Interim Report of The Committee on New Business of Keidanren
Recommendations for Creating New Businesses:
Building an Economy and Society that Nurtures the Entrepreneurial Spirit
Chapter III : Creation of Venture Businesses
The founding and growth of independent venture businesses serves as a measure
of an economy's vitality. In order to promote their growth, a comprehensive
system must be created to enable organizations and individuals to cooperate and
share not only the risks, but also the rewards.
- Stimulating The Start-Up of Independent Businesses And Economic
- Importance of supporting start-up of businesses:
The emergence of new industries and businesses is not limited to specific fields
and it is possible to create new opportunities in every field by going beyond
conventional markets or by exploiting every niche market. Innovative ideas
and technologies can be the spark for starting up new businesses not only in
high-tech but also in conventional fields, such as distribution, business logistics,
consumer services and entertainment.
In starting new businesses in conventional fields, the key players will be the
individual entrepreneurs of the small to medium marginal-scale firms that carry
the burden of developing the economy and play a major role in job creation.
- High-tech venture businesses will lead in technological innovation:
In the fields of information, communication, computer hardware/software and
biotechnology, high-tech venture businesses will lead the way in creative new
technologies and are expected to carry the burden of developing new high-tech
industries and businesses. These should be positioned as the leading industries
of the future and the regulatory environment to nurture them must be established
as national policy, which supersedes the jurisdictional framework of the
- Improvement of The Fundraising Climate:
- Problems related to procuring funds for start-up businesses:
A system under which start-up funding can be easily procured is essential for
fostering the growth of independent venture businesses. Japan can learn much
from the US in this regard, where venture businesses are sustained at each stage
of their development by a variety of supporters, ranging from individual
investors (known as "angels") to venture capitalists and institutional investors
such as pension funds, partnership firms and government affiliated funds.
- The Stock Market:
In order to stimulate the creation of venture capital funds for the support of
independent venture businesses, it is essential that a system be established under
which fund providers can expect quick returns commensurate with the risks they
have assumed. To accomplish this, Japan must have a vigorous and open stock
market in which a venture business can list its stock within a short time after
From this standpoint, it would be difficult to say that the over-the-counter
market in Japan is fulfilling its responsibility at present. The stock market
should be governed by the principles of thorough disclosure and individual
investor responsibility. It is absolutely essential that the government
bureaucrats involved in stock market administration radically change their
perspective and throw-out their regulatory mind-set, if we are to create a
vigorous stock market that will also foster independent venture businesses.
The key problems of Japan's over-the-counter stock market and the reforms
necessary to address them are as follows:
- Observance of formal standards of registration:
There are no major differences between the announced standards governing the
public listing of stock on Japan's over-the-counter market and the US NASDAQ
market, including standards for the net worth and number of shareholders.
However, in actual practice the firms that have succeeded in gaining over-the-
counter registration in Japan are consistently of a higher level than required by
law. We can surmise that the number of new firms going-public is being
artificially restricted by inequitable application of the regulations. Firms that
can be expected to attain high growth should not be prevented from registration,
simply because government authorities are applying standards that are higher
than required by law.
The government has already decided that for R&D firms, certain exceptions will
be made, such as not requiring them to meet the profit standard. Broadening
the scope of firms that qualify for exceptions should be seriously considered.
Additionally, firms applying for registration should not be required to continue
to make a profit during the time they are being screened. It should be policy
that during screening, a drop in earnings attributable to rational reasons, should
not hinder registration.
- Excessive demands concerning internal organization should be stopped:
At present, authorities demand that any firm being screened adopt a uniform and
formalized organizational structure. This requirement should be removed and
it should be considered sufficient that a firm has instituted an self-auditing
- Reform of the method of determining initial public offering price:
In Japan the determination of price for an initial public offering of shares is
based on the auction system, but we believe that price should not be set in this
uniform fashion. In order to establish a price that reflects the market demand,
such methods as computation of stock price based on the demand forecast of
analysts or the road-show method, which creates real demand through corporate
presentations, should be considered.
The number of shares to be sold at an initial public offering is decided on the
basis of the number of issued shares coupled with market trends, without
consideration of the initial public offering price. We must adopt a system that
allows a flexible determination of the volume of shares offered at the initial
public offering. In addition, restrictions on allocation of shares, currently set at
5,000 shares, four times a year per customer, should be abolished.
