with startup entrepreneurs.In the human resources market (job change market), there is no need to look for people with venture capital experience (there aren’t many of them, and the salary range is high), and we recommend hiring someone from within your company who has both of the above-mentioned 1 and 2. I think it would be a good idea to look for people who can improve performance in both the accounting department (or finance or IR) and the sales department.

The person in charge of co-creation does not necessarily need to be strong with numbers. Suitable candidates are those who have a rich network within the company, those who are loved by others, and people with ideas. The people in other departments within the company who are asked to consider co-creation with the startups we invest in are generally busy. It is quite difficult to get people to listen to your story or to attend meetings with startups. Therefore, we need someone who can say, “If you say so, I’ll come to one meeting.”Also, it’s okay to be delusional, so this is someone who can come up with ideas for combinations, such as “Can we do something like this by combining 〇 and △?” or “Maybe we can do a new initiative based on the needs of this department within the company and the services we invest in?” . People with excellent results in proposal-based sales (consulting sales) may be suitable candidates. Additionally, new graduates who join the company may have an advantage in co-creation roles because they have a network of new graduates within the company rather than mid-career employees.

The best person to be in charge of management is a person with a methodical personality. Every day, we handle materials that must not contain any mistakes, such as managing and analyzing the figures of investees, responding to proxy statements from shareholder meetings, and compiling financial materials for both internal and external sources. Confidential information must also be handled with care. It would be even better if you have a qualification such as level 2 bookkeeping (not required). I’m sure there are many different ways of thinking about this, but I think that someone who likes to stand out or has an aggressive personality like “I, I…” might not be suitable for me from a continuity perspective.

If you have a team of four, there should be diversity in age, gender, and background (past industry and department). I wanted to make sure that all four of us were men in their 40s who were new graduates (lol).

I may write about the reasons on another occasion, but I am strongly opposed to the establishment of a CVC business company in the form of a “two-person partnership.”

2)Sourcing (search for investment projects)

The main purpose of venture capital (hereinafter referred to as VC) investment in startups is the profit from the sale of stocks (capital gain, hereinafter referred to as CG, net investment).The main purpose of a business company’s investment in a startup is co-creation and business synergy, not CG, so it cannot be discussed from the same perspective as a VC, but even if a business company invests in a startup, only about 10-30% of it is co-creation. Considering the reality that it does not lead to business synergies or business synergies, we need to aim for CG for the remaining 70-90%.For reference, let’s take a look at VC investment.

There are multiple factors that determine the success or failure of a VC startup investment (the presence or absence of CG, the size of the investment).The main elements are (1) sourcing (proposal search), (2) DD (investment scrutiny), (3) growth support (hands-on), and (4) EXIT (sale), but many capitalists say that (1) sourcing is the most important.The extent to which you support growth is important, but it also matters in which company you invested in the first place and how you acquired that investment opportunity.

Great VCs and capitalists always have success patterns and sourcing networks. And I don’t want to tell people that (lol). For example, in professional baseball, it’s the winning formula (intermediate pitcher → closer pitcher), or in fishing, it’s your own secret fishing spot (lol).

Startup communities are often private. There is actually not much “network based on relationships of trust” or “quality information” of entrepreneurs, angel investors, advisors, VCs, business company CVCs, etc., either on the web or at event venues (excluding invitation only).Many high-quality investment deals are non-public information.Becoming an insider in the community and gaining relationships and positions that provide non-public information will lead to good sourcing.When starting a new startup investment, it’s a good idea to invest time and money in becoming an insider in the community.
We believe that making an LP investment (indirect investment in startups) in a ”highly compatible VC fund” whose business areas overlap and dialogue will mesh will also help.

For sourcing, we recommend building a multi-layered system where information comes in through various routes.For this reason, diversity among team members is important.A capitalist in their 20s and a capitalist in their 40s will likely work with different CVC personnel of different ages and positions, and those with a background in food trade and those with a background in pharmaceutical research will have different areas of expertise. With the diversity of our team members, we aim to cover as many routes as possible to obtain information.

