by Noriyuki Morimoto
For investing in startups to be a viable business, it is essential to control risk using scientific methods. The first way to do that is the so-called hands-on approach, where the investor actively supports management of the companies they invest in, and the second is diversified investment.
If you prioritize the hands-on approach, there will be a limit to your range of investments, while increasing the number of investees based on a diversification strategy will result in less hands-on influence on each company you invest in. Regarding this dilemma, it has long been said that Japanese investors prioritize diversification, while those in the United States emphasize the hands-on approach. Recently, however, there has been a shift in emphasis to hands-on in Japan as well.
In the background is the harsh reality that if the assumption that new start-ups in Japan will deliver performance as a whole is no longer viable, diversified investment will lose its meaning. If the fierce competition of entrepreneurship means that only a handful of businesses succeed, instead of producing results as a whole, the inevitable way would be to take a hands-on approach and be highly selective in your investments.
Meanwhile, this reduction in the number of investees leads to a larger amount of investment in each company. It can be easily thought that putting large amounts in one investment is risky, but on the flip side, it can also be a way to control risk.
If a company you invest in is rich in capital, its ability to develop business is boosted, which can change the conditions of competition itself. For example, the company may become capable of aggressive management strategies that involve either destroying or acquiring its peers.
Even with an excellent business concept that captures a change in the times, it is impossible to know exactly when that change will happen. But if the concept is good, that turning point will certainly come. If you can wait to take an ambush strategy, that is, if you can buy time, you will be able to succeed. However, in order to do that, you must have abundant capital.
And providing this length of time is the essence of investing. Finance is just that, finance, and finance itself does not have the power to create new value. However, finance can assist entrepreneurs by giving them the time they need. The essence of hands-on is the effort to reduce the time needed to provide. This is because the amount of return on investment is inversely proportional to the length of time.
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.