What makes a "Startup City"?

In September 2016, Devin and I decided to go into business together to launch a private investment firm focused on startups. We have talked about doing business together for a long time. We finally found the right business we both want to do. Plus, we now have enough capital to do it on our own without raising external funds. In the weeks that followed the decision, we worked on our business plan and figured out the financial commitments needed to launch it.

One of the things we had to decide was WHERE to base our business. As investors who are interested in the startup space, naturally we want to be based in a location where we will have easy access to a lot of startups.

But, that is not the only thing that matters. From our own experience dabbling in angel investments in Singapore since 2014, we realise that it is not enough that there are sufficient numbers of startups to ensure a steady deal flow for us. There were other vital factors that must come into play.

So, just as any good investors would do before committing money to a deal, we did a whole lot of due diligence in our search for the perfect headquarters location. And since we were looking for a city we will call home for a while, we did a fair bit of traveling to check out our shortlisted cities. Singapore is definitely top on our list of cities to live and work. But we also checked out Fukuoka, Taichung, Perth and Penang. In the end, we picked Fukuoka City in the southern island of Kyushu in Japan.

Fukuoka is probably not on the top of the list of many venture capitalists, angel investors, startup entrepreneurs or even just leisure travelers for that matter. So, why did we choose Fukuoka?

Talent Pool

First, for any city to grow economically, it must have a big and deep pool of talents. And for us in the technology business, the talents we are looking for are those who can code. We also want to find talents who can sell. And preferably, the rare talents who can do both.

In the case of Silicon Valley, having the likes of Stanford University right smack in its epicentre has really helped in producing a steady stream of tech and business talents to fuel the growth of startups. In the case of Fukuoka City, having Kyushu University, a well-recognised and well-respected technology education and research institution ensures that we will find a steady supply of such talents. There are also Fukuoka University and Seinan Gakuin University, just to name a couple more, which we hope will be producing lots of future entrepreneurs and coders.

We have spend a lot of time in our home country universities like National University of Singapore (our alma mater), Nanyang Technological University and Singapore Management University giving talks on entrepreneurship, judging pitch competitions and mentoring students who are launching their startups. We still believe that working with universities is the best way to identify and nurture the next generation of entrepreneurs. We are planning to do the same with the universities here in Fukuoka to do our part in growing the talent pool and encouraging more young people to take the plunge to be entrepreneurs.

But universities are not the only incubators of talents. Big tech companies also helped to develop talents in cities like Hangzhou (thanks to Alibaba) and Shenzhen (Huawei, Tencent). In Singapore, the government’s efforts to attract big tech companies to set up their regional HQ and R&D centres have borne fruits in training and encouraging a lot of tech talents to launch startups. Speaking for myself, my 8 years working at eBay Inc.’s Asia Pacific HQ located in Singapore were instrumental in preparing me to launch my own business in technology investments.

In the case of Fukuoka, we have found that the likes of Line, Rakuten have set up operations here. These more established technology companies have brought with them staff that could potentially be the next generation of tech entrepreneurs. We have seen that happened in Silicon Valley where the PayPal mafia has gone on to establish a whole host of successful tech companies and venture capital firms. We believe Fukuoka is on the right track with City Hall making a really strong push to attract more big tech companies to relocate or set up a second operation HQ here in Fukuoka.

In places where there are not a ready pool of talents, the smart money is in attracting immigrants and foreign talents to relocate to their cities. Some, like Paris has gone with a big-bang effort like Station F. Others like Japan, have taken a more slow-and-steady approach by carving out a few special economic zones, like Fukuoka, where immigration rules are slightly relaxed to make things easier. We were drawn to Fukuoka initially by all the news we have found online about the “Startup Visa” which the city is offering to any qualifying startups. We were also pleasantly surprised to find a great one-stop-shop in Fukuoka called the “Startup Cafe” when we first arrived in December 2016. The Startup Cafe really helped new arrivals, whether they are from other parts of Japan or abroad, to get a lay of the land in Fukuoka and also get access to all the services and support entrepreneurs may need to launch their startups.

Speaking for ourselves, the Startup Cafe advised us on the drafting of our business plan needed for our Business Manager Visas (a kind of entrepreneur visa which grants us a 1 year stay in Japan). The Startup Cafe also introduced us to our real estate agent who found us our home and office premises. And for any foreigners who have tried to rent a place in Japan, we all know how difficult that process can be with landlords typically reluctant to rent to foreigners and guarantor companies charging an arm and a leg to support our rental applications. With a “concierge” service like the Startup Cafe, these setting up pains were lessened by a great deal.

