Tim Romero is a Tokyo-based innovator, author, and entrepreneur. He’s started several companies since coming to Japan more than 20 years ago — and he’s deeply involved in Japan’s startup community as an investor, founder and mentor. He is the author of the widely-read blog DisruptingJapan.com – and earlier this year he founded, then shuttered, a legal startup in Japan called Contract Beast. I recently sat down for a discussion with Romero about Japan’s startup ecosystem – and in particular – about the prospects for legal startups in Japan.
What happened with ContractBeast?
“I shut it down. I actually wrote an article about it that went viral in a way I never expected. But fundamentally it was contract lifecycle management for small to medium businesses. It was a complete lifecycle but it focused mainly on the administration, a very strong templating engine, permissions, archiving. The data model used Microsoft Word documents as its center.
We did extremely well with beta testing. Our beta testers really loved us but I noticed that there wasn’t enough actual use. They would use it for one contract. They weren’t adopting it for very much and the fundamental problem was that the benefits that contract management provides, and ContractBeast, in particular, provided, was something that would accrue over months or even years.
The real benefits come when something comes up for renewal or when staff leaves and work needs to be reassigned. But for the work you have to do today, right now, there wasn’t that much of a benefit. Some contracts, you might save a few minutes. Some would take a few minutes longer to produce.
So if you’re selling to the boss, that’s not a problem because executives or managers of any kind are used to thinking long-term. “If this was going to save us money in the next year, great, we’ll use it.” That’s the standard. But individuals don’t make that choice. We’re horrible at it. It’s the same way everyone knows they need to eat better and exercise more but they don’t do it. Everyone knows they need to save more now to be financially secure later but they don’t do it.
At the bottom of a SaaS product, they’re applying the same logic. “Yeah, this would be really good long-term but it’s not helping me today.” I could not engineer that to fix it. I actually had funding and I had a team that was ready to quit their job to commit but I pulled the plug about a week, two weeks before people were supposed to start wiring money and individuals were going to quit their jobs. I’ll send you a link to the article. It lays it out better than I can.”
Sure. I think I saw an article you’d written on LinkedIn that you turned down a half a million in funding… Is that the article?
Yeah, that’s the article.
[Editors note: The article mentioned is entitled: Why I turned down $500K, Pissed off my investors, and Shut down my startup, which became an editor’s pick on LinkedIn Pulse when it was published June 10, 2016.]
Do you see a market in Japan for some type of legal forms or perhaps it might be more accurate to say a technology-driven legal solution for businesses in Japan?
“I think so. We were talking about it before and I think that the business-facing legal tech market breaks into three segments. There is, let’s call it Yelp for lawyers. The portal will recommend a lawyer. There is template sales, which is like Rocket Law, Dragon Law, where they have thousands and thousands of legal templates that are suited for specific jurisdictions. And then there is the actual contract management.
Contract management is actually a huge industry, in and of itself. It’s about 7.4 billion globally but it’s almost entirely on the enterprise market. There’s very little on the low-end, for the reasons I just described, actually.
There are a lot of startups that are doing, for example, mark-up. There are hundreds of digital signature companies but those aren’t an integrated solution.
The template sales model, it depends on how it’s executed. I think the intrinsic value of legal templates is very low, especially for things that are fairly standardized, like an employment contract, an NDA, reseller agreements, things like this that are customized for each client but the customizations don’t add a whole lot of value. Every attorney has got his own preferred NDA in his briefcase but they’re really not that different.
I think long-term, the value of the templates is low and getting lower. Those businesses can be viable businesses if they’re framed as the templates being just a lead, a loss-leader to get them. Most businessmen are like, “Okay, we have 6,000 templates. That doesn’t help me because I don’t know which two of those 6,000 I need.” If the business model was based on, “Okay, now that we’ve got this, now we can help you out and you can pay for it,” that’s valid.
And the Yelp for lawyers model works well in many countries but it won’t work in Japan.”
Why Japan, in particular?
“Well, in Japan it’s illegal to… Only lawyers can charge referral fees. Only lawyers can charge commission on work given to other lawyers. There’s no way to make money on it legally unless you are already a law firm. A law firm might be able to do that.
In Japan, there’s a company called Bengo4.com that is doing that. They’ve done something with the structure so that one of the two companies in the holding company is a law firm, so that’s how they get around it. But it would be very hard for a startup to address that market here.”
Would you say the avenue to legal forms in Japan isn’t possible from a regulatory standpoint? I think you’re also saying it doesn’t look like it’s even an appealing market, full stop.
“I think the only way to do it is to be a law firm executing that strategy internally but even then it becomes this questionable legal matter of, even if this is a successful business, how do you spin it out of the law firm to this new company that’s no longer a law firm that’s going to want to sell shares and IPO and you don’t want those restrictions.
