Creating a Venture Ecosystem and Supporting Exponentially Growing Startups

Yuuichi KatayoseManaging Partner & CEO, Tokyo University of Science Innovation Capital Inc. (University-certified Venture Capital)

‍Visiting Professor, Institute for Research Promotion, Tokyo University of Science

After completing a Master's degree at the Graduate School of Tokyo University of Science, joined Dai-ichi Life Insurance Company (currently Dai-ichi Life Holdings, Inc.). Worked in the Asset Management Department, handling structured finance and alternative investments. After assignments at the U.S. subsidiary and overseas asset management companies, joined Goldman Sachs Asset Management. Later, participated in the establishment of Tokyo University of Science Investment Management Inc., which supports university-related businesses and venture companies, and became its CEO. Held positions as Special Assistant to the Chairman of the Board at Tokyo University of Science and Visiting Professor at the Institute for Research Promotion, Tokyo University of Science.

Founded Tokyo University of Science Innovation Capital Inc., serving as Managing Partner and CEO (currently co-managing partner), and continues in this role to the present.

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University-based Venture Capital that Seamlessly Supports Product Launch, Technology Validation, and Patent Acquisition for Portfolio Companies.

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- Can you tell us about the venture capital activities managed by Tokyo University of Science (TUS)?

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Since starting venture investment activities at Tokyo University of Science in 2015, by December 2022, we had reviewed over 2,000 cases. On average, we review about 300 cases per year, with 36 investments made. Regarding exits from portfolio companies, we have had a total of 8 exits, including IPOs, M&As, and MBOs.

Characteristics of the TUS Fund include not only providing funding, but also collaboratively creating services, validating product quality, and supporting the acquisition of patents.

In the case of MBOs, as the business of the portfolio company became profitable and the company gained confidence, the decision was made to pursue MBO, not aiming for an IPO, but rather to expand other businesses with strong ownership. The operational philosophy of the TUS VC is that we are not particular about the form of exit as long as the technology of the portfolio company is brought to market.

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- Can you tell us about the structure of the investment team?

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The venture capital fund management for TUS's second fund, "Tokyo University of Science Innovation Capital Inc. (TUSIC)", was co-founded by Mr. Takada and myself. We currently have a team of 12 people. The team is divided into 8 members in the investment department (4 investment managers, 4 incubation managers) and 4 members in the administrative department.

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- Are there any specific fields that you are focusing on for investment?

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One of the key areas of focus is the cross-tech field (X-tech: developing new technologies and services in industries such as construction, finance, and real estate), where there is a large information asymmetry between sellers and buyers. By using technology to enhance existing services, we can improve productivity and deliver services on a larger scale. We believe that by changing traditional cost structures, we can create more value. In the field of data science, which is critical for cross-tech, we are collaborating with researchers from relevant fields to evaluate technologies. On the other hand, turning data into value is quite challenging. There are cases where universities and startups collaborate on joint projects to research how to connect big data with business.

Additionally, we are focusing on establishing sustainable revenue models that align with SDGs while also covering the life sciences sector, which is supported by TUS's research departments in pharmacy, life sciences, biotechnology, and applied chemistry. We are investing not only in drug discovery, but also in fields related to medical devices, medical testing, and health promotion.

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Support for Startups from Seed to Later Stages, Creating a Venture Ecosystem Through University Collaboration and Co-creation

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- Can you tell us about Tokyo University of Science’s support for startups?

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One of the key characteristics of TUS’s support for startups is providing a seamless range of services, from "entrepreneurship education," "incubation (support from startup preparation to seed stage)," and "growth investment from venture funds."

We support entrepreneurs from the preparation stage of their business, helping them assess the viability of their technologies, and assist them in setting a path for commercialization so they can establish their companies. During this process, we help them deepen their understanding of fundraising, team building, and the importance of business planning. Once entrepreneurs gain awareness of their role, the growth roadmap becomes clearer. When we are involved from the beginning and support the startup, we are not just ending the support at the seed or early stage, but continue to support through the middle and later stages as well.

Although we do not only invest in the seed or early stage, once we commit as shareholders, we want to provide support at every stage of growth.

