Why a Japanese engineer ended up attending classes of a startup accelerator in New York that specializes in the retail & consumer goods (Part 3: Barriers to enter Japan)

(Continued from the post “Why a Japanese engineer ended up attending classes of a startup accelerator in New York that specializes in the retail & consumer goods (Part 2)”)

Blogging movement was coming

Several months before Joi Ito asked me whether I was interested in joining Six Apart, I met Six Apart’s co-founders and chatted with them on their product as well as their business strategy in a meetup in Tokyo. It was in late January, 2003, even before Neoteny, Joi’s company, made a decision to invest in Six Apart.

Neoteny was, instead, talking with Pyra Labs, owner of Blogger.com, who was eventually acquired by Google a few weeks later. Google’s acquisition triggered Neoteny’s talks with Six Apart and Six Apart finally agreed upon the seed funding in late April. Three months had passed since Six Apart’s founders came to Tokyo.

Even after Google’s acquisition of Blogger.com, traditional media including Nikkei did not write on Six Apart’s funding or its product strategy. Two weeks later, I ended up contributing to a Nikkei media and its article was published on May 12, almost three weeks had gone by since the announcement of the funding (my post, dated on May 12, 2003, is still available!).

I started getting interested in evangelizing the blogging in Japan, as I believed it would be a great tool for individuals to communicate to others on the Internet. Until then, most updated websites were run by companies, as so much energy was needed to maintain websites before the blog came out.

I also thought that communities of individuals on the Internet would help my business plan — multiplayer mobile role-playing location-based game platform — as communities of enthusiasts would be great sources for online “gaming” communities and these people would be first customers for multiplayer mobile games.

Joining Six Apart while I still had my business plan

When Joi recruited me for Six Apart, I declined his offer at first since I was the only person intermediating between the MIT community and Nikkei. I thought I simply couldn’t leave.

But Technology Review Japanese Edition was decided not to go.

In the flight to Boston to tell the termination of the contract for the Japanese Edition of Technology Review, what I was thinking was my next business career.

I still had hope to continue on the online game platform plan, but I no longer expected Nikkei to help me start my plan. Six Apart was a small startup of two c0-founders in San Francisco and one employee in New York. So I would be able to engage myself in starting up a business in both the U.S. and Japan. The experience at a startup would be much more precious to me than at a big media company.

Honestly speaking, I thought it was less than 30% of chance for Six Apart to survive for a few years. But I also thought that the sudden termination of the Technology Review Japan project would be something that made me join Six Apart instead of staying at Nikkei. I made a phone call to Joi to tell I changed my mind and accepted his offer in the early July.

Six Apart already raised Seed from Neoteny and an angel investor Reid Hoffman, Founder of LinkedIn. But the Seed money was only several hundreds of thousand dollars and all the money was for the U.S. operations.

JV for a local market

Neoteny had an option to build a joint venture (JV) in Japan with Six Apart. JV was a common practice for American companies to enter the Japanese market.

But I did not like the idea to form a JV of a small startup. Rather, I preferred the Japanese subsidiary fully owned by the U.S. headquarters. The JV idea is based upon the assumption that the U.S. headquarters would control local offices so much that local markets would be sacrificed. But this assumption applies only to companies who have big headquarters to control local offices. Six Apart was a company of two co-founders and one employee. Its headquarters had to be busy for local operations and would not be able to control local offices. I rather imagines I would be able to collaborate with the headquarters to build one single company in multiple countries.

From the headquarters’ perspective, the JV slows down business and keeps it from implementing global strategy. In the long-run, I do not recommend forming a JV in Japan. I‘d rather prefer asking partners to invest directly into the headquarters.

Anyway, I joined Six Apart as interim Country Manager for Japan.

Technology Licensing v.s. Business Partnership

Six Apart already had prospective customers in Japan. Traditional media companies did not cover the blogging business happening in Japan. But I found out biggest Japanese ISPs interested in Movable Type, Six Apart’s first blogging software.

In 2003, Six Apart was already shifting its business model from software licensing to subscription. Six Apart announced TypePad, its new blogging platform for subscription with no free plan. Japanese prospective users were obviously interested in TypePad.

