IN-HOUSE VENTURE CAPITALISM:
Big Firms Set Up Their Own Startups

March 10, 1997

Automakers Out In Front
Fierce domestic and external competition is prompting more and more major corporations to set up "in-house startups" based on ideas suggested by employees. In many cases, the person who came up with the idea is made president of the new company, and the parent helps with funding. For major corporations, the main goal is internal revitalization by diversifying the business and inspiring employees with a greater zest for challenges.

Last autumn, a small office-cum-showroom was opened by a small company near the station of a private railway in Toyota, Aichi Prefecture. A major car maker asked employees from summer 1995 to suggest new business ideas, from which it approved one. The venture startup was set up with funding and other help from the car maker. The originator of the idea, a 39-year-old male midlevel manager, was installed as president, with six employees under him.

His business idea was to manufacture and sell high-efficiency burners, boilers, incinerators, and other equipment with curbed emission of carbon dioxide, nitrogen oxides, and other substances that pollute the atmosphere and cause global warming. Of the total investment capital of 100 million yen (833,000 dollars at 120 yen to the dollar), the parent contributed 85% and developers of the burners and other equipment poured in 10%. The fledgling firm's president provided the remainder.

This venture startup aims to become profitable in its third year and enjoy annual sales of 1 billion yen (8.33 million dollars) after five years. The president brims with confidence. "When I was an employee of the parent company, it was all right for me to focus only on my own job," he says. "But now that I am a manager, I have to have a handle on everything, from production to sales to accounting. But I think we can still develop and commercialize products faster than a big company."

The clean-incinerator idea was one of 155 proposals. Nine others were taken up, of which three have also made the transition into businesses. They include companies that handle car inspections and maintenance, and imports of construction materials. There are plans to progressively turn the other ideas into businesses, including, apparently, a sport-fishing center and a riding club.

Each case involves a transferral of personnel to fill president and staff positions, with previous wage levels guaranteed. If the business is successful within the planned time frame, the transferred personnel become permanent registered staffers at the new company, and the investors can expect capital gains from stock and other benefits that accrue to founders of businesses.

Steadily spreading
Currently, there are no statistics on the prevalence of this kind of in-house venture capitalism. But according to Keidanren (Japan Federation of Economic Organizations) and other groups, the phenomenon is spreading steadily throughout all branches of industry.

Last year, one maker of electrical equipment likewise invited employees to propose business ideas, and has so far received 107. As a result, a new company has been set up to develop and sell systems that can show residential living spaces in three dimensions, using computer graphics; the idea was suggested by a 40-year-old midlevel employee in the software division, who was shifted to the new company along with three other employees. Of the 20 million yen (167,000 dollars) in capital, 82.5% came from the electrical-equipment company, and the remainder from the originators of the idea. The four were transferred to the new company, and the employee who made the suggestion was made president. Because the venture startup is an independent entity, it is in a better position to receive orders from companies outside the parent's corporate group. The arrangement has also proven beneficial because the transferred personnel have freedom of action, and can devote themselves more fully to development of new software.

Another manufacturer of electrical equipment last year threw open its brain-picking drive to the staff of its entire corporate group, including affiliates, asking them to freely contribute suggestions via electronic bulletin boards and e-mail. So far, it has set up one company to manage personal-computer tuition services aimed at children and housewives. The idea came from two female employees. Rather than being assigned executive positions in the startup, though, they were given practical control of the company, being put in charge of accounts management and computer instruction.

But it doesn't always work out. Last year, a major railway operator asked its employees for business ideas and got 45 responses. Of them, five proposals including one for a quick-massage service cleared the screening process, but commercialization has been put on hold. It goes without saying that these projects must be rigorously examined to establish their potential and future profitability, even if they do originate in-house.

Benefits for Whole Economy
A key factor underlying this trend is a growing sense in all industries that employment levels must be kept up despite the shift overseas of Japanese companies and their accelerating globalization. But compared with the United States, where entrepreneurs enjoy broad opportunities for tapping funding from venture-capital companies and individual investors, Japan offers a hostile environment for venture startups. From establishment to expansion of business, fund procurement is a major problem.

Meanwhile, the climate of intensified competition in the global market is forcing corporations into new businesses. At the same time, a sense of crisis is also growing among the flagships of Japanese industry, which fear that they are about to fall victim to "big-company sickness." It is felt that these organizations have become bloated and slow-footed, and that their employees have less stomach for a challenge and greater institutional dependence.

Thus, companies are increasingly beginning to dip into their own pockets to nurture and prop up startups initiated by their own employees. If big companies--which command all the necessary personnel, intellectual, technological, and funding resources--can awaken the entrepreneurial spirit in their employees, not only the companies themselves but the whole economy will be galvanized, and the payoff will be improved business conditions all around; so runs the argument.

As yet, however, it is slow going. For in-house venture capitalism to really take off, companies will have to revolutionize their thinking at the top management level and amass a store of know-how.