- Improvement of the secondary market after going public:
Regarding the stock price after going-public, NASDAQ firms engage in a
proactive market making approach in which they quote selling and buying prices
and must sell/buy the minimum fixed number of shares when an investor places
an order. This procedure, which promotes smooth trading, should be adopted
by Japan, since it would greatly improve the secondary market.
The long period of lead-time required to prepare for listing, normally more than
two years, compared to six months in the US, along with huge preparation costs
hinder firms from going public in the over-the-counter market shortly after
- Investor's responsibility and the roles of issuers/underwriters:
As a consequence of the over-the-counter market's relaxed listing standards,
resulting from the introduction of certain exceptions, an increase in bankruptcies
of high-risk firms is expected. As mentioned earlier, it is a given that these
firms must be required to make a thorough disclosure and potential investors
must be made aware of their individual responsibility. New regulations
regarding disclosure are being planned, and they should not only emphasize
figures and numbers. Rather, they should take the form of easy-to-understand
information made in the form of statements concerning the economic climate in
which a firm operates and the management philosophy of its leaders.
In their role as intermediaries between stock issuers and the market, securities
firms should be responsible for fair and timely distribution of disclosed
information to all investors.
- The Need For Practical Venture Capital:
The role of venture capital is to supply venture businesses possessing growth
potential with funds and management resources, so their rapid growth will be
insured and they will foster the next-generation industries.
Venture capitalists should not only respond to needs for funding when a firm is
in its earliest stages, but should also fulfill a venture capitalist's wider role of
generally supporting new venture businesses by: 1. assuming posts as directors
or advisors to monitor and support management; 2. introducing potential key
candidates to bolster the management team; 3. introducing new customers and
company partners; 4. providing long-term financing using their influence to
arrange equity financing, loans, new investors, etc.; and 5. developing "corporate
identity" and, playing the roll of a mentor who provides introductions and
connections to the corporate world.
While there are many venture capitalists in Japan, their principal activity is
lending rather than investing. The firms they help to finance are chiefly those
that already have good prospects for going public. Only a few are willing to
fulfill the wider role of a true venture capitalist, which goes beyond merely
providing capital during their start-up phase or shortly thereafter. And, there is
a very limited number of venture capitalists who possess the ability to properly
evaluate companies and technologies and thus be able to support the
management during start-up.
In order for the government to encourage practical venture capitalists who are
willing to provide risk capital, the most important change in regulations is
shortening the time between a firm's founding and the time it is permitted to go
public so it is possible to produce an early return on investment. In addition the
following measures need to be addressed:
The government should also consider establishing a new system to encourage
private sector support of venture businesses by working cooperatively with
public financial institutions.
- Increase the volume of funds available by relaxing the restrictions on asset
management for institutional investors, such as pension funds;
- Allow high-risk start-up firms and others recently founded to put aside a
certain percentage of the invested capital in tax free reserves; and,
- Establish a framework for government support of fund procurement by
venture capitalists, similar to the US SBIC Program, which guarantees
obligations when a venture capitalist provides funds.
- The Incubation Function and Regional Revitalization:
- Start-up of Regional Business and the Role of Incubators:
One of the roles that independent venture business is expected to fulfill is that of
revitalizing and expanding regional economies. The new business incubator is
a critical component in supporting the start-up of small and medium-size
businesses. Incubators provide business in the initial start-up phase with
office/R&D space at low rent, clerical support services and expert technical and
A number of incubators are already operating in several regions under the
management of local government and economic authorities. For example, the
Osaka Shimaya Business Incubator, a not-for-profit arm of the Osaka Urban
Industry Promotion Center, fulfills incubator role and in addition promotes
cooperation between firms in different industries, supports external research
organizations, including the Osaka City University. It has also formed an
affiliation with the City of Osaka's collateral exempt loan system, and is
producing impressive results.
The Tohoku Intelligent Cosmos Plan, under the leadership of seven prefectures
in northeast Japan and the Tohoku Economic Federation, is forming a base for
development of creative science and technology which will serve to coordinate
development throughout the region. The successful ventures will be used to
create new industrial technology that can be used regionally. This program is
an innovative attempt to develop a diversified incubator which can provide
advanced technology to local manufacturing, agricultural, forestry and fishery
industries. The program's progress is being watched with great interest.
During the fiscal year, Okayama Prefecture launched a program titled
"Operation to Support and Foster Young Edisons", which provides graduate
school students and others from all over Japan, with comprehensive support to
enable them to start new businesses on the condition that they conduct research
in Okayama Prefecture and maintain their headquarters there for five years after
establishment. The support provided ranges from that at the research and
development level and extends to collateral-exempt, low interest loans for
establishing a firm and supporting management training. The program is very
highly regarded as an exceedingly unique experiment.
