Japan team leaves 500 Startups, goes it alone with $45m fund

The team behind 500 Startups’ Japan fund has spun out of the US-based seed investor and relaunched as independent firm Coral Capital.

Founding partner and CEO James Riney told Tech in Asia that the new name is a play on the “foundational role” that coral plays in the marine ecosystem. “We hope to do the same within the entrepreneurial ecosystem,” he said.

The Coral Capital team / Photo credit: Coral Capital

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Previous 500 Japan investors Mizuho Bank, Mitsubishi Estate, and Taizo Son (brother of SoftBank supremo Masayoshi Son) are among those that have backed Coral Capital’s first independent fund. Shinsei Bank has also come on board as a limited partner, alongside a number of undisclosed institutional investors.

This last group accounts for more than half of the new fund’s backing, which, according to Riney, marks a departure from the earlier 500 fund and other Japan-based venture capital firms that tend to be dominated by corporate investors.

“Historically, a lot of the money for [Japanese] startups comes from corporates,” he explained. “But in Silicon Valley it’s mostly institutional. Institutional investors haven’t really shown a lot of love for startups in Japan. But recently, there’s been a lot more institutional investment. When we did this fundraise, they were a lot more receptive.”

Riney thinks increased interest from Japan’s institutional investor segment can be explained in part by the growing number of startup success stories to come out of the country, such as IPOs for local tech players Mercari, Money Forward, and Wantedly on the Tokyo Stock Exchange’s Mothers board for high-growth companies.

“We’ve been able to produce some consistent hits domestically,” he said. “One thing to keep in mind in Japan is we have a local exchange to take startups public, so there’s liquidity. In other emerging startup markets, that’s hard to do. [So institutional investors] are now investing in venture as an asset class.”

Another dynamic encouraging more investors to bet on Japan’s startup space is the country’s emerging culture of entrepreneurialism.

“The caliber of entrepreneurs coming into startup market has increased quite a bit,” Riney said. “People with very promising, respectable careers in trading houses and traditional big corporates are leaving those positions to start their own companies, so there’s opportunity there.”

See: Taking risks ‘will make Japan great again,’ says Uber investor

Growing appetite for Japanese venture investments is also indicated by the amount of capital flowing into the ecosystem. Riney noted that locally operated funds in Japan have become much bigger since 500 Japan launched in 2015.

That is partly what drove Riney and his team to spin out from the 500 Startups network and do their own thing.

“We tend to write bigger checks – we were actually doing US$500,000 up to US$2 million [per seed round], so we were a bigger seed-stage player within Japan. For the first [fund], we invested in 43 companies. That’s a bit closer to concentrated seed-stage portfolio, so the style is different to what you’d traditionally associate with 500 Startups.”

500 Japan also became the first fund in the US group to lead a series B round, investing in Tokyo-based SmartHR by way of a special purpose vehicle. The compulsion to participate in later-stage fundings also strengthens Coral Capital’s case for leaving 500 Startups, which is typically focused on seed rounds.

The whole 500 Japan team, including Riney and co-founding partner Yohei Sawayama, has migrated to Coral Capital. They’ll continue to manage the 500 Japan portfolio and will still work with 500 Startups “on our existing funds and [to] collaborate on initiatives for the Japan ecosystem,” Riney said.

“It’ll be a hybrid situation where we’ll still be fund managers of the distinct fund [and] take our own founders and take our own investors.”

He added that the new firm is “basically agnostic” when it comes to which areas it will invest in. “However, if you look at our portfolio, a lot have tended to be in legacy industries or industries under-penetrated by tech, such as insurance, healthcare, and logistics.”

nCoral Capital reached its US$45 million funding target in about two months, and manages a total of around US$100 million, including the US$35 million that comprises the 500 Japan fund.