Founder Spotlight: Yutaka Kitade of 650 Fund on Streamlining Risks and Opportunities
in the time of Uncertainties
Due to the impacts of COVID-19, investors face a simple question: fight for growth or flight from risk? The economic shock caused by the pandemic led investors and entrepreneurs alike to lose money. The current funding environment globally is making things worse for venture capitals. Some even believe that our current situation could reshape global financial systems. Below Yutaka Kitade shares his insights on how investors and startups should react to the current economic shocks, market volatility and our current strife for economic survival.
Tell us a brief background of yourself and how did you come up with 650 Fund?
First of all, my name is Yutaka Kitade. I've been in the business for 27 years. I started my career at Dentsu, one of the largest advertising agencies in Japan. I’ve worked there for 12 years. I then thought to myself that I wanted to do something different. Hence, I did my MBA, and I’ve changed industry completely. From that point, I've been more involved with the IT sector. I was able to make some investments with this new company. That's how I actually learned many areas like how to be involved in a startup, on how to invest, and things like that.
I’ve worked for that company for a couple years. After a while, I got independent. I started to do some startup investment. I was lucky enough that some of my friends were in the startup arena. In order to learn how this business and venture arena works, I thought it would be good to make an investment and see how the business grows.
I have been an angel investor for more than 10 years. A couple of years ago, one of my friends was running this small type of venture capital in the US and asked me if I could join 650, which was originally called 415. They would rebrand it as 650, and they expanded in the region geographically.
I’m not a full-time committed partner, but I'm a venture partner. My mission is to look after Japan, and eventually other parts of Asia. I have my own business. At the same time, I do some venture capital activities on the side.
As a venture capital, what are the key traits of startups that you are looking for?
It really depends on the stage. I think, if you really want to be successful, you look at the team and the entrepreneur - the key person who runs the show. Typically, I would feel safe if I put investment into a company that was founded by someone who had previous experiences as an entrepreneur or someone who has worked in a startup adventure before. Ideally, if that person has experience in both successful and failure cases, I think that will be ideal. I've seen someone who has one big success and try the next one and he fails. If you don't have that failure, you don't learn much. Maybe, you were successful, because you're just lucky.
If you have ample experiences that really help in the failure rate and the possibility of failure will go down. As an investor, I feel safe to invest in businesses run by these types of people. However, it’s not always the case. You will have to look at the potential of the company, business model and the entrepreneur.
In that case, you bet, but you'll also learn something by investing into this young entrepreneur or startup with the cool cutting-edge business model. Most likely, the success rate will be lower than the company I’ve mentioned before. It's actually a combination of both. You're not always lucky that you get to invest into a company that is quite promising with a great team and an entrepreneur with unplowed experiences.
For example, in Japan, there are the third, fourth, or fifth generation of entrepreneurs. They are people who are like serial entrepreneurs, with four or five foundations, and these people can actually become a mentor as well as an investor. Of course, if you compare them with Silicon Valley, the pool is much smaller. Nevertheless, you have probably a 30-year history of the startups scene. If you look at Southeast Asia, for example, this history is shorter. It's hard to find someone who has the experience such as establishing five companies like three IPOs and two failures. You have to bet more on the talent and the business model. As for Southeast Asia, the potential for growth is much larger, because the economy or the market itself is growing. It might be risky, but the outcome is probably larger than in Japan.
In your view, what are some of the most important trends in the startup ecosystem in Southeast Asia this year?
In 2021, whether it be Southeast Asia or Japan or the US, I think for startups, if you're a small player, you really need to be cautious. I don't like to say this, but I think the economic outlook may not be so good. Everybody's actually locked down and the economy is not vibrant. There's a lot of restrictions. Even if some countries have support from the government, it doesn't really help to bring back the economy as it was back in 2019. Therefore, I think the sentiment in the economy looks bearish. People really need to be careful, especially in terms of fundraising or having access to cash in the form of a debt or equity. I think it's important to have reserve cash. Surviving is one key. At the same time, adapting to the new environment is also a key to survive and to bring the business to the next level.
