Nikkei Business Daily December 8, 2016

Five Common Misunderstandings about Silicon Valley Start-Ups:

Joanna Drake Earl
General Partner, Core Ventures Group

Accelerators in Silicon Valley are where the best startup founders go.

The accelerators in Silicon Valley are largely organized to help outside founders who don’t have much experience with Silicon Valley startups or who don’t have a local network and, therefore, need help navigating fundraising, sourcing talent and general company building. Experienced Silicon Valley entrepreneurs don’t need to give up equity to be taught “how to be an entrepreneur,” or to gain access to investors. This is in clear contrast to other startup centers like Tokyo where accelerators may still be attracting top founders because the founders do not have access to the five decade Silicon Valley history of entrepreneurs, infrastructure and services.

Large corporations can “study/research” their way to high quality deal-flow.

The Silicon Valley market of start-up investments and exits is highly competitive and moves incredibly quickly. It is also characterized by fundamentally imperfect information flow.  Investors, acquirers and service providers (lawyers, bankers, etc.) who deal with start-ups have incentives to operate confidentially and connect only with trusted, insular networks to guard company performance and valuation data. As a result, methodical market analysis using public sources is not effective. Business development efforts from outside will always be disadvantaged compared to Silicon Valley insider human capital networks that have access to the most critical non-public information.

Japanese executives visiting Silicon Valley for short durations can build understanding and reputation.

Executives new to Silicon Valley need three to five years to understand the local ecosystem and to build a network of trusted relationships. So when a new Japanese representative arrives and leaves Silicon Valley in less than 18 months, their corporate brands are tarnished and the likelihood of startups investing in a relationship with the company in the future decline. We recommend placing your best talent in Silicon Valley with a specific 3-year mandate and the resources to develop their own strategically curated human capital network. Japanese companies that have had the most success in Silicon Valley almost always are represented by a strong executive who has spent many years living in or consistently visiting Silicon Valley.

Japanese companies can win competitive deals using trusted relationships.

Having trusted relationship with founders or top tier venture capitalists helps develop partnership opportunities, but unlike in Japan, they are unlikely to offer “hometown discounts.” Ultimately rational business transactions find their natural landing zones. And startup executives are bound by fiduciary responsibilities to always take the best deal terms over personal relationships.  The benefit of trusted relationships is in gaining access to hot deals and critical information to offer a chance to be competitive in the deal.

Start-ups are excited by access to global corporations and their brands.

While large corporations hold the promise of lucrative contracts and validation, experienced start-up founders almost always prefer top tier venture capital involvement over corporate investments. Investments from respected venture capital firms signal to the market that the startup has proven business fundamentals, is focused on big markets and has the potential for large returns. Corporate venture investment implies beholden interests and “lender of last resort” often times with complicated deal terms. And, while corporates offer product and solution channels, most early stage companies do not have the experience or patience to deal with the contractual and organizational complexity.

In our next column, we look forward to sharing top 5 common Silicon Valley start-up misunderstands about Japanese companies.

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