We must also commend the JETRO Office in Fukuoka. These folks were really awesome in terms of figuring out the laws and regulations we need to comply with, the different kind of taxes we will have to grapple with, etc. They also found us the lawyers who helped us set up our company here in Fukuoka and submit our visa applications to Japan Immigration. Again, these are not simple tasks to complete, especially for new arrivals like us who do not even understand basic Japanese.

But, can these efforts to attract foreign talent be improved? Absolutely. We think Fukuoka has come a long way since we started looking at it back in 2014. But, a lot of other cities have also caught on to the importance of having a startup-friendly ecosystem. For example, there are bolder efforts like what Taiwan has done by having a national program to encourage foreigners to launch their startups across the country. With a national program, different government agencies are all properly aligned on the same mission to attract foreign talents. One of the things we find most frustrating about being in Fukuoka is that although we feel that Fukuoka City Hall’s policies are very friendly towards foreign startups, some of the national laws and policies have yet to catch up. Take for example, the 1 year visa granted to investors like us. It is very hard for us to commit to any long-term business plans and investments here in Fukuoka as we really do not know if our own stays in the city will be terminated in March. This kind of short-term approach to policy-making does not encourage risk-taking by foreign entrepreneurs. Why should anyone place a bet on Fukuoka for just a 1 year’s stay? It would surely be better for the Japan government to look around at the competition and up their game immediately.

Again, Singapore being a city-state, has an easier job in that it can have a nation-wide policy for its city-geography. Being a very open economy, it is also not surprising for Singapore to offer one of the most compelling startup package for foreign entrepreneurs — no money down in terms of investments needed and a 2 year visa provided the entrepreneur comes with a compelling track record and a solid business plan.

Bottomline, we think the talent pool of a city is what makes it interesting as a place to launch a startup. Attracting foreign talent is hard. The world really is their oyster these days as an awesome startup can be launched basically from anywhere with good internet connectivity. There are plenty of digital nomads who move from Bali to Chiangmai to Singapore to London every few months. It is hard to keep them in one place. Fukuoka is lucky in that it is geographically blessed by being as close to Seoul, Shanghai or even Taipei, as it is to Tokyo. The location advantage makes it attractive to foreigners who want to live in Japan but still be able to travel to the rest of Asia easily. For Japanese, the wonderful quality of life here in Fukuoka must surely be an attraction. It helps that nature is so close, the city is young and growing and there are plenty to do other than work 18-hours day, 7 days a week.

Venture Capital

The second thing that is needed for a city to be startup-friendly is venture capital. Not just any kind of capital, but venture capital. There are plenty of rich people, companies and sovereign funds out there. But not all of them understand the risks and rewards of investing in startups. The availability of venture capital is even more critical when it comes to early-stage startups. These startups may or may not have the right products, business models and/or teams. As a general rule, they fail. Very, very few of them actually will survive to the next few rounds of fund-raising. It takes a really savvy investor to want to take those risks. It further takes very smart investors who not just invest the money but also the time and efforts to advise these early stage startups to improve their chances of success.

Looking at Silicon Valley and its famous Menlo Park where venture capitalists congregate, the key for any aspiring city is to create a critical mass of venture capital coming to set up shop. In Singapore, the gathering of private wealth management, hedge funds, family offices, private equities, etc. over the last 2 decades eventually led to many of these non-traditional venture capitalists also investing in tech startups or venture capital funds. In addition, the very well-endowed Singapore sovereign wealth funds Temasek Holdings and GIC also played their parts in leading investments in startups with well-known investments in the likes of Alibaba and Grab, just to name 2 of them.

In the case of Fukuoka, we have met several angel and early-stage investors since arriving here last December, including a home-grown champion, F-Ventures. There are also a handful of later-stage venture capital firms based here like Sakura Internet, Mistletole Ventures, Dogan Ventures, etc. The pool of venture capital here is still small in comparison to Tokyo or other more established centres like Hong Kong, Singapore or Shanghai.

We strongly believe that success begets success when it comes to attracting capital. Or in laymen’s terms, “Everybody loves a winner.” Singapore has done well in drawing private wealth management and hedge funds to its shores. With this big pool of ready capital and a big team of wealth managers, the spill-over to venture capital is inevitable. So, for Fukuoka to succeed as a startup city, we think there must now be a stronger push to attract venture capital here too.

For a start, it would be really easy and convincing for Fukuoka City Hall to market itself to the growing pool of Japanese who are going into retirement age. At 50s, 60s or even 70s, these Japanese are still mentally and physically active, alert and sufficiently well-endowed with capital to deploy. With the low interests rate offered by banks and the strong correlation in the different types of investments asset-classes, diversifying into venture investment might be a good way for these rich Japanese to find better returns. With their work experience, connections and knowledge, they will also be great mentors and advisors to the startup entrepreneurs who tend to be a lot younger and lacking in experience and connections.

