The third meeting of the “Expert Panel on Venture Capital”

The Financial Services Agency (FSA) has published the minutes of the third “Expert Panel on Venture Capital” meeting held on June 26th, 2024. We have previously covered the first meeting and second meeting. Please note that the following summary is for informational purposes only and may not be a perfect representation of the original Japanese text.

Background

The meeting builds upon previous discussions regarding the creation of guidelines for venture capital (VC) firms in Japan, aiming to attract investment from domestic and international institutional investors. This effort aligns with the “Basic Policy on Economic and Fiscal Management and Reform 2023” and the “Grand Design and Action Plan for New Capitalism 2023 (Revised Edition)”. These documents emphasize the need for a robust asset management market and identify VC’s role in facilitating the flow of funds to startups as crucial for this goal.

Purpose of the Meeting

This meeting aimed to discuss the document titled “Recommended and Expected Practices for Venture Capital (Draft)”. This document, intended to be finalized after public consultation, outlines guidelines for VC firms seeking to attract investment from both domestic and international institutional investors.

Key Discussion Points

Framework and Terminology

• The document shifted from using the term “principles” to “recommended and expected practices” to avoid misinterpreting it as regulatory mandates.
• The document emphasizes that these are guidelines, not rules, and VC firms have the autonomy to adapt them to their specific situations.
• The need for a mechanism to monitor the implementation and effectiveness of these guidelines after their release was highlighted.

Content of Recommended and Expected Practices

• Recommended Practices: This section covers essential aspects for VC firms, such as (I) fiduciary duty and governance, (II) building sustainable management systems, (III) compliance management, (IV) ensuring transparency of LP rights, (V) conflict of interest management, (VI) alignment of LP and GP interests, and (VII) information disclosure (including fair value assessment of assets and frequency/content of information provided to LPs)
• Expected Practices: This section focuses on broader expectations for VC firms to contribute to the startup ecosystem’s growth, including (I) investment contracts with startups, (II) support for investee companies’ management and capital policies, (III) post-listing support for investee companies, and (IV) ESG and diversity considerations

Specific Feedback on the Draft

• Several members emphasized the importance of fair value assessment methodologies for VC portfolios, particularly given the evolving nature of startups and the lack of established valuation frameworks.
• The role of the Japan Venture Capital Association (JVCA) and other industry bodies in promoting these guidelines and collecting data on their implementation was discussed.
• Some members highlighted the need for clarity regarding the lead entity responsible for monitoring and reviewing these guidelines over time.
• The section on ESG and diversity garnered significant discussion, with members emphasizing:
• The importance of diversity in the VC industry and startup ecosystem
• The need for concrete actions beyond merely stating good intentions
• Concerns that the language used might inadvertently downplay the significance of ESG and diversity

Next Steps

• The chairman will finalize the document based on the feedback received.
• The finalized document will be published for public comment.
• Feedback from the public comment period will be incorporated, and the document will be finalized.

Overall Sentiment

The meeting participants expressed broad support for the initiative. They viewed the “Recommended and Expected Practices” document as a valuable tool for enhancing the Japanese VC landscape and attracting more investment from domestic and international institutional investors. The discussion highlighted the need for a collaborative effort involving VC firms, LPs, industry bodies, and the government to ensure the successful implementation and ongoing review of these guidelines.

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