Hiroshi Mikitani at Startup School 2012

Thank you for coming. Thank you very much for inviting so many people. There's a lot of people, so maybe to start, you could just tell us a little bit about what Rakuten is and how you got started.

Okay, so I founded it in Japan in 1997, as a matter of fact. You know, I was trying to partner with one of you to found a program, and you know my concept was to recreate what we call an internet shopping mall or in Japan. It was very, very early days, and we tried to do a lot for the viruses, but it didn't go through. So we started to hire young graduate school students, starting from initial capital of 200,000 USD. Never raised any money from any VC, just hired young guys and went public in 2000 and started to, you know, buy many companies.

Now we are number one in e-commerce, about 35 to 40 percent market share in terms of e-commerce. Number one in travel, number one in online banking, number two in online brokerage, and we do about 38 different businesses in Japan. We sell to globalize our business, so now we are in more than 13 countries. We bought the second largest ebook company called Kobo, which is doing extremely well in Europe, in Canada, and in Asia. So we are a little bit different internet company in Japan, and now trying to globalize our business.

How is starting the company in Japan and growing a company in Japan different than Silicon Valley?

Well, you know, there is no really, you know, venture capital ecosystem. No, there are venture capitