Areas of change/investment to watch in 2023 as VC in Japan
(this article is translated by using the deepL. Original is Japenase context)
“Engagement Economy.”
I think we are nearing the limits of the attention economy. Many people are fed up with the side effects of the attention economy, which are reflected in phenomena such as “flames,” and many are questioning the current situation where platforms completely control the direction of attention, i.e., where results fluctuate according to algorithms. I believe that change is required on the part of creators.
An alternative trend to the attention economy may be the engagement economy. I put this in the context of fostering deeper engagement in a smaller community. You may have heard of it through the blog post “1000 true fans”. Instead of a momentary, thin battle for attention dictated by algorithms, creators will shift their thinking toward what the post calls “super fans,” fans who support the content itself and draw deep and intense passion from them. This is what the article calls “super fans.
As if to support this trend, a number of “methods of converting passion into money” have emerged in recent years. The most representative of these methods are those that do not rely on advertising revenue as in the past, but rather generate income through donations, subscriptions, NFTs, and tokens. As these services and technologies become more widespread, we believe that we will see the development of an engagement economy, an economic sphere in which money is made through engagement.
Looking at the rise of Vtubers and the overseas expansion of Pococha, I believe that Japan’s strength lies in its expertise in raising the enthusiasm of fans and finding and creating opportunities to win. Japan is a country with a very strong “push” culture, and I believe that this culture will be further developed in 2023.
AI-scratched company
What are you paying attention to now? I think the world will be even more surprised when GPT-4 arrives. Sam Altman is amazing. On the other hand, in my profession, I am quite troubled when people ask me, “Is there a way to win in the area of Generative AI when compared to US?” I am quite worried. I would like to hope that there will be some kind of database connection system or something, but looking at OpenAI, I honestly feel that the technology itself has already won the game (well, that’s when good startups come out).
What I am thinking of now is a startup that works on improving the value chain by restructuring existing industries with “AI scratched” (I am expecting a startup with such an idea this year). (I would be happy to meet an entrepreneur with such an idea this year.) For example, consider a professional profession with AI scratched (e.g., a Generative AI-based law firm), or an AI scratched game company, or an AI scratched animation company. However, this idea is not a reality. However, the realization of this idea will require a rethinking of not only the value chain but also the organizational chart, etc., with a softer head, and since it seems somewhat unrealistic for an existing business firm to convert, we look forward to the possibility of an AI scratched firm emerging as a new enterprise.
While I feel that there are still other possibilities besides this, I have not yet had enough time for research and thinking. Taking the data domain as an example, there are many ways to climb up the internal data resources ✖️Generative AI, etc., so this is a topic I would like to think about some more somewhere.
Evolution of NFT use cases: Tokengated Commerce, etc.
As new technologies such as Soulbound Token (SBT) are introduced every year, use cases for NFT itself will become more creative and sophisticated, as seen in the case of ANRI’s portfolio company, NOT A HOTEL, which utilizes NFT in its membership program. We believe that there are many more use cases to be found in addition to BCG and NFT IP, which have been successful cases in the past.
Certificate-like usage derived from the POAP (Proof of Attendance Protocol) concept will also expand, and may be utilized for work history and background. Current use cases of NFT are limited to the efficient operation of concepts that already existed in the real world, such as memberships and paper certificates, etc. However, in the sense of linking NFT to certain actions or linking purchasing behavior to gamification in a way derived from this, “Dynamic I think there is more such a thing as “Dynamic NFT” (I don’t think there is such a word, but wow!).
The concept of Tokengated Commerce is particularly noteworthy, and I think there are places that will start running, if not “trending,” in 2023. I’m not sure yet if it originated with a brand or not, specifically, but I suspect that use cases will be tested to incorporate NFTs into purchase condition variables.
Blue Chip NFT’s next move will find a new legitimate way for NFT IP.
It has been only one year since Azuki started, and there are several NFT IPs, including Bored Ape, that have quickly gained recognition, but I am curious to see what kind of moves these Blue Chip NFTs will make this year.
Considering just the past year alone, I have seen new IPs appear one after another, coming and going in and out of vogue, and frequently causing wild fluctuations in floor prices, and I thought it would be abrasive to run IPs as if they were publicly listed companies, constantly worrying about floor prices.
I think the trend is somewhat changing from a roadmap-following approach to something more mysterious. Instead of a startup-like roadmap, I think they will try to operate in a way that keeps a high degree of secrecy as a brand strategy, while emphasizing the importance of the unchanging surprises of what happens next. I think part of the reason for this change may be the load placed on the management. (Sorry if I’m missing the point.) I think it is easier to keep it secret and let each party foster their own expectations as they wish, than to show a roadmap and adjust expectations or try to force them to meet them there.
I think that further successes and failures will emerge from this trend and become a playbook for NFT IP, and further blockbusters based on these cases will appear this year or next (recently, there is a trend called “Free to Own”).
Evolution and Formalization of Tokenomics by BCG and others
This is another area for research, but I believe that STEPN, which went viral last year, may have triggered many people’s interest in creating wallets and crypto. I believe that games are the best way to propagate new technology, so it will probably take a blockbuster game to cross the threshold in crypto in general.
I believe that there are examples of IEOs coming up this year, and that knowledge and game design will be refined in each country. I have high hopes that this year will be the year that we will see a series of such examples (although I think it will be a little while before we see a blockbuster game), but I would like to keep a close eye on this area this year as well, as sometimes the “winter period” is a good time to take on a challenge.
I think we may see something trendy in the more closed ✖️ social networking vector.
Although I cannot fully verbalize it, I have a feeling that SNS has become too much of a medium in the past few years. In the past, SNS was a free playground or an extended space for drinking with friends, but nowadays, I feel that it has changed into a place with a strong public nature. Twitter, in particular, has been transformed into a place for casual conversation and one-sided information transmission. While it is becoming increasingly difficult to write one’s true feelings, I think it would be good if more closed social networking sites became popular, although I am sure that these will remain.
Looking back at history, such social networking sites have repeatedly appeared and disappeared. Recent examples include Gas, BeReal, and, as I write this, Bondee. However, the user base that has taken root here is still small, and those tied to communities, such as Discord and ANRI investee Parallel, seem to be growing.
This may be a bit vague, but I think there is still potential for new inventions to occur in this area in a closed vector, but I don’t know exactly what.
The content industry is beginning to be re-evaluated.
Based on the listing of ANYCOLOR last year and the engagement economy trend mentioned at the beginning of this article, distribution tended to be limited to the domestic market until a few years ago, while the diversification and internationalization of distribution channels such as YouTube, TikTok, and Netflix However, the diversification and internationalization of distribution channels such as YouTube, TikTok, Netflix, etc., has led to a reevaluation of Japanese content.
For example, the size of the anime market overseas grew from 580 billion yen in 2015 to 1.2 trillion yen by 2020. This market size growth is probably similar to that of the fast-growing industrial market that startups should target. I also believe that the environment is changing to one where value is more easily visualized and amplified with the increase in liquidity (Mercari, etc.) as well as NFTs and throw-aways.
Among my investments, companies such as MINI-Z, which deals in Pokemon cards and Trekkies, and RENDEZ-VOUS, which deals in used cars, are growing their services in proportion to the increase in liquidity, and are developing the “collectibles market. I like content and things like that, so I would like to invest more in this area this year.
Inflow of funds into Deeptech/Hardtech,
I would like to think more about the future of the traditional startups that attack with a single product. In light of the emergence of words such as “compounding” and the aforementioned overseas expansion, it is not clear whether the Internet industry will remain an industry that can achieve the same level of capital cost and expected IRR as before, even if it does not lose its status as a growth industry.
Having said that, we believe that there is a great possibility that the investment field will further expand and grow in the future, either through innovations in Generative AI, which has near zero marginal cost, or through crypto and metaverse, which will create new demand.
At the same time, I think we will probably see more inflows into technology-based startups, an industry we at ANRI call Deeptech, and there is a sense that the assumptions on which upstream funds are allocated have changed over the past few years in response to the ESG/SDGs trend. If this is the case, funds for startups that solve social issues with technology will increase (and I believe that the formation of funds on such themes will continue). In Japan, this may be a year with a lot of news about large startups in the same area.
The Importance of Communities and the Changing Nature of Communities through DID
I mentioned earlier the reevaluation of the content industry, but another area that is beginning to be reevaluated is the concept of “community,” and with concepts such as DAOs in Crypto, I feel that the world is looking for more community.
This may be due in part to the aforementioned maturation of social networking sites. I personally think that digital media may perhaps get in the way of democracy in the broadest sense: while SNS and digital media have been largely complicit in accelerating fragmentation, they have also contributed greatly to the discovery and development of community. In the longer term, I believe that the nation-state is no longer the locus of identity (although it may still be), but can become a digitally connected group of people with the same interests and ideology.
In fact, in Japan, the Internet and otakatsu have long been compatible, and in recent years, communities formed by NFT holders have been increasing. If decentralized sovereignty such as DID is established digitally, it may soon be easier to find and operate such communities.
I am not sure, but I am hopeful that the importance of these communities will increase, and that the way they are operated and run will change and develop with technologies such as DID. I have a feeling that the management and the way of being will change and develop more with technologies like DID.
Will AI create collaboration, or will it be the beginning of a battle against false images?
As I wrote in the “AI-scratched” section, I believe that collaboration with Generative AI will surely progress. It will be good for mankind in many ways. It is expected to improve efficiency, for example, by reducing work time.
On the other hand, it could also lead to the mass production of fake news and a world full of false and fake images, and we have always been warned that GAN-related technologies are very dangerous if misused. I think it is possible that we may indeed cross the threshold, if not this year, then very soon.
There may be a technology or service that can determine whether a certain creation is AI-generated or not, but it is highly doubtful that all of us would be willing to go through such a hassle every time. Perhaps the battle against such Fake will attract greater attention in the future.
This could be the year of TikTok’s business use.
TikTok has been around for a while now, and YouTube’s focus on short videos is sure to make TikTok-like video content formats more popular in the future.
YouTube also started out with only rough content, but now has many sophisticated forms of content, such as business content. I believe that there is a time lag before open UGC services reach the point where they can be used for business purposes, and I suspect that more serious and business-like content will become more prevalent on TikTok, although this may not be the case this year.
There has been a case study of a VC called Redpoint using Tiktok to disseminate content overseas, and startups and companies in Japan have been using YouTube and podcasts for recruitment PR, etc., but I think we will see more serious business use of TikTok.
If the last 5 years have seen many startups grow with YouTube as their PF, I think Short/TikTok has a chance to win in the next 5 years, so I would like to keep a close eye on it.
Avatar Economy/Avatar Echoes are the Focus
The term “Vtuber” has become a household word. Perhaps Japan has always been used to it, but I think that 3DCG avatars will become even more common. In my school days, I was familiar with this culture through GREE, and it may be a little late for the younger generation since it is now widespread through Fortnite and APEX.
While the soil is being prepared, I think we will see a few more avatar-based services this year. I’m just guessing. I think there is a possibility that money will begin to circulate in the avatar-centered economy, the avatar economy/avatar economy.
For example, as I have more and more chances to have VR Chat, I feel like “I want my own avatar in the world” or “I want a 3DCG model in the world. Even if many people do not go so far as to spend money to create their own avatars within this year, I believe that the number of people who have such thoughts and interests will increase. I also have a feeling that people will pay more for avatar-viewing than for Insta-viewing.
Rising Valuation of Seeds and Difficulty in Series A
It is possible that funds that can make multi-stage investments will start investing larger amounts in seed. As a result, seed Valuation may become inflated.
With the move to secure a 2–3 year Runway, we may see more start-ups that have cash but cannot establish explosive growth points (Capital intensive points) or business models and become zombies.
In addition, rather than properly proving LTV>CAC, only those companies and services that have achieved easily understandable results, such as unusually high stings of value propositions of their products/services (e.g., being able to attract customers only through inbound with Non-Ads), will be able to raise funds. I think it is possible to make Series A more difficult.
In terms of reproducibility, it should be easier for VCs to invest in a company if there is a point at which funds can be invested, but I am not sure how I should view concepts such as this blitz scaling in an adjustment phase such as the one we are in. It is also true that a startup is not a startup without growth, and I do not intend to make a major change in my policy of prioritizing growth over profit or growth, but it is a difficult point.
Startups are increasingly expanding overseas
VC fund size has continued to grow over the past five years. This means that the VC side has a mission to continue to expand the amount of return on their funds without limit. This also means that startups that raise funds from these ever-expanding funds are also subject to the same gravitational pull to achieve larger market capitalization and higher growth.
From the startups’ perspective, they will have more time to prepare for the launch because they will be able to raise funds for a longer period of time and are likely to be able to increase the amount of funds raised while remaining unlisted. In the midst of that preparation, I think more and more companies will take on even bigger challenges. There will be the much-talked-about M&A and compounding, but I think we will see an increase in unlisted startups using overseas expansion (market expansion) as a way of taking on new challenges.
In fact, B-oriented startups such as CADDi and commune are starting to expand overseas, and some of the services I have invested in, especially in the crypto domain (even though they are Japan’s first startups), have a majority of overseas users. I believe that such “born global” and “going global” startups will be born, and I personally would like to invest in startups that take on such challenges.
(Of course, I do not agree with the way startups are forced to grow for the sake of VC. On the other hand, I think that many entrepreneurs unconsciously limit their market expansion potential to Japan. In such an environment, I believe that VC firms should be more willing to support highly ambitious entrepreneurs who are aware that it is not easy to expand overseas, but who are willing to take the option to do so.)
-Other Topics of Interest
Supply chain review in the U.S.-China conflict, Clean tech, Defencetech, Security tech, Compound, Vertical SaaS, Distributed SNS… (*SaaS/DX)
(*SaaS and DX are themes that we will continue to focus on in the future, as there is a major theme that this country has no choice but to increase labor productivity due to the lack of population, but we have not included them because they are too obvious).
We look forward to meeting many interesting businesses this year. Please contact me if you would like to discuss these things.
Thanks for reading this article.
