If the business model makes sense, an investment remains a possibility.
21 Feb, 2018FORBES.COM
As the largest e-commerce and internet company based in Tokyo, Rakuten has been described as the “Amazon of Japan.” One of the people responsible for Rakuten’s rapid growth is Sae Min Ahn, who runs Rakuten Ventures, the company’s venture capital arm. Ahn’s job starting out was to help Rakuten expand into Southeast Asia by investing in companies that could add financial value to Rakuten—a job Ahn jokingly admits he undertook with such blindness early on that he’s sometimes scared to look at old investments.
Thankfully, his track record is excellent. Over the past five years, Ahn has perfected a formula that he now uses regularly when considering whether a company makes sense for Rakuten Ventures.
“It comes down to this: does this business have an asymmetrical informational advantage?” he explained. “Some sort of sourcing advantage? Where is the actual relationship arbitrage coming from? For example, if you were trying to build the next Trojan condom in Malaysia and your father happens to be one of the biggest exporters of latex, it makes sense that you would try to build that kind of business inside Malaysia.”
While Rakuten Ventures has gravitated towards certain industries in the past—artificial intelligence, advertising technology and data transferal formats, to name a few—Ahn believes one of the company’s biggest strengths is that it is open and opportunistic to specific behaviors and movements in the market. If the business model makes sense, an investment remains a possibility. But in artificial intelligence, the field Ahn is most interested in right now, too many companies are missing that important element.
“When it comes to building the next generation of artificial intelligence for a computer vision, so many people miss out on creating the right kind of business model,” Ahn shared. “A lot of the AI companies coming out right now will have a hard time making bank because all of their engineering force, no matter how high quality, is too expensive to develop a profitable model out of. For investors, new businesses must amalgamate into our investment thesis and demonstrate how they can meaningfully scale.”
The biggest red flag for Ahn when a founder pitches him an idea is when the pitch sounds scripted.
“When I look at a discouraged founder and I can see that he’s done this pitch so many times that it’s motorized, that’s a red flag for me,” he revealed. “At that point, he’s going through the motions. He’s not excited to meet me. He’s more focused on completing the action rather than having an interaction with me, which is very off-putting.”
On the flip side, Ahn is captivated by founders who truly know their industry.
“One of the biggest green flags for me is when, number one, the company is working in an industry that I’m interested in, but also, when the founder has mastered his whole industry,” Ahn said. “He not only knows exactly what’s going on in his company, but he knows what’s going on in the industry. He knows it so well, in fact, that he’s able to break down all the complexities and explain it to me like I’m a five-year-old.”
In the end, Ahn is trying to learn during these pitches, not just hear why he should invest in the founder’s company. He believes the same is true for many investors.
“One thing that I want people to know, if you’re a founder who is trying to get funding, is that investors, at least the meaningful ones that I understand and look up to, are trying to get something from you,” he said. “They’re also trying to learn something about the industry. When they try to interact with you, please regard this as a two-way street.”
Ahn is the first to admit he’s made mistakes as an investor. The latency between his decisions and their effect is so low that mistakes become apparent right away. Hindsight is needed to spot errors and learn from them. One of the biggest mistakes Ahn made when he started in venture capital came as a board member.
“I was afraid to speak up with other board members,” he admitted. “I assumed they all knew better. When I look back, the board members didn’t know better than me and were looking for guidance. I learned that when you have something to talk about, it must be meaningful to the founders, but you should never hold your tongue.”
Another mistake Ahn made was taking the role of board member for granted.
“I’ve seen board members take that role for granted, and I’m guilty of it, too,” Ahn said. “But now, I have much more respect for what a board member should be, and I make sure that if I am one, I fight tooth and nail for a founder and the company. That’s very important to me and it's fundamental to Rakuten Ventures also.”
This article was first published by Jay Kim on Forbes