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Tech Startup Venture Capital

Category Creation: hybrid venture capital

A tech startup’s international reach is typically limited by a lack of understanding about how to conduct business outside North America. And venture capital funding does not automatically solve that problem. Many startups need both money and the expertise required to market products in Europe or the Far East. This combination of resources is called hybrid venture capital.

The Japanese market represents a significant opportunity for software developers to increase sales and build a worldwide presence. However, adapting software products to the language and cultural requirements of foreign markets involves a complex and time consuming process of translation and re-engineering. In many cases, a simple translation of the product is inadequate; language-specific features must be added.

Nikko Securities (a member of the Sumitomo Mitsui Financial Group) wanted to create a new U.S.-based venture capital fund, but they were unsure how to offer something that was truly different and valuable within the crowded VC community. Warren Schirtzinger at High Tech Strategies guided Nikko to a new approach called hybrid venture capital.

To achieve their goal Nikko needed to learn about venture capital investing practices in the United States, and build a team of highly-skilled investment managers and analysts. But their biggest challenge was “fitting in and standing out.” They needed to co-invest with established VCs in the US and offer something that was both different and highly valuable.

The VC Ecosystem

The reaction of the venture capital community to this initiative would have a significant impact on how the new organization is perceived. If leading VC firms quickly begin to include Nikko in their new deals, it would send a strong message to others in the marketplace that this new organization provides unique and valuable services. The reverse is also true. If VC’s decided not work with Nikko, it would be seen as a negative endorsement.

To be successful in U.S. venture capital, Nikko Securities needed to build an organization with specific skills and capabilities, especially in the areas of investment analysis, assessment of market potential and business lifecycle management. Developing these skills internally would have taken more time than was available. So Nikko had to attract and recruit personnel from other organizations or make use of outside resources.

Part of the deal flow

The financial return to Nikko from this new enterprise was directly related to the quality of the software companies that were funded or supported. To achieve an excellent return rather than a mediocre one, Nikko had to find ways to get involved in the early funding process of software companies that hold the greatest potential for success.

Nikko would also need to maintain an ongoing awareness campaign to ensure that influential business advisors—bankers, lawyers, accountants, etc.—would know when to call or recommend Nikko’s new organization.

And many of the tech startups served by Nikko would ultimately need help in the area of business management. Therefore Nikko had to consider providing management services directly, or plan to make use of consulting resources that can provide management counsel, or both.

Nikko needed to align their new organization with the existing VC ecosystem

Nikko Securities announced the formation of a new U.S.-based organization, EnCompass Group Inc., to help emerging software companies successfully adapt and sell their products in Japan.

To ensure the success of that new organization, Warren Schirtzinger introduced Nikko’s management team to all of the successful and high profile venture capital firms in the Northwest. He then provided a blueprint of typical software-startup funding practices, along with a comprehensive compensation survey.

A well-executed corporate communications program was designed so Nikko could proactively manage or address all of the issues outlined above. In creating such a program, several specific tasks had to be completed in a timely fashion to maximize the effectiveness of Nikko’s communications activities:

First, Nikko had to establish relationships with the leading venture capital firms right away.

Second, it was vitally important to develop crystal clear positioning messages and identify the key individuals who need to understand the messages when they are communicated.

Third, once Nikko began communicating with members of the investment community, it was important to plan ways to maintain ongoing contact with each group, and not appear to fade away as many new ventures have.

Given these requirements for success, High Tech Strategies, Inc. recommended an approach to ecosystem alignment made up of the following steps:

The first step was to develop contacts and references in the venture capital community several weeks before making a formal announcement to the press. This started with making contact and meeting with leading venture capital firms in the Northwest as well as California. The goal was to work toward establishing relationships with a key members of the VC community so that they can act as a positive reference during the formal announcement to the press.

Second, High Tech Strategies prepared all of the necessary introductory materials—positioning messages, backgrounders, presentation outline, question & answer document, etc.— as well as set up one-on-one meetings with selected VCs. High Tech Strategies also prepared and selectively distributed an information packet to influential members of the investment community, prior to announcement.

And third, Warren and his colleagues provided information, counsel and support for Nikko’s early-term needs. This included research data from salary and compensation surveys, and systematic testing of how well various external audiences understand Nikko’s mission.

Six of Encompass Group’s portfolio companies completed initial public offerings in one year: BSQUARE, Data Critical, F5 Networks, Primus Knowledge Solutions, Preview Systems and Uproar.

EnCompass Group is believed to be the first true “hybrid” venture capital fund, providing a ready-made solution for emerging tech startups needing to succeeding in Japan.

EnCompass Group’s mission is to provide the complete spectrum of resources a software developer needs to achieve success in Japan –language expertise, translation, localization, distribution, marketing, product design, and investment funds, said Yasuki Matsumoto, EnCompass Group’s president and chief executive officer. We believe we’re the first to take a fully integrated approach.

Nikko Securities established the resources and capability to help software companies with an entire range of business expansion services, from early stage funding and product design assistance to full-scale marketing and distribution in Japan. By providing an integrated package of the necessary resources, Encompass Group can best ensure the developer’s success.