Supplying risk capital and supporting the growth of startups -- that's the image many people have of VC firms. JAFCO has been investing in startups from early on, providing seed and early-phase funding, and also executing buyout investments. While the common perception leans towards venture investments, JAFCO actually has a 25-year history of buyout investments, dating back to 1998.
In buyout investments, in addition to traditional areas like business succession, there has been an increase in cases of venture buyouts (investing by buying out early-stage companies). AVILEN, specializing in the AI solutions business, is one such company, having gone public on the Tokyo Stock Exchange Growth Market on September 27, 2023. Having made its investment in January 2021, JAFCO leveraged its accumulated management support expertise, extensive network, and insights into cutting-edge technology services held by startups to provide diverse support to AVILEN.
To understand the specific impact of JAFCO's capital participation from the perspective of the startup's growth, we spoke with AVILEN Representative Director Kotaro Takahashi as well as JAFCO's representative from the Structured Investment Division, Yosuke Yanagidate.
【Profile】
Kotaro Takahashi, Representative Director and Data Scientist, AVILEN, Inc.
Kotaro Takahashi is a graduate of the University of Tokyo Graduate School. He engaged in research on instantaneous tsunami height prediction using machine learning. He is a standard committee member at the Financial Data Utilizing Association. Mr. Takahashi joined AVILEN as a founding member and became its representative director in 2021, steering management to deliver the latest technology to a wide audience. He is also actively involved in discussions on digital talent definition and development at the Japan Deep Learning Association. His book Fast Track Deep Learning G-Certificate Exam Question Collection has sold more than ten thousand copies.
Yusuke Yanagidate, Structured Investment Division, JAFCO Group Co., Ltd.
Yusuke Yanagidate joined JAFCO in 2020. Prior to JAFCO, he worked in France and other overseas locations for a financial advisory firm, focusing on cross-border investment support services, after working in the IPO department of a major audit firm. He is a certified public accountant.
Improving the world through data and algorithms
─ First of all, please tell us about how AVILEN was established.
Takahashi AVILEN is a company I co-founded with a group of acquaintances. While it was officially established in 2018, prior to that, we were operating the web media Statistics for All Humanity, publishing numerous educational articles centered around statistics.
Given that many of the co-founders had a background in AI research, we thought it would be good to delve into AI-related businesses. We believed AI held significant potential, but in 2018, the awareness of AI's possibilities was not as widespread as it is today. In Japan, where the working population will decrease by about 60% in the next 40 years and where labor productivity is low among developed countries, the technology of AI has the advantage of automating and streamlining various tasks as well as the added value of doing what humans cannot, so its use is extremely important.
On the other hand, few people understood or utilized it, and educational materials for learning were priced very high, ranging from 1 to 1.5 million yen at the time.
To change the world with AI, we have to increase the number of people who understand AI. Despite its potential for significant growth, both societal implementation and talent were lacking. Recognizing this as an opportunity, we founded AVILEN in 2018.
At that time, we reevaluated what we wanted to achieve, leading us to the conclusion that improving the world through data and algorithms was our goal. As everything becomes digitized, a plethora of data emerges. Our aim was to help realize a world in which we can automate and streamline various things, such as forecasting and decision making, based on data.
To achieve this, it's necessary to build internal systems for AI, train personnel, and develop AI-integrated software. However, there weren't many companies capable of handling all of that. Most companies were struggling with a shortage of talent and didn't know how to effectively utilize AI. Therefore, to address this challenge, we started offering digital organizational development services and AI technology implementation services to companies.
─ AI is now attracting much attention, led by the generative AI ChatGPT, but I don't think the level of interest was as high in 2018. Were there difficult times during the first five years of the company?
Takahashi Currently, we primarily engage in B2B and have increased dealings with major companies. However, in the early days, being a company launched by students, we faced a lack of credibility, making it difficult to establish transactions with major corporations. Therefore, we initially rolled out an educational business targeting consumers. The first few years were challenging, as we were also heavily involved in setting up the business.
Realizing long-term growth and vision required JAFCO's help
─ How did you first encounter JAFCO?
Takahashi Our company's vision of "bringing the latest technology to as many people as possible" is quite ambitious. To make this a reality, we believed it was crucial not only to gain trust as a company and continue to conduct PoC but also to carry out a number of valuable large-scale transformation projects.
While looking for partners who seemed capable of such initiatives, we had discussions with several companies, and that's when we met with JAFCO. At the time, we had a strong desire to grow more and be involved in larger projects.
Yanagidate The timing when we considered investing in AVILEN was about two years after its founding. It was still in its early stages of development. However, in terms of data science, we strongly felt the rise in societal demand and future potential. This field faces chronic challenges like difficulty in hiring people and high salaries, but AVILEN, being a company with strengths in training, securing, and supplying data scientists, accurately captured the zeitgeist. Despite being only two years since its founding, I felt that with strengthened business models and management foundations, AVILEN could achieve stable growth.
The industry experiences daily technological updates, but many members at AVILEN are regularly exposed to the latest research. With mechanisms in place for internal access to cutting-edge technology, we perceived the company's sustained growth potential. Despite being a startup founded not long ago, AVILEN was securing projects from large financial institutions ahead of major consulting firms and other competitors due to its ability to adapt to the latest technologies.
─ There must have been various options available. Why did you decide to accept investment from JAFCO?
Takahashi We felt that, as a partner, they were thinking about things by putting AVILEN in the front seat and that they would give us the support we needed to achieve our vision. We received IPO and M&A suggestions from JAFCO, allowing us to realistically envision these as possible considerations. While we were aware of IPO and M&A options, we didn't consider them very feasible.