Naturally, we came up with revenue share deal, like “you take 70 and we take 30”, as this was essentially business partnership deal.

But prospective customers were ISPs and they were used to technology-licensing, so they countered with software license with flat fee licensing structure.

Six Apart would sacrifice its subscription revenue opportunities if it provides platform software to these ISPs, so revenue share idea was a critical component for Six Apart. I spent a few months negotiating with these ISPs on our premise like this.

In November 2003, we were talking with three big customers on different terms: (1) technology licensing for revenue-share with minimum fee, (2) white-label hosting for revenue-share, and (3) technology licensing for multi-year flat fees.

Deal #1 was straight-forward. Negotiation was tough and time-consuming, but very fair. We were also happy we were treated as a fifty-fifty counterpart, even though we were a startup of several employees.

Deal #3 was a great deal for startups, as long-term sales commitment is a proof of company’s competitive advantage in the market from third-party’s perspective.

Deal #2 was a bit tough for us. Six Apart already purchased servers, but these servers were for the US market and this prospective customer wanted to have our hosted service co-located in Japan, due to network latency.

Not accustomed to dealing with independent third-parties

This prospective customer, let’s call it Company B, was a subsidiary of a well-established Japanese public company (and this subsidiary also went public after a while). But dealing with Company B was challenging and problematic.

Company B treated us like their subsidiary. I suspected most of their development deals were with their subsidiaries, because their contract terms were very unfair and financially irrational to us. But people at Company B did not recognize themselves as such overbearing negotiators.

I suspect all their inter-company transactions were designed to maximize their consolidated profits. But staff-level employees did not understand their transactions could be unfair when they negotiated with independent third parties.

There was one interesting observation.

I kept saying we would not deal with them if deal terms did not make sense to us, and they kept saying they were treating us as a fifty-fifty business partner like a big American company. However, wording in the contract was always completely unfair.

So I did an ironic joke — I replaced “Company B” with Six Apart and Six Apart with “Company B” in the contract we were negotiating and emailed as our counter. My counterpart suddenly called me and pointed out this deal was unacceptable because it was unfair. I replied I just exchanged the name of his company with mine. He said he would talk with his supervisor.

Said “Trust us” and then sent an email to cancel everything

Other interesting, but hurting event was something that could have had killed us. They scrap the deal with us in a short email saying “sorry we wouldn’t deal with you” after they told us to buy servers for tens of thousands of dollars. We hesitated to buy servers because it took long time to negotiate on contract, but they said something like “we are one of the biggest Japanese companies and our words should be as credible as legal agreement. Trust us”.

I clearly recall that we received a canceling email in the morning on a Saturday. On the previous day, they called us and wanted to meet in person to discuss. It was 5PM on Friday and they wanted to come at 9PM. We were busy and not so much to talk with them, but they wanted to meet us so we met. They tried to convince us in pricing, and we spent three hours and they finally said the terms looked good. But on the next day they sent us an email to scrap all the discussion and after then they never got back to our emails or calls.

Deals are sometimes broken, and we were talking to three companies competing to each other, so we did not expect all three deals went well. But it was shame to see a well-know big company do this.

Each Japanese individual is honest, kind and responsible. However, when these people represent their company — especially big Japanese corporation — you should be careful. They can easily be shameless and/or irresponsible.

I think this results from governance system of Japanese companies — the system where no one has clear responsibility for any decision. People are relieved when decisions are made by not any individual but an imaginary individual — a legal entity.

Behavior by Company B people is typical. Each of their employees asked us to trust Company B since it is so big as to be trustworthy. But nobody was responsible for their cancelation, or I’d say “deceit”, as each of them probably thought the decision was made by the company not any of them.

It is not an example of barriers to entry in Japan. But I would like to advise any of you who are possibly to deal with any of these companies, because you never imagine such things would happen especially when you know of Japanese people as each Japanese individual is kind, honest and trustworthy.

Eventually we closed deals with two out of these three Japanese ISPs and, more importantly, succeeded in securing $2.5M in cash.

(To be continued)