3)DD (Investment scrutiny)

If you want to consider co-creation with this startup, think there may be business synergies, or want to invest and become a shareholder, it’s time to conduct due diligence (hereinafter referred to as DD).

Although the details are omitted here, the main items of DD are as follows.

(1)Management team (especially representative director)
(2)Competitiveness and technological capabilities (strengths)
(3)products and services
(4)market
(5)risks and weaknesses
(6)competition (rival
(7)Finance (financial statements/monthly trial balance)
(8)Stock price and investment return
(9)Capital policy and shareholder composition
(10)Business plans (especially performance plans)
(11)Legal affairs (patents, business alliances, investment contracts)

Basically, the above-mentioned series of DDs are carried out within the team, but depending on the backgrounds of the team members and their relationships with other departments within the company, (11) may be supported by the in-house legal department.

This is not an M&A project worth 1 billion to 10 billion yen, but a partial investment project worth tens of millions to hundreds of millions of yen, so we asked outside accountants and lawyers to handle the project over several months and several million yen. DD will not be performed.

It would be too technical and long to write, so I will omit it (lol),”Design of impairment rules”, ”investment policy that takes into account impairment rules”, and ”holding policy after investee exit” are very important when investing in startups of operating companies undergoing IPO. It will affect your company’s performance and IR.

4)Investment procedures and execution (stock acquisition)

As a result of DD, if an investment decision is made by the investment committee, etc., we wait for responses from other investors (sometimes making adjustments to reduce the amount, etc.), and then we finally get to the payment date.

After making an investment decision, we will confirm the final version of the investment agreement and shareholder agreement that will be concluded with the startup. Although we agree on a general outline before making an investment decision, there are many cases where slight changes are made due to requests from other investors. You need to know all your rights and obligations.It is important to recognize that this is an investment project that has such risks, rather than saying that it cannot be done because of the risks.While coordinating with the startup’s requests and the requests of other investors, it is rare for things to go 100% according to your wishes.

Investment agreements and shareholder agreements are often prepared by the “lead investor.” VCs often have more experience in this area than operating company CVCs, and roles are often divided among shareholders.Support for increasing sales and business alliances is provided by operating company CVC, and support for governance and capital alliances is provided by VC.For CVC operating companies, I think it would be better to place more emphasis on business alliance agreements than on capital alliance agreements (such as shareholder agreements accompanying investments).

Internal procedures (applications) include applying for sealing of investment contracts, etc., and applying for funds transfer (payment). I think it would be a good idea to delegate authority to the application system as much as possible and design it so that it can respond quickly.

Now, how many members should be included in the “investment committee” that makes the final investment decision in startups?It depends on the size of the company, but I think around five people is appropriate. It varies depending on the size of the company and the length of the department’s activities (experience level), but for example, it looks like the following.

(1)New business development department manager level (actively promoting co-creation
(2)Management department related to accounting Department manager class (governance)
(3)Investment team manager (main body proposing investment projects)
(4)Technical department: On-site managers, etc. (people who know about new technologies and markets)
(5)External advisors (such as GP managers of funds in which LP invests)
*Investment team members other than (3) will serve as the secretariat and will be responsible for projecting materials and preparing meeting minutes.

By the way, I think that there are many CVC companies that take 3 to 6 months from the start of DD to the payment, but if you think about the structure, member composition, and investment committee design, it can be done in about one month. For example, let’s say a startup is raising funds for the end of March, three months from now. There are other investors (for example, we are VCs) who are trying to connect this company (operating company) and this startup because they think there is a good compatibility and that there will be synergy.From a schedule standpoint, we are able to connect with companies that can respond within 3 months, but unfortunately it is impossible to connect with companies that require 6 months. I think it is better to have a larger number of cases to consider co-creation and investment.In particular, there are many high-quality projects introduced by investors with whom you have a trusted relationship, and you want to avoid not being able to accept them (not being accepted into your group) because of the long consideration period.

to be continued

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