American startups dominate the current innovation cycle not as a result of startup innovation, but of enterprise innovation. Today we sit down with Dai Watanabe and dive into the dynamics of industry disruption and startup innovation. For the last 25 years Dai has held leadership roles at the center of Japan's major innovation trends. From the glory days of Japan's mobile internet, to the utter disruption unleashed by the iPhone, to today's doubling down on startup innovation. We talk about what's in store for the future of Japanese startups, and why opportunities in innovation are never quite what they seem at first. It's a great conversation, and I think you'll enjoy it. Show Notes When it's time for a CVC to transition into a VC How Japan lost its lead in the mobile internet How DeNA went global in China and then in the US Why the first generation mobile advantage did not transfer to the second generation The different approach to retaining talent in Tokyo and San Francisco What Japanese founders need to bring back from San Francisco Which Japanese startups should move to Silicon Valley The reason there are still so few Japanese entrepreneurs How to get talented employees to leave and start startups, and why we'll see more of it The biggest thing holding back startup growth in Japan How Japanese employment law keeps startup valuations low Japanese enterprise and startups are developing more collaboratively that in the US Links from our Guest Everything you ever wanted to know about Delight Ventures Meet the team Learn how they invest [Japanese] Connect with Dai on LinkedIn Leave a comment Transcript Welcome to Disrupting Japan, Straight Talk from Japan's most innovative founders and VCs. I'm Tim Romero and thanks for joining me. Mukashi mukashi, Once Upon a Time, but not so long ago, Japan was far and away the world leader in mobile internet innovation. But such times were not to last. The world changed, Japan changed, and today Japan is trying to catch up. And, you know, they just might do it. Today we sit down with my friend Dai Watanabe, co-founder and managing partner of Delight Ventures. And as you'll see from our conversation, Dai's career put him at the center of the entire arc from Japan's mobile internet explosion and crash, the current focus on startup growth and why Japan is now seriously rethinking the Silicon Valley model of startup innovation. Dai and I dig deep into his work with METI and other agencies to help form innovation policy, how Japan's lifetime employment system is suppressing M&A activity, and keeping valuations low. And why Japanese mamas don't let their babies grow up to be founders. But, you know, Dai tells that story much better than I can. So, let's get right to the interview.   Interview Tim: So, we're sitting here with Dai Watanabe, the co-founder and managing partner at Delight Ventures. So, thanks for sitting down with me. Dai: Thank you for having me. Glad to be here. Tim: Dai, I'm so glad I finally have been able to get you on the show. We've been talking about these things for years now. So DeNA, it's mostly mobile, social gaming, networking, entertainment, sports, consumer facing content, that kind of thing. But Delight's portfolio seems to be much, much broader than that. So, what's your thesis? What kind of companies are you investing in? Dai: So, the Delight Ventures is a VC fund that started as a spin out of DeNA, my ex-employer. But we are not CVC, so we don't do any strategy investment. We invest as independent VC. We set up some investment thesis at the beginning, which isn't necessarily aligned with DeNA's core strengths. Tim: Is DeNA still your sole LP? Dai: No, DeNA is one of the LPs. So, we are on fund two right now. The majority of the LP money is coming from Japanese financial institutions, some corporates banks. Tim: So DeNA, just like the rest of the LPs are looking for financial returns. Dai: That's true. Yes, that's correct. Tim: Well,  let's back into this because your career, it kind of perfectly mirrors this rise and fall of Japan's mobile internet and then the innovation shift to Silicon Valley and sort of the new rise of Japanese startups. I want to dig into this and to kind of set the stage for those of us who've been in Japan a long time. In the 2000s, Japanese mobile internet was by far the biggest and the most innovative in the entire world. And DeNA was clearly the most successful entertainment player in that market. That's no longer the case. Things have changed. So, walk me through what happened. Dai: So, going back to the year 2000 when I joined DeNA, I was one of the earliest employees of DeNA, it was pre-mobile era. So, there was dotcom bubble happening in Japan too. And like a fast wave of startups came in. Objectively, I think we can say that most of the internet services were dominated by US, especially Silicon Valley startups, whether it's