Episode 6 - Mitsuya Shimura, Founder and Managing Partner of M Capital

In Japan, nobody knows such one model at this point in the time of 2023, and in my case, fortunately, I was featured by Nikkei Newspaper, the largest financial paper in Japan. That article could increase my reliability, so promotion of the project is very important to think.

So the big question is this. How are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? How do acquisition entrepreneurs find businesses, find, buy them, and then create generational wealth while taking on less risk? Welcome to Surge Funded the Entrepreneurship through Acquisition podcast. Our guest today is Mitsuya Shimura. He's the founder and Managing director of M Capital. M Capital is actually the second traditional search fund ever in the country of Japan. So I'm really excited to have Mitsuya on the podcast and to learn more about how his experience has been so far blazing the trail for search funds in Japan. And I'm especially interested because I feel like Japan is a very interesting country for search funds given that it's such a large wealthy nation that's also aging rapidly. So the demographics there make it very exciting for succession. At the very least, I think a great place for us to start Mitsuya would be just to learn a bit more about how your experience has been so far searching in Japan and what motivated you to take that brave step to start one of the first search funds ever in the country of Japan.

Thank you Nick. I'm pleasure to come here. Actually, my family background gave me the idea. My grandfather was the entrepreneur and my father was the entrepreneur too. So they inspired me to be an entrepreneur. But in my case I didn't have any specific idea to start my own business. So such fund model can be a really good option for me because we can choose one existing company from many options. Also, at time of 2021 when I was fundraising, there was only one traditional type search fund in Japan. And at that time I noticed that, wow, this was so cool. If I studied search fund in Japan in 2021, now probably I could be one of the pioneers in this community. That sounds crazy, but this was my another motivation and I called my company M Capital. N is for Mitsuya, of course, and Madrid, because I studied in Madrid at IE Business school in Madrid.

I know IE has a really good program for search funds. Is that where you first learned about the concept or where did you come across the concept of a search fund?

Yeah, actually after I was admitted by the IE Business School, I talked with some alumni including IE or ESA or the Stanford, etc. They gave me the idea that's really interesting.

And I'd be curious to hear what your thoughts are on Japan as a place to do a search fund. On the one hand, it has huge aging population. There was an article in the New York Times recently about a business owner who couldn't even find someone to buy his business, so he sort of gave it away for free. Which on that side it looks like. Yeah, it's an area where there's a ton of potential for people who are looking to acquire businesses. On the other hand, I know a.

Lot of Asian countries have a business.

Culture of passing it down between the family, and it may be a bit hard to explain the search fund model to business owners there. So I was just curious what your thoughts are on Japan and if any macro factors made you decide that it was the right idea to launch a search fund there.

Yeah, as you said, in Japan, we have really, really serious business succession problem because there are 4 million companies in Japan, but the average age of the company owner is 60.2. It's barely aging and 50% of them don't have the successors who take over their company. So I believe the situation in Japan and the search fund model, as known as entrepreneurship through acquisition, can have a really good affinity. So that's a perfect place to start the search fund or launch a search fund.

Sure. No, it definitely seems like a place with huge potential. So I guess first of all, how did you convince investors when you were raising the fund that Japan was a place to do it? And I guess the second part of that question would be, what's the mix of your investors? Are any of them Japanese at all or are they all international? And if they are Japanese, how did you explain the concept to them?

Yeah, it's a very question actually. I have 18 investors. They could be the MBA professors or private equity or fund of such funds. In my case, half of them Japanese. So nine investors from Japan. And as you mentioned, basically nobody knows about sage fund models in Japan. So we Japanese sagists like me have to explain about the search fund model from the scratch to them and we have to educate them. It's a really difficult process, but it's a really fun process of the fundraising stage in Japan. I really love that.

Were there any common questions or concerns that the Japanese investors had when you explained it to them?

Yeah, it's very simple. It's the question is about what's the risk of the search fund for the investors or what's the return of the search fund investment. So probably the question itself can be very Similar to the other countries. But the model itself is very new. So we have to educate them or explain them. Explain about the model from the scratch?

Yeah, I mean then there's definitely a lot of good data to back up risk and return for surge funds. So I think of those are the main questions they have. It should be pretty straightforward. So in terms of the search itself, what has been the most difficult part for you so far? Whether it's, you know, reaching out to businesses, finding them. What. What have you found most challenging thus far?

In my case most difficult part of my sourcing phase is approaching to company owners because I believe Japanese owners have conservative mindset compared to the US and European owners. Basically me and my interns approach to the company's owners via email. Probably we approach 300 or 400 owners per month, but the response rate is very low. And another problem here is There are over 3000m and a related players such as M and A, boutiques, financial advisors, etc. So the market here is super competitive. Yes, we are the only one active traditional search fund in Japan, but we have many competitors to find the excellent company or build the relationship with business owner. That can be another challenge for me.

Sure. In terms of searching for the businesses here in the US we have databases to scroll through and then that helps with the proprietary outreach a lot. I was wondering if there's anything like that in Japan or how do you source your deals there? How do you find businesses? Is there a culture of brokers? How do you look for businesses in Japan?

Yes, we have the database to see the very basic information such as revenue or operation income or shareholders, et cetera. So it's quite similar to the US So basically we rely on and utilize this database to find excellent companies. Yeah, actually my strategy is contact Business Owners Directory. It's called probably proprietary search. Is it correct? Yeah, that's right. So I'm not asking M and Diabetics, but basically our main resource is direct source. Great.

And how have those conversations gone so far? I know you mentioned that it's a conservative culture, but have any of the business owners been receptive? What have been their questions when you talk to them, how's that gone?

Yeah, it's a very interesting question actually 99% of the business owners for them such one model is very brand new concept. They don't understand it and they ignore our emails or reject our email. But see, only 1% of the business owners in Japan can have a very strong curiosity toward our project. And yes, those people can be our target.

Sure. I mean the 1% response rate's pretty standard anywhere I would guess so it's, it's very conservative.

But yeah, I had to close more.

Sure, yeah, but that's great. And do you have any industry thesis there? Are there any particular industries in Japan that you think they're most attractive or. I guess first of all, going into the search, did you have an industry thesis and has that changed at all since you started searching?

In my case, I focus on the software and the healthcare industry in Japan because it's growing as well as many international sludges. We focus on very basic search fund criteria such as growing industries or recurring revenue or a minimum 1 million EBITDA or high EBITDA margin, etc. As I mentioned, I believe software and healthcare industry in Japan have room and potential to grow in coming years. So of course they are my target.

Sure. Yeah, I can imagine that healthcare in Japan could definitely get its idea.

So yeah, it can be any good opportunity.

Yeah, absolutely. So has there been anything that has surprised you since you started your search? I assume there are always surprises. But what was most surprising that you didn't anticipate to surprise you?

Okay. For me the most surprising part of my search fun journey is many company owners in Japan feel loneliness. Of course they have many employees, customers, partners to talk about general topic, but they have. I noticed that they have nobody to talk about very important topics such as the future strategy of the company or the direction of the company or they don't have anybody to talk about very important decision. So basically they feel loneliness. And I believe such an entrepreneur like me can be somebody to hear their story or here their loneliness.

Totally. Yeah, I can definitely see that. It's always lonely at the top, I suppose. But based on the New York Times article I read, a lot of these businesses are outside of a large city. It can be even lonelier for these owners. I was wondering, are you only looking at Tokyo itself or are you open to moving to other parts of Japan to take over business?

Yeah, actually, yeah, I don't have any specific idea to live in, so I'm open to Europe and I'm Japan.

And have you talked to businesses in other parts or have they mostly been around Tokyo?

Actually if I focus on the. For example, over 1 million the beta company, probably half of the company are in Tokyo in my case. So I visit the owners in Tokyo most frequently.

Yeah, suppose that makes things a little bit easier. Tokyo is such a huge city and.

Yes, exactly.

There's a lot there. And what were you doing prior to the MBA and cers. What was your previous background and how did that relate to what you ended up doing now?

Yeah, actually I worked for the best chemical company in Japan and I don't have any experience in M and A market before this career, but my previous career was the sales and the new business development position at a large chemical company in Japan. So personally I love to discuss potential of the new business. So I love to visit the owner and discuss what kind of future business can be achievable. I believe this is the most fun part of sourcing phase of my search fund journey. Knock the door of the business owners and talk about the new business and talk about the potential and it's very fun.

Yeah, I think a sales background is actually very relevant to search, particularly the.

Searching phase of the search fund journey.

But it's always very relevant for entrepreneurship.

And I totally hear you on the.

Fun of talking to business owners and learning more about their backgrounds and their problems they're solving for. I have a bit of a sales background myself and that was probably the most fun part of the job, I guess, wrapping up.

I would like to know if you.

Have any advice for people who may.

Be interested in launching a search fund in Japan.

You've raised the fund, you've had various successes reaching out to businesses and reaching the LOI stage there. So I'd love to learn more about what advice you may have for someone.

Who would like to follow your journey.

And launch their own search fund in Japan.

Okay. In Japan, yes. I have two advice. My first advice is to find good local investors in Japan. We have very unique SME M on the market. Maybe you don't have any experience for network like me. So in such a case your investors can be your REBA guide and they can give you some advice or introduce somebody to help you. So local investors, Japanese investors are very important and my second advice is to promote yourself. As I mentioned before, in Japan nobody knows such one model at this point in the time of 2023 in my case, fortunately I was featured by Nikkei newspaper, the largest financial paper in Japan. That article could increase my reliability. So promotion of the project is very important thing. So this can be my another advice.

Wow, that's excellent advice. I mean Nikkei is a huge paper, is known across the world. So it's really amazing that you got in there. And I think that is great advice for anyone who's launching a search in a country. More search may be new, whether it's Japan or another part of the world that is still a new place. Get media mentions that asset credibility. In terms of the investors, did they help you in your search at all? Understand that they were not familiar with the search fund model previously, but did they have any business relationships in Japan or any other ways?

Especially Network is a very good resource gave by them. So, for example, if we talk about the future strategy of the company, our investor can introduce somebody to help the project or. Yeah, such kind of thing can happen. So, yeah, that's why I'm saying finding good local investor can be a very good thing for launching your search.

Sure. Yeah. Well, yeah. Thank you so much, Mitsuya. This was extremely interesting. I'm very happy for you that you found a business and it's so amazing that you took the step to launch the second search ever in Japan, which is really exciting and I think there's huge future potential for search funds there in Japan. I mean, it's very large country, actually aging population, but still quite wealthy country. So there is a ton of potential there, I believe, and the demographics make sense. So I'm sure there'll be a lot more searches going forward. But Mitsuya Shimura, blazing the trail there in Japan for Surge Fund and really appreciate you being on the podcast.

Yeah. Thank you very much for your time, Nick. I really enjoyed the podcast and thank you very much.