Financial Times Europe - 27.08.2019

Tuesday 27 August 2019 ★ FINANCIAL TIMES 13

COMPANIES

L E O L E W I S A N D K A N A I N AG A K I— TOKYO

Four years ago a Tokyo-based start-up

called Seven Dreamers stole the show at

Japan’s biggest technology trade fair

with Laundroid, an artificial intelli-

gence robot that could fold clothes

neatly.

Despite Laundroid taking well over

five minutes to process a single T-shirt,

the machine became an instant super-

star and Japan’s collective imagination

— always eager for the next miracle

robot—wasinawe.

By 2017, said its makers, the $16,

machine would be on the market. By

2018, it would be sold to nursing care

facilities. By 2020, there would be a

Laundroid unit ready for people’s

homes.

Unfortunately, the start-up proved to

have better potential for folding than

the machine. Technical problems

mounted, commercialisation was elu-

sive and not a single unit was ever sold.

Seven Dreamers filed for bankruptcy in

April and, in late July, liquidators said

theycouldstillnotfindabuyer.

The death of Laundroid, say analysts,

has become a parable of Japan’s rela-

tionship with high tech, venture capital

and, particularly in the field of robots,

thegulfbetweenpromiseandreality.

The huge success of Laundroid’s pitch

was nevertheless viewed at the time as a

pivotal moment for Japanese start-ups

— long seen as fighting an impossible

war in a system rigged against entrepre-

neurs and starved of the disruptive Sili-

conValleyspirit.

Seven Dreamers, whose credentials

were bolstered with former Sony and

Fujitsu staff, quickly attracted more

than $50m in backing from blue-chip

Japanese companies, includingPana-

sonic andDaiwa House. That was soon

augmented by investment from Henry

Kravis and George Roberts, founders of

KKR,theprivateequityfirm.

Initially, Seven Dreamers seemed to

represent an antidote to Japan’s per-

plexingshortageofunicorns—privately

held companies with a notional valua-

tionof$1bnormore.

Despite its reputation as a technology

powerhouse, Japan has failed to punch

its weight in unicorn-breeding — one

effect, says Nicholas Smith, CLSA strat-

egist, of the huge problems that

would-be unicorns face in Japan in gain-

ing access to funding on the far more

supportive scale and terms available in

theUSandelsewhere.

Another problem, highlighted by

MasatoshiKikuchi,Mizuhostrategist,is

that Japanese start-ups are too easily

enticed to float their shares prema-

turely in Tokyo, forcing them to submit

to market discipline before they have

privatelyattainedunicornstatus.

Jesper Koll, head of WisdomTree

Japan, an exchange traded fund man-

ager, said the problem was mischarac-

terised as a lack of entrepreneurship in

Japan. Instead, he said, the growth of

unicorns was stunted by the lack of the

sort of ecosystem that, in other coun-

tries, fuses tech with the necessary busi-

nesselements.

“It takes five or six components to

build a business and to take a piece of

technology to commercialisation. There

is plenty, plenty of innovation in Japan,

but it is very difficult to assemble those

components around it. You need more

than a good robot to commercialise a

robot,”hesaid.

According to data from CBInsights

and following the initial public offering

of Mercari, the flea-market app, last

year, Japan now has a pipeline of just

three unicorns: Preferred Networks, in

AI, SmartNews, in news aggregation,

and Liquid, in fintech. That falls well

short of the 192 unicorns in the US, 96 in

Chinaand20intheUK.

Last year, in a campaign widely dis-

missed as fanciful, Japan set itself a tar-

get of creating 20 unicorns by 2023. It

reaffirmed that target two months ago,

without explaining how it plans to trig-

ger a fundamental transformation of

tech entrepreneurship, raising doubts

among venture capitalists whether the

government even properly understands

thedefinitionofunicorn.

Analysts say Seven Dreamers’ dra-

matic rise to fame should also have

raised red flags in a country where dec-

ades of attempts to bring robots into

everyday life, and billions of dollars in

investmentsbythelikesofToyota,Sony

and Panasonic, have produced few

examplesofcommercialsuccess.

“There remains a large gap between

the technological reality and the very

high expectations that people have

towards robots,” said Kenichi Koba-

yashi, chief executive of Robot Media, a

roboticsresearchfirm.

“As with AI, people are confused

between what is likely to happen in the

futureandwhatcanbeachievednow.”

Seven Dreamers also faced a problem

typical of other start-ups in Japan. Find-

ing capital in the initial funding phase

was not a challenge, especially with

many cash-rich Japanese companies

relying on start-ups for their next wave

ofinnovation.

But early backers of Seven Dreamers

eventually pulled out as the company

revealed that the robot could not

fold flaky material — a technical prob-

lem people close to the company

claimed was resolved before it went

bankrupt. The business also lost inves-

tor faith as it grappled with a string of

technical hurdles that needed to be

cleared for the robot to be given regula-

tory clearance for delivery to Japanese

consumers.

The downfall of the Laundroid maker

is unlikely to stall investments by Japa-

nese blue-chip companies in AI and

robotics, but the key question is

whether such capital is sustainable,

even though collaboration with start-

upshasbeenakeysurvivalstrategy.

“There are more big Japanese compa-

nies with a sense of crisis about whether

they can continue on their own and

keep up with the pace of technology

advances,” said Hideki Matsui, director

atVentureEnterpriseCenterJapan.

“But there are also some concerns

among venture capitalists that these big

companies could pull out their invest-

ments in start-ups once economic con-

ditionsdeteriorate.”

Japanese unicorns stumble at funding hurdle

The Laundroid had great promise but proved to be a washout that has highlighted a deficient commercial ecosystem for start-ups

Japanese unicorns v global rivals

Number of privately held companies with a notional valuation

of bn or more

Source: CB Insights

    

Bytedance

Didi Chuxing

JUUL Labs

WeWork

Airbnb

Stripe

SpaceX

Epic Games

Grab

DoorDash

World’s top unicorns

Valuation as at June  (bn)

US  China 

UK 

India  

South

Korea



 



Japan 



Others 

Germany  Israel  France  Indonesia  Singapore 

M I L E S K R U P PA— SAN FRANCISCO

Viking Global Investors, one of the

largest US stockpicking hedge funds, is

imposing more restrictive redemption

terms on some longtime clients as it

pushes deeper into venture capital and

other difficult-to-value investments.

Last month, Viking told investors who

put money into its $5.2bn Viking Global

Opportunities fund in 2015 that they

will be allowed redemptions only every

two years, not annually as previously

agreed.

Clients who do not consent to the

change by September 30 will be handed

back their money, the firm wrote in a

letter reviewed by the Financial Times.

The restrictions would begin affecting

investors next year, after their initial

five-yearlockupexpires.

Investors who have put money into

VGO since last year are already subject

to the two-year restriction, and affected

clients can still make annual withdraw-

als on some proceeds from private

investments.

The tighter restrictions reflect how

hedge funds are increasingly interested

in illiquid investments that may be

tough to sell, especially in times of mar-

ket stress, but can offer better returns to

compensatefortherisk.NeilWoodford,

the stock picker, was forced to suspend

redemptions from his Equity Income

Fund in June after accumulating outsize

positionsinilliquidsecurities.

Viking’s VGO funds, split almost

evenly between public and private com-

panies, manage almost $3bn in illiquid

investments, including stakes inImpos-

sible Foods, the plant-based burger

company, andBirchbox,the make-up

delivery service. It has also been an

investor inUber, the ride-sharing pio-

neerthatwentpublicinMay,since2015.

Thefirmsaiditsplantolimitredemp-

tion opportunities for earlier investors

was due to the “evolution” of its private

investmentprogramme,whichinvested

morethan$580minthefirsthalf.

“While some of our deals have rela-

tively short closing periods, others can

take over a year to negotiate and obtain

requisite approvals,” Viking wrote to

investors.

“We believe this two-year rolling

lock-up period better aligns VGO’s

liquidity terms with our deal-sourcing

efforts by providing our investment

staffwithgreatervisibilityintoavailable

drypowder.”

Viking is known as one of the most

successful hedge funds, tracing its roots

toJulian Robertson, the high-profile

investor, and groups such asCoatue

Management andTiger Global Manage-

ment, in recent years, the firm has

expandeditsSiliconValleypresence.

The new investor terms follow a June

leadership shake-up that installedNing

Jinas Viking’s sole investment chief.

Viking, which was founded in 1999 by

Andreas Halvorsen, the Norwegian

investor and a protégé of Mr Robertson,

said in the letter that it once again man-

ages more than $30bn. It returned $8bn

to investors two years ago, a move that

shrunkitsassetsto$24bnatthattime.

VikingsaiditplanstoreopentheVGO

funds to outside investors in January.

Theyhavebeenarelativebrightspotfor

the firm, taking in $900m from inves-

tors while Viking’s flagship hedge fund

and long-only strategies have suffered

redemptionsoverthepasttwoyears.

As part of the changes, Viking also

said it would divide investments into

core and noncore categories. The firm

said core holdings include private

equity investments and the “most liq-

uid” public stocks in its funds, but did

notdefinenoncoreholdings.

“While we do not currently have new

fund strategies under development, we

believe this update provides investors

with increased clarity regarding VGO’s

primary investment focus, while also

giving us greater flexibility to launch

future fund products focused on differ-

entstrategies,”Vikingwrote.

Financials

Viking curbs investor redemptions in VC push

Andreas Halvorsen-led Viking has

taken stakes in groups such as Uber

‘People are confused

between what is likely to

happen in the future and

what can be achieved now’

Japanese start-ups are often too

easily enticed to float their shares

prematurely in Tokyo, analysts say

Jae C Hong/AP Photo

Big tech

How big tech’s big money is

dividing San Francisco

communities

ft.com/video

‘Some deals have relatively

short closing periods but

others can take over

a year to negotiate’

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