Other innovative experiments are under way in regional districts to support the
growth of R&D intensive firms in which the local government is playing a
central role, such as Toyama Foundation for Development of Technology and
the Aichi Technology Development and Information Communication Center.
Both the Japanese government and the business community must lend strong
support to all of these efforts.
In addition, existing government research facilities as well should be able to
play a more proactive role by making their resources available for use of local
businesses and entrepreneurs and by providing them with technological guidance.
- Reconstruction following the Great Hanshin-Awaji (Kobe) Earthquake and
new industry development:
On March 28, 1995 Keidanren released its
"Proposal for the Revitalization of
Industry Following the Kobe (Hanshin Awaji Region) Earthquake", in which
Keidanren called for a number of initiatives to assist in the rebuilding. The
area affected by the earthquake had a strong technology base, supported by rich
human resources and the report called for priority treatment be given to
establishing an incubator facility to promote creation of new high-tech industries
and businesses. Naturally, regional priorities must be established by local
business people in drafting a reconstruction plan, but Keidanren wishes to re-
emphasize the importance of making new industry and business creation a top
priority in the overall post-quake rebuilding effort.
- Responsibilities of the central and municipal governments:
- Government support of start-up businesses:
Although the private sector must take the initiative in the launching new
industries and businesses, it must be supported fully by the government, which
should make a bold change in its policy of protecting existing small and mid-size
enterprises and instead lend support to the start-up of independent venture
businesses, particularly R&D firms.
The Law on Temporary Measures to Facilitate Specific New Business (which
sunsets on May 29, 1996) and The Law on Temporary Measures to Facilitate
Business Innovation are designed to provide extensive support of new
businesses and promote restructuring of existing firms. We advocate that
government go a step further to lay the foundation for intergovernmental
cooperation in order to provide the comprehensive support necessary for the
start-up of new businesses. Furthermore, the central and municipal
governments should set a fixed percentage or set-aside goods and services that
would be purchased from independent venture businesses, since this
"endorsement" of the businesses would increase the market's evaluation of their
Municipal governments should also work with local business groups to support
start-up businesses which are in keeping with the unique character of each
region, beginning with the creation of incubator facilities mentioned earlier.
For example, the Foundation for Osaka Research Enterprise Companies
(FORECS), set-up with funds provided by the Osaka Prefectural Government
and regional businesses, provides investment deposit funds to venture capital
firms, known as "indirect venture capital". It is an innovative experiment that
is attracting considerable attention.
- The role of public financial institutions:
Public financial institutions should play a significant role in fund procurement of
independent venture businesses. For instance, The Venture Enterprise Center
(VEC), which has a nearly 20 year track record, provides a variety of programs
to support start-up firms in addition to guaranteeing their obligations. VEC has
played a major role in the start-up of R&D companies throughout Japan and is to
be commended for expanding its framework for guaranteeing obligations and the
scope of industries that it supports.
However, VEC's key responsibility and that of other government-sponsored
venture capital institutions, is the timely provision of loans and the guarantee of
obligations. They do not possess sufficient investment authority; the firms they
support are limited in scope; they lack the capability to evaluate new ideas and
technology. Therefore, they are unable to fully address the venture capital
needs of a growing economy. As for the more conventional public financial
institutions -- they are not structured to provide start-up financing -- period. In
general, public financial institutions are not fulfilling the all important role of
supporting the growth of the new industries and businesses that can revitalize
All public financial institutions must go beyond their conventional framework
and, working together with private sector-financial institutions, assume
responsibility for providing venture capital and coordinating start-up business
services. Specifically, in order to match innovative ideas and technologies with
start-up firms, public financial institutions must be capable of evaluating
technology, as well as commercial viability. They should not require short-
term returns on investments but should provide long-term venture capital in the
form of an investment.
At the same time, they should provide equitable management assistance,
including guidance on growth strategy to firms that are novices at business
management. In their initial stages of growth, venture firms must have
assistance with accounting, tax and legal matters and must receive guidance in
creating relationships with research institutes and with big corporations.
Furthermore, we believe that the so-called "corporate venture" -- a venture
business generated from within a major corporation -- will play a very
significant role in Japan's economic future. Public financial institutions should
also play a role in the creation of this type of venture business by providing
creative funding and taking risks inherent in this kind of start-up assistance.
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