Furthermore, despite being a university-based VC, TUS operates in an open manner, which is another key feature. Anyone with ambition and the ability to take action, not limited to TUS alumni or affiliates, can receive any of the available support services. We greatly benefited from the advice of Professor Michael Cusumano, who served as the Special Vice Chancellor of TUS when the university participated in MIT’s Regional Entrepreneurship Acceleration Program (MIT REAP). His advice was that "Entrepreneurial support should not only expand the unique ecosystem of the university but also build a platform with all the necessary resources for entrepreneurship and promote open innovation."

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- Could you tell us about the specific types of support you provide?

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As a base for education (entrepreneurship education) and incubation (business development), we operate the Tokyo Entrepreneurship & Innovation Center (TEIC), a Tokyo-certified incubation facility called "Cross Point." As of the end of December 2022, we have four locations around Iidabashi and Ichigaya stations, with approximately 200 contracts for use by companies and individuals, primarily startups. Our incubation facility is open not only to ventures originating from Tokyo University of Science (TUS) or TUS-backed VC investments but also to anyone who wants to utilize it.

Recognized as an incubation facility by the Tokyo Metropolitan Government, tenants can receive mentoring on entrepreneurship and business, clarify business challenges, and be connected to TUS VC or partner companies when funding is needed.

A key engine for building the venture ecosystem is the venture pitch events. A total of 107 companies participated in the two pitch events held in 2021 and 2022. Startups, whether in the seed stage or later stages, are eligible to participate. In addition to prize money for the winning companies, they also receive the benefit of one year of free use of the incubation office.

We aim to provide not only incubation facilities for technology ventures but also to offer support to promising ventures planning to launch new services. We also provide mentoring on demand as needed.

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In addition, we offer an entrepreneurship course program as an open college for working professionals. The instructors are Mr. Takada, co-managing director of TUSIC, the CFO of a portfolio venture who is a certified public accountant, and myself. All of us are practitioners in the field. This course is offered free of charge to our portfolio companies and students, and at a low cost to external participants. The course covers topics such as technical trends for entrepreneurs, and the perspectives and ways of thinking needed to capture growth opportunities, based on case studies and the outlook for technological innovation.

If you are committed to a business, it doesn't make sense to fight in areas that aren't growing. Instead, focus on industries that are growing exponentially, and that is one of the key messages we convey in this course.

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- What do you mean by "exponential growth" specifically?

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きかきゅうすう‐てき キカキフスウ‥【幾何級数的】
ある事物、事象が、常に前の場合の何倍かをかけた数に増える、すなわち幾何級数（等比級数）のように増える傾向にあるさま

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Technological innovations sometimes make certain things possible that weren't achievable before, while there are still unmet needs due to technical limitations that have prevented these solutions from being implemented in society. The concept of growth based on technology innovation is about how, once constraints are lifted, the market grows rapidly. This image describes how growth accelerates after technological breakthroughs.

For example, compared to 10 or 20 years ago, there have been a significant increase in new businesses built on innovations in the telecommunications industry, such as computing speed, hard disk and cloud storage costs, and renewable energy generation costs. As communication infrastructure development progresses, the transition from 5G to 6G is underway. By 2030, it is expected that 100 hours of 4K video will be downloadable in just about 8 seconds. We anticipate that the strength of data communication infrastructure after 2030 will become a critical source of national competitiveness and the foundation for next-generation businesses.

Thus, the ability to support business growth in areas where exponential growth is expected, while also keeping an eye on the timing of technological breakthroughs, is one of the distinctive strengths of university-based venture capital. Innovation in technology can unlock possibilities that were previously constrained, leading to rapid market expansion as a result. We expect this exponential growth in industries where such technological shifts are anticipated.

The innovations in computing power, data storage (hard drives and cloud), and renewable energy generation costs have greatly changed the business landscape. In the coming years, the development of communication infrastructure will continue, leading to the transition from 5G to 6G. For example, by 2030, it is expected that 100 hours of 4K video will be downloadable in approximately 8 seconds. From 2030 onward, we foresee that strong data communication infrastructure will be a key driver of competitiveness in next-generation industries.

We aim to support business growth in these exponential sectors and believe that the university-based venture capital model has a unique strength in helping to achieve this.