From a purely market standpoint, I think it would be very good but you’d have to do a lot of work to figure out how to work within the laws that govern referral fees to attorneys.”
You mentioned a Yelp for lawyers. There is a company in Australia called LegalVision that does something very similar to what you described Bengo4.com is doing and they, essentially, produce online content that is aimed at attracting the consumer legal market, small businesses, individuals. And what they do is they attract those customers and then they funnel the work that is inbound via their very impressive blog, essentially, with social media channels, and then they send it back to small law firms who need the work. Do you see that as a possible market?
“It’s not something I investigated in depth but if that model was based on charging the lawyers a percentage of the work they get, it would not be legal in Japan. If the model was based on, you can charge subscription fees to the lawyers, you can charge advertising fees…
In fact, the original business model for contract fees was the contract management was just kind of a platform and the real value was going to be funneling work to the lawyers. I almost went down that road until I realized the legal hurdles I’d be up against and changed the business model.
It could be done but you’d have to change the model a lot from the way it works in the States and the way it works here. So you could charge membership fees, you could charge advertising fees to have the lawyers ranked in different orders but you couldn’t charge a fee that was calculated based on the amount of work that you sent them, in any way.
It’d be challenging but the market is here. Particularly, I think, we’ve been taking more on the business-facing law. In the consumer-facing law, there’s a huge opportunity here. In America, there’s Nolo law. Business contracts, they do tend to be more customized than wills and things like that, where you’ve got a big chunk of boilerplate.
You wouldn’t run up into those problems here in Japan because you’d print it out and the idea would be like, “Okay, now need to take it to a lawyer, just to make sure.” That wouldn’t be a big enough percentage of the revenue that you’d need to worry about and then you could just charge the attorneys fee-based membership or something like that.
I think it’d be easier, the consumer side, but I don’t know what the competitive landscape is here. There might be other companies doing it.”
Now, you’re very well known as a podcaster and a blogger with Disrupting Japan. What’s your background in the startup arena in general and then in Japan, in particular, and, as a tangential question to that, what do you see as unique about the Japanese startup world?
“My own background, I started four companies in Japan. ContractBeast would have been my fifth. They’ve all been B2B in software. So, ecommerce, a customs clearing system, an inventory management system and one that was document analysis and classification. Sold two, bankrupted two.
I guess I find myself in the middle of the entrepreneurial, the startup scene here in Japan just by nature of being here for so long. I’ve been doing it since the start of my first company eighteen years ago here.
I think Japan… It is different this time. Around 2000, during the internet bubble, there was a lot of startup activity as well but it was different. At that point, there was a huge amount of money flowing in but it was only flowing into a handful of companies. Now the amount of money might actually be a little less, coming in, but it’s being spread out between hundreds and hundreds of companies.
There are also these small startups. Now there’s enough of them that they can form an actual ecosystem. People are selling to each other. Larger companies are much more willing to work with startups now than they were before and I think a lot of that has to do with… One, is the business environment.
The Japanese firms know they need to learn how to innovate. They used to be great at it and they’ve lost it but I think, more importantly, Prime Minister Abe has been really outspoken about the importance of startups, how it’s part of Japan’s future and he’s legitimized it. After that, a lot of companies were saying, “Okay, well we need to figure out how to have an open innovation program.” It’s still just baby steps now. It’s still really early but it’s happening. Things are moving.
I think if you look at some things like Sharp failing and being sold to a Chinese company and, just universally, in Japan it’s kind of understood that, yeah, they could not innovate. They relied on their internal R&D that produced just terrible products. They had a few good products in displays and things but they just rode those until they became obsolete.
In business circles, Sharp’s failure is widely understood to be a lack of ability to innovate and so companies were looking inside and saying, “Yeah, we’ve got a similar problem.” It’s exciting right now in Japan. It’s just moving slower than I’d like it to be.”
Where is it going to be ten years from now, twenty years from now?
I think it’s not going to be anything like the US, unfortunately. I think one of the keys is Corporate M&A. This is going to do a couple of things. One is it’s really the only way these firms are going to be able to innovate. US and European firms have this down to a science. They just view acquisition as a supplement to their own R&D, their own product development. In fact, a lot of companies, for all intents and purposes, don’t really have internal product development. They just rely exclusively on M&A. That’s just not done in Japan. M&A has traditionally been done for distressed assets. If you bought a company it was because it couldn’t survive on its own. That attitude is changing a bit. A lot of the newer companies, those that IPOed after 2000, are very inquisitive. The reason M&A is important is not only because it gives larger companies a source of innovation, but it gives startup investors an exit. To have to rely on an IPO is just too risky, too difficult. But with M&As, there’s a possible exit, the exits are more frequent, there’ll be a market for them, which means that the prices will go up, investor returns will go up, there will be more startups. That’s really what needs to happen.
What might be partial fuel for that is foreign firms are beginning to acquire Japanese startups and some of the Japanese firms are actually acquiring foreign startups as well. It’s starting to happen.
I’ve worked with a lot of firms on their open innovation projects and the really traditional companies like, Toyota has a great open innovation project, Panasonic has one, but I cannot see them ever, certainly not within a generation or two and I mean a huge generation, not a technological one, being like the American style of M&A, where it’s like, “We need to get into this sector. Here are the three leading companies. Buy whichever one makes sense,” and that deal is done in five months. I just don’t see that happening.
But what it might evolve into, and what I’m seeing seeds of here, is Japanese firms value the relationship, perhaps a bit too much at times, where large firms will do strategic investment early on and stay very involved and they will not be hyper-growth companies, but they will help them maybe sell through their channels, they’ll work with them. Everyone sort of knows everyone and if an M&A happens, then great. The integration will be simple.
I know a lot of Japanese firms are playing with that idea. There are a lot of consulting firms that are working with them to see if they can set that up. I could see that being the model for M&A here.”
One very prominent Japanese startup that’s getting quite a lot of attention in the United States is Gengo.com. Is their story unique, in that it appears as if they went to Silicon Valley and got their funding there and then went back to Japan?
“I don’t know if they were unique but they were certainly one of the first to do it. Gengo is a company that could have been formed anywhere in the world, quite honestly, but they just happened to be in Japan. Actually, no, I take that back. They probably couldn’t have been formed in San Francisco. But it could have been formed anywhere in the non-English speaking world, where there’s a built-in need for translation.
Matt went to the US because he had to. He couldn’t get… Investors just weren’t interested in it. But that was in, what, 2008, maybe? It was before things had really ramped up and he didn’t have investor connections here or any of the things he needed to normally get the investment so he went to the US, pitched a bunch of VCs and the idea was plausible enough and he and his partners seemed like confident enough people to give it a try, that he got seed funding from 500 startups and a few others and he just came back to Japan and grew his business. They’ve executed well.
I think a lot of companies like that have gone to the US to get funding but the trend now is there’s enough seed funding in Japan. If that happened today, I don’t think he would go to the US. It’s available in Japan today. What we’re seeing now is there are a lot of companies, they’ll get their seed in Japan and then, after they get to, say, a Series B, they’ll move to San Francisco to try to expand and raise more money and grow.”
What’s next for you?
“That’s a good question. I really don’t know. After I shut ContractBeast down, I needed time to decompress.”
Would you consider the legal space again? Do you think it’s that attractive?
“I do. I think someone’s going to make a lot of money on it, but it’s not going to be… Well, it may be me, but it’s not going to be me with ContractBeast. I think that the space is interesting and I’ve actually, after I published that article, I had representatives and sometimes the CEO of several legal tech companies contact me and say, “Let’s talk. We’d love to have you come on as a Project Manager” or something. That doesn’t really interest me.
I don’t know. I’m working now on a consulting basis with a company that works with large Japanese firms on their open innovation projects. We’ve got something with Panasonic ramping up I think next week. In the past I’ve done work with Toyota. It’s exciting but I haven’t really decided what I want to do long-term.”
What advice would you give a young person starting out, maybe who’s in college or maybe who just recently graduated, who has an entrepreneurial zeal — about what they should do to perhaps found their own startup or maybe work for a startup?
“There’s so much standard advice on that and I’m going to try to avoid all of the stuff that your listeners have heard from a hundred other sources. I’m going to contradict one of the pieces of advice that everyone hears and thinks it’s the worst possible thing to tell a young person who wants to run his own company.
Don’t follow your passion. Or, at least, not necessarily.
I’ve been running or involved with startups my whole career and I’ve seen this progression. People will interview successful founders or successful businessmen. And they’ll always go, “It’s my passion,” “It’s my drive…”
It seems like another life now, but I used to be a professional musician. I was passionate about it. Most of the people around me were extremely passionate about it and most failed. Passion does not equal success. The media doesn’t pay attention to all of the passionate people who didn’t make it.
I think the relationship is actually the inverse. As you start becoming successful, you start becoming passionate about what you’re doing. As you start understanding that what you have created or what you’re doing in daily life matters to people and is improving their life in some way, you become passionate about doing better at it.
Passion doesn’t lead to success, success leads to passion. So I say, focus on adding value. Find a genuine problem that you’re solving. Find something that actually makes someone’s life a little bit better in some way and then work on that. Listen. Find out which people… Listen to the people who are using it and how are they are using it. It’s probably not the way you thought it would be but follow that. As you add value, you’ll become passionate and more likely to succeed. I’d say focus on adding value.”
That’s great advice. Thank you very much for taking the time to speak with me.
“Delighted to be here.”