However, through discussions with JAFCO, we understood that IPOs and M&A could be means to quickly realize our vision. By having JAFCO as a capital partner, we could increase the organization's size, raise funds, and gain trust. We came to believed that this would enable us to work towards achieving our vision with a greater sense of speed than before. Rather than just doing an IPO, we thought it would be better to run together with JAFCO for AVILEN's long-term growth, and that's why we welcomed their investment.
While we had opportunities to talk with other parties, it often seemed that we would only end up as the AI department of a company. In such a scenario, achieving our vision would be challenging. However, JAFCO assured us that they wouldn't compromise AVILEN's vision; instead, they would work together to accelerate the realization of our vision. We felt that JAFCO's approach was indispensable for AVILEN's growth. Initially, amidst various investors, I can't deny there was some uncertainty about decision-making, but after JAFCO's investment, we had no worries.
Yanagidate In my role as an investment manager, I have the opportunity to interact with many startups. During various discussions with different companies, what stood out about AVILEN was its particularly disciplined organization. Startups initiated by friends often tend to loosen up on an organizational level once the business starts running, causing various distortions in the business.
However, the rigorous attitude of AVILEN's management towards progressing straight toward the vision, even though it didn't necessarily manifest in traditional management skills such as expressed in KPIs, resulted in the creation of organizational discipline. I believe that this discipline is the fundamental reason for their high growth. Even if there are different ways of thinking and doing things, if it's necessary for achieving the vision, they are quick to make course corrections. I found their organization, such as it was, to be strong, and I wanted to support their growth.
Takahashi JAFCO has indeed provided tremendous support. In particular, their assistance in building the administrative structure and recruitment support was significant. Regarding the establishment of the administrative structure, it started with searching for CFO candidates and included hiring a management control director. In terms of organizational development, they provided a lot of advice not only for setting up the organization but also for creating and operating the operations. JAFCO has extensive knowledge in talent recruitment and organizational rule development, and we were greatly helped by this. Moreover, hiring members at the executive level is extremely challenging, but having JAFCO on board makes it easier in terms of the company's credibility. It was a tremendous source of support.
Promoting investment as an option for growth
─ AVILEN went public in September 2023. Looking back, what do you think was key?
Takahashi After meeting with JAFCO and being presented with an IPO option and roll up strategy involving continuous acquisitions, we felt that these approaches could bring us closer to realizing AVILEN's vision. In reality, there are many companies with data but which are struggling with effective utilization. We thought it would be interesting to acquire such companies through a roll up strategy, especially considering the societal need. Therefore, we deemed an IPO as something important, and with JAFCO's capital participation, we committed to firstly pursuing an IPO.
Yanagidate Regarding the IPO, a significant factor was the favorable market environment, indicating a strong societal demand. AVILEN's business domain has an expected long-term market expansion, and the constructive complementary relationships established with major companies like Otsuka Corporation likely contributed to the evaluation of future growth potential.
Given the nature of the industry dealing with cutting-edge technology, there are many young members on board. Still, AVILEN is fortunate to have experienced senior management members, maintaining a balance between growth and stability while capturing the momentum of market expansion.
Takahashi A capital partnership is an interesting option for accelerating the speed of growth and advancing to the next phase. Every startup reaches a point where decisions become crucial for further growth. I hope that forming partnerships as a choice for further growth becomes more widespread.
Functioning as a hub for strategic capital alliances between startups
─ Finally, please tell us about your future outlook.
Takahashi It's undeniable that utilizing AI and data will become commonplace. Taking action without a strategy leads to exhaustion, and businesses need to reevaluate their business models, work processes, and organizational structures fundamentally. The rapid pace of technological advancement leaves business leaders puzzled about which questions to address and what actions to take.
That's why AVILEN, as a partner that deeply understands technology and customers, aims to help business leaders with these questions. We want to significantly expand our efforts in that direction.
Additionally, we want to focus on M&As. Many companies possess data but are unable to fully leverage it. AVILEN aims to acquire such companies, infuse them with elements of AI and digital transformation, and drive change. We not only want to address the questions of major corporations but also engage in acquisitions and transformations. If we can achieve this, I believe we can indirectly deliver the benefits of technology to even more people.
Yanagidate Startups are characterized by utilizing specialized skills and new business models, leveraging agility that larger corporations may lack to create new markets. These characteristics of startups have been recognized by society, and I believe that the environment for raising funds in the private market is improving.
On the other hand, many startups face challenges in management skills to fully leverage these specialized skills and new business models. Entrepreneurs themselves may excel at starting from scratch or scaling, each having unique strengths. Therefore, I hope that JAFCO, with hands-on support, can play a role in bridging companies and businesses to appropriate leaders based on their phase of development.
Additionally, in terms of the startup industry as a whole, I believe that the excessive dispersion of players has led to an inefficient market structure, where many small players are competing, and originality and competitive advantages have become scarce. Despite starting businesses to launch new business models, everyone seems to end up doing the same thing, leading to a lack of uniqueness and intense competition for customers.
Excessive player dispersion also incurs unnecessary management costs, redirecting funds that should ideally be invested in growth initiatives into administrative costs, creating inefficiencies in the overall economy. That's why I believe that startups utilizing M&A for collaboration can share their strengths, enhance growth capabilities, and contribute to a more efficient economy.
JAFCO manages funds for both venture and buyout investments. With our theme of supporting companies to make a second start and carving out a future together, even startups can be recipients of business succession. In the future, we hope to function as a hub for strategic capital alliances among startups with the aim of furthering growth.
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Photography: Shunichi Oda
Design: Asuka Itsumi
Planning: Mai Tokui (JAFCO) / Akiko Komiya (PRAS)