Fukuoka City is a really liveable place with a mild climate, affordable cost of living and great transport connectivity. Personally, we think it will be a great retirement or second home. And with them living here, some of the capital they control will surely flow here to invest in the startups. Looking abroad, we are surprised that Japan has not really marketed itself as a retirement or second home country to foreigners. Malaysia has a great immigration program encouraging rich retirees to move there and park their money in Malaysia properties and companies. Several of the friends I have made in Hong Kong back in the early 1990s are now retired in Malaysia under the Malaysia My Second Home scheme. Fukuoka can certainly give the likes of Malaysia a run for this valuable source of capital.

It is therefore important to relook the laws and policies to make sure it is attractive for fund managers to want to park their money in your city and deploy the money from there. We think that the Taiwanese government’s recent changes to their visa scheme to specifically attract venture capital startups is a very smart one. The changes even take into account capital deployed from Taiwan into investing in foreign startups. This change seems to show that the Taiwan government might be trying to create their own Menlo Park. Singapore’s success in attracting Taizo Son of Mistletoe to be based there is another good example of why a city government has to work hard to attract venture capitalists to their shores. Without venture capital, startups will not be able to launch nor grow. It is not advisable for any government to try to be a venture capitalist and take risky bets with taxpayers money or their citizens’ pensions. It is much better to retool the laws and policies to attract venture capitalists to come to your cities.

3. Government

We have talked a lot about the government’s role even in the context of Talent and Capital. To come back to our main hypothesis that in today’s globalised world and extreme connectivity (both in the real-world thanks to budget airlines and Airbnb or in the virtual world, thanks to high-speed mobile internet), talent and capital can be anywhere. If a government wants talent and capital to come, it has to fight to get them. Unless you have a really huge market like the US, China or India, you really need to throw a lot of goodies at tech talents and venture capital to want to move to your city or country.

Once again, Singapore presents an interesting case study of what are the steps a government can do to attract talent and capital. To start with, you can try to grow your tech talent pool with your universities. But that takes time, and it may or may not work. So, having an open door policy towards foreign talent is the only option which, again, the Singapore government has just recently upped its game with a very simple Entrepreneur Visa that requires no paid-up capital investment, just a track record and a viable business plan. With the US tightening its immigration policies, now is the best time for governments to go out there to attract foreign entrepreneurs and venture capitalists to set up shop in their countries. Paris is doing it. Taiwan is doing it. Even Thailand has launched new visa schemes to attract tech talent.

But it takes more than an easy visa scheme to make it work for a city. Governments must also invest in good infrastructure to connect their countries or cities to the rest of the world. Fukuoka and Taipei, for example have awesome trains, buses and airports right smack in the city. Their broadband infrastructure is also something amazing. It is this kind of connectivity that will attract digital nomads to a city like Fukuoka. The city is on Kyushu Island which offers plenty of great outdoor space whether you like climbing mountains or surfing in the morning before you start coding. The fresh produce from around Kyushu Island is also amazing in its variety, freshness and high quality. So, why aren’t more people flocking to Fukuoka? We think the marketing might need to be refocused a little…

Take for example the interesting phenomenon of how resort towns like Chiangmai and Bali are also shaping up to be hotspots for tech startups entrepreneurs looking for a more laid-back living environment. So, our hypothesis is that a city must first be liveable. It can mean different things to different people but most would agree that it must be safe, clean, affordable, green and highly connected. We think having a local population that can speak English also helps. It is the universal language on the Internet afterall. So, if people around me speak English, chances are I can build a product in English and have it scale from there globally, rather than just something build for the local language. Again, unless you are China, it is really hard to justify the investments to build a product in your local language. There just isn’t the scale to make it worthwhile. Therefore, it is again interesting to see that a lot of the newer Taiwanese startups are building products which are in English. They are Made-in-Taiwan but the technology is clearly targeted at a global market. Same goes for almost all the Singapore startups we have come across so far. The product is in English so that it can go global from day one. If there is traction in any local-language markets like Indonesia, Vietnam, etc., localisation can happen later. We have come across several entrepreneurs based in Bali building apps meant for their home US or European markets. They were able to do so because English is widely spoken in Bali and hiring local talents to work in an English work environment is not a major challenge.

Finally, a word about government grants and subsidies. We do not think they are good solution for the long-term. It is a good quick-fix to draw attention to your city or country when you want to start getting the attention of tech entrepreneurs and venture capitalists. But, as most startups, especially the early-stage ones will inevitably fail, grants and subsidies are not good use of taxpayers money. Instead, we think a smart government should spend their tax money to create a great living and working environment for everyone, locals and foreigners alike. Then, stand back and let market forces pick the winners. Entrepreneurship by its definition involves taking financial risks in the hope of generating a profit. Taking handouts from government is risk-free and cannot rightly be called entrepreneurship.