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- What efforts are being made to assess technology?

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The social implementation and monetization of technology do not necessarily equate to each other, so to avoid making significant mistakes in assessment, we discuss technology roadmaps in meetings with the investment team. Additionally, while the research level may be high, whether it can be implemented in society is assessed in collaboration with entrepreneurs, professors within the university, and industry-academia cooperation bodies. "Never assume you know everything" and always keep checking the facts.

However, if a venture capitalist is passionate but lacks knowledge or ideas that align with the entrepreneur's perception, there will be a disconnect and miscommunication.

Therefore, in the university's open college entrepreneurship course, we cover fundamental frameworks for entrepreneurship such as:

• What challenges or problems you want to solve
• Whether your service can break or disrupt existing systems (methodology)
• Whether the market size for the problem you're trying to solve is large enough
• What kind of team will solve the problem

Through these, we offer a program that helps entrepreneurs understand what "growth opportunities" unicorn companies identified and seized in their journey.

This kind of "entrepreneurship education" and "incubation" is provided to create an environment where future businesses and companies can be nurtured, whether or not TUS VC chooses to invest.

We do not offer this as volunteers. For companies that are investment targets, we provide capital and, once invested, offer necessary management resources to support business growth.

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- How do you engage with portfolio companies, and what kind of support do you offer?

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When we invest, we want to support entrepreneurs until they reach their exit. Therefore, we primarily lead investments. About 80% of our portfolio companies have been led by TUS VC, and in some cases, the investment team members serve as directors or auditors.

Even though they are external, as directors, our job is to grow the business. We don’t just ask questions at board meetings—we also leverage the network and resources that university-based VCs possess.

In addition to business development using student communities and research assets, we also assist with creating business plans focused on growth via free cash flow, analyzing progress and gaps, and providing feedback to management.

For some portfolio companies, I am involved at a level where I approve decisions after reviewing them.

It may sound like a lot of involvement, and you might think "that would be burdensome" or "it can't be easy for the supporter," but once we invest, we are committed to supporting them until the end. If the business needs it for growth, we will provide that level of support. Having a "healthy sense of urgency and sharing that with the company" is the most important role of an investor. The challenge of exponential growth is crucial, but survival is equally important. This is why we provide concrete support, such as cash flow management that includes working capital and proposing withdrawal criteria for businesses.

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- Can you tell us why you are so passionately involved with TUS VC?

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Just as Silicon Valley formed around Stanford University, in the U.S., there is a fertile soil (venture ecosystem) where mega-ventures keep emerging around institutions like Harvard, Stanford, and MIT. Universities are not only research and educational institutions but also gateways that connect alumni with society and are psychologically close to companies. When analyzing startups in the U.S., many of them leverage their university's network and resources to start their businesses.

Research outcomes, alumni donations, human resources, and ideas all converge around the university. Incubation centers and venture capital firms that integrate these resources are the backbone of the ecosystem.

To establish this ecosystem in Japan, my greatest motivation for joining TUS VC from my previous job was to build an organization that could handle everything from "entrepreneurship education" to "business incubation" and "business investment."

TUS is Japan's largest science and engineering university, with over 230,000 graduates and a key research and educational institution supporting the development of the country's scientific and engineering fields. I believe that TUS can exert a significant influence in creating and embedding an ecosystem in Japan, where startups with new technologies and ideas are born and grow.

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Analyzing the Growth Factors of Companies and Wanting to Foster Industries with the Power of Finance

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- Let's go back in time a bit. Can you tell us about your time as a student at TUS?

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My mentor during my undergraduate years was a Ph.D. in science, and I was part of the environmental science research lab. In graduate school, I studied under a professor who led a think tank, researching management strategy, information and communication strategy, and corporate value evaluation.

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- It’s surprising to hear that you had such a strong sense of issues even as a student. Were there any influences that shaped you?

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The influence of my graduate mentor, Professor Fumido Yamada, was significant. He was very strict but taught me everything from the basic attitude of how a corporate professional should be, to problem-setting, analytical methods, and practical aspects like reporting results.

Through my research, I became strongly interested in analyzing what allows companies to continue growing. If there’s a problem in management, it means that if you focus your efforts on the right areas, growth can continue. I became deeply attracted to management analysis aimed at finding the key points for growth and executing solutions.