Google, Amazon, these guys. And then this mobile internet started to happen in Japan, mainly thanks to NTT Tokomo's I mode, I think mid two thousands Tim: Imode were, was introduced in 1999. I mean, we were sending emails and browsing the web in a very basic way on our phones in 1999 in Japan. Dai: Oh, yeah. Oh, wow. I think it was early 2000s when this pake-hodai like all you can eat pricing came in, and then the whole population started to spend a lot of time just looking at the phone. That phenomenon didn't start in the rest of the world for another few years. Japan was definitely leading the whole phenomenon of mobile internet consumption in the world. And in that industry, DeNA was different leading. So, we came up with mobile auction. We came up with a mobile gaming platform, and we came up with mobile ad platform, none of which existed outside of the country. Tim: What do you think prevented this technology, this innovation from moving from Japan overseas at that time? Dai: The sign of that happening was seen in Korea, China, but this imode was so brilliant that the players in other countries really struggled. Outside of Japan you have to spec your website based on different phone devices, whereas in Japan, you just make one website for imode and then you don't have to worry about different devices. Tim: So at the time, was it just the carriers had the lock in, in the different countries and that prevented it or? Dai: So, different carriers didn't control precise spec of how the mobile websites are supposed to be built. So, the user experience was not as smooth as what you could see in Japan. But it's all you can eat. Pricing didn't start until few years later. So, the Japan was leading that market, and DeNA was leading that country. So, it was really natural for everybody to think that the DeNA should get out of the country and expand in other areas where mobile internet was about to explode. So, that's what we are working on starting 2004-5. Tim: Right. And you were president of DeNA global during that period, right? Dai: Yeah. Even before that, I was president of DeNA China. We actually started in Korea because Korea was known for its broadband. The government policy was really bullish on internet, and then also mobile internet too. But we found that the market was a little bit too small for us. So, we shifted our focus to China. So, we set up DeNA Beijing and I was leading that effort. And in China there is a huge mobile internet consumption explosion happening in the south of the country. Tim: Like you came to San Francisco to launch mobage, right? Dai: Yes, yes. Tim: Like the year before the iPhone launched. So, what was that based on pre iPhone? Was it the palm pilots and Blackberries and…? Dai: Yeah, our targeted platform was WAP. It is still feature phone, and we launched a gaming platform on the WAP platform. Tim: And when the iPhone was introduced, I mean, it didn't change overnight. Dai: No, it didn't. So, actually when I moved to the US iPhone had already been released, I believe it was in 2007. And then this iPhone app platform came out in 2008. It was like it was immediate hit. Tim: It took three or four years to really develop. Dai: So, DeNA was like leading star of mobile internet. So, not just ourselves. So, the whole industry in Japan, we felt was really rooting for us to become something in this mobile internet. So, we representing the whole Japanese industry we had really great product back then. We had gaming contents, we had a platform, but over time, maybe before we realized, the whole premise was disrupted by iOS and Android. So we were running gaming platform on top of much stronger, bigger platform of iOS and Android. And we really struggled and we swung our strategy to making games instead of working platforms. And that was totally different game too, no pun intended. We were making games on feature form platform, which was much lighter less expensive, but on iOS and Android game development was much more expensive. It took longer. It didn't work. Tim: That's a really good point. I mean, everyone kind of groups the mobile internet together, but the change from desktop to early mobile in Japan and the change from the feature phone to the smartphone, the iPhones, that was almost just as big a shift. Dai: Yes, yes, exactly. It took us a while to really realize how like fundamentally our business model was disrupted. That's one thing. Another thing is we came to Silicon Valley thinking this is a place that we launched new business, but when we started to see a lot of competition, we had to compete over like a talent. And we later realized that the Silicon Valley was not necessarily a great place to keep talent, especially when we are working on some industry that's past, like a very peak of the hype cycle. So, people started to leave. Tim: So, this is something that's very interesting.