More so, the venture capitals, many of them, still have lots of cash. However, because of the sentiments, they are becoming very cautious. In fact, in 2019, the ticket size was maybe around 500,000 USD. Unfortunately, this year, for the same kind of business, they will probably invest half of that. Even if you have access to cash, you probably won't receive the amount you were receiving two years ago. You really need to consider this as a tough environment. The reality is that some of your competitors may now be gone in six months or one year. Once the economy turns on a good cycle, then you may have less competitors. Therefore, surviving is really important.
I have seen this cycle before, about eight or nine years ago, after the financial crisis and the dot-com bubble, especially in the states. If you survive, then, you can do new things, you can do a challenge again. You really need to think how you can adapt to this environment.
What advice would you give to companies/startups that are considering scaling up beyond their home market during this time? Is it wise to do that?
Well, I think it depends. If you can expand your services without taking so much risk and without investing, especially your cash, then you should move really fast. As I said, your competitors are probably not as aggressive as you are. We have to think wisely about how you want to expand. Nowadays, it's hard to travel. You have to come up with a different strategy on how to build a business outside your market. In that case, I think building a good relationship with a potential partner or if you already have one then you're in a very advantageous position. If you can make use of that, I encourage you to expand your business without taking so much risk. If you don't have that kind of network or idea, I think you should be very cautious.
For example, FinTech is very large, but some of the certain sectors in FinTech or I call it more digital economy, have a huge chance. People stay more at home and want to do more activities online, including the economic settlement or payment. They’re not going to the physical store anymore. Therefore, I think all this transaction at the dawn of the digital economy is a very hot area. As you know, you have the large players like Grab and Gojek, who are probably dominant in this sector, but I think there's also space for niches. Niche players do not really have to compete, but fill the gap in the arena of digital economy. That's one big sector. Of course, the game is good. I don't know if it depends on the content or the game itself. It's a rather positive industry during this period.
Do you have upcoming ventures or plans to explore in the Philippine startup scene? Would you mind sharing this to us?
I invested in this company two years ago, and we just talked about gaming. This is a gaming platform with some interesting features of non-fungible token (NFT). The company is called Digital Entertainment Assets. In a nutshell, they’re a gaming platform. They actually give players a token or the NFT, which can be traded sometimes at a very expensive price.
Some people would buy these digital assets or digital art, because they like the design, character, or the artists who actually design it. We're actually setting those characters around in the game. You can purchase them using certain cryptocurrencies. This platform has been very successful in Indonesia. Obviously, people are spending more time at home and have nothing to do. We’ve proposed this game where you get to earn money in the form of cryptocurrency by playing and participating in the game.
After playing for one month, every day in this game, you earn a certain amount of cryptocurrencies, which eventually can be converted into your local currency in Indonesia. The concept is that you play games and you earn some money. It's quite ideal during this pandemic. We're thinking where to bring it next, and the Philippines is one of the candidates, since the market is very similar to Indonesia. I guess, we’ll see. Maybe, we would find the Philippines interesting when I come into the market in the next three to five months.
What is your outlook on the startup ecosystem in 2021?
The economy itself won't be that good. I would rather say, bearish. You really need to be careful on how you’d be spending your cash. Cash is very precious in 2021. I think you have to be very wise. Think of how you can differentiate yourself to your competitors and not just by competing. The best initiative is to not spend more money in marketing, which you probably did in 2019 and some part of 2020. I think you need to think thoroughly and be careful and cautious. I'm repeating the same statement, but I think that's really the key to surviving in 2021. I cannot be optimistic right now. I wonder what other people who are optimistic are saying like “Oh, we have a work team and after people are locked in, the economy will come back and things are gonna be okay.” Actually, no, I don't buy that story.
It's not just about Southeast Asia, in America and in Europe, it’s even worse. In Southeast Asia, Japan and China, most parts of Asia are rather good. We have more liberty to go outside. For example, I'm here outside a cafe, but this probably cannot be done in the US, especially in Europe today. I cannot complain much. Nevertheless, since everybody's actually locked in and they have a restriction of going out, a lot of things can happen.
People are staying home and they work from home. A lot of technology needs to be adapted into the environment. That's why I said gaming is a favorable sector. Where do people spend time? I think these changes will drive growth to certain sectors. This is how you observe changes and adapt accordingly. This is really the key to becoming successful.
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