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- Could you tell us about your journey from becoming a working professional to joining TUS?

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I joined a financial institution as a new graduate and was assigned to the asset management department. During the interview, I brought a corporate analysis report I had created and gave a presentation on scenarios for enhancing corporate value, which seemed to have been well-received.

I thought that asset management was a field where I could be involved in "finance that nurtures industries", and I felt that the departments that could manage assets with a long-term perspective would likely be insurance companies or trust banks. Within that context, I chose to work in life insurance, as it would allow me to manage funds that could benefit many people, such as pensions for my future and living funds for my family.

My first assignment was as an analyst in the equity investment research department, where I handled the telecommunications and semiconductor sectors, conducting corporate analysis and industry research. Later, I was assigned to a newly established department focused on structured finance (securitized products, credit products) and alternative investments (hedge funds, private equity).

Later on, I was transferred to New York through the company's overseas study program. Shortly after arriving, I encountered the Lehman Brothers collapse, and to put it mildly, it was a terrible experience. Although I had gone there to make investments, I spent my time reading English contracts, making decisions on continued investments, and recovering funds. The colleagues I worked with during this time are still close friends to this day.

During this period, while dealing with the aftereffects of the dot-com bubble bursting, I began my career in asset management, and half of my career was spent in the midst of economic recessions, including the Lehman shock.

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I Want to Create a Real Venture Ecosystem

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- How did you join TUS and get started in venture capital?

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While working in the asset management division at Goldman Sachs, I volunteered to give special lectures at TUS for professionals. The lecture involved hearing stories from TUS graduates who were working at global companies. After that lecture, I received a phone call from the then-chairman of TUS, which led to my connection with the university.

In asset management, I was involved in selecting and investing in profitable businesses and financial products through "securities analysis" and "financial analysis." However, I felt a disconnect from the "business investment" I had been aiming for. I decided that I wanted to be involved in business growth through venture investment, conducting "management analysis" while helping businesses grow, which would be a fulfilling career path if the businesses grew significantly.

To establish a business at the university, I co-founded it with Hisanori Takada, who was in charge of the asset management division at the Norinchukin Bank (now co-representative of Tokyo University of Science Innovation Capital).

However, even though we had started the venture, it wasn't immediately possible to dive into venture investment, as we had to build a partnership framework with the university's board of directors and industry-academia cooperation organizations. It was a start from scratch.

Before establishing the venture capital firm, we worked on projects related to regional revitalization involving the university, such as establishing business companies utilizing management resources from local governments and setting up renewable energy facilities on the TUS campus in Shumambe, Hokkaido. We also established incubation facilities and created an ecosystem around the university campus, including building student dormitories with innovation labs. Those days were incredibly busy, to the point where there was no time for rest, but it was extremely rewarding. Having spent my career in asset management without being involved in actual business management, I believe this step was necessary for me.

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- Finally, could you tell us what you hope to achieve through your work as a venture capitalist?

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I believe that being involved in nurturing new companies with entrepreneurs and guiding them to their exit is a highly meaningful job in society. When actual value is created, it leads to economic returns as well.

If we only focus on financial returns, we would merely repeat the process of discovering good opportunities and making project investments. However, I had a strong desire to create a venture ecosystem and make a meaningful impact.

Currently, Tokyo University of Science has established a venture ecosystem called "TUSIDE (Tokyo University of Science Innovation Driven Ecosystem)." The entire ecosystem has been built by the stakeholders (the university, VCs, and university-affiliated companies such as incubation facilities) working together as one.

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Japan is often said to have few startups, but according to data from 2016, businesses established less than five years ago created nearly 5 million jobs, while businesses older than 10 years had lost more than 4.5 million jobs. Additionally, it is predicted that in 20 years, 65% of people will be working in jobs that do not exist today.

Change and challenges are difficult, but if we can build an ecosystem with the desire to "create new businesses," it will accelerate innovation.

Staying true to the core of my desire to "improve businesses" and "create valuable things" that I had when I was studying management analysis in graduate school, I will continue to focus on "entrepreneurship education," "business incubation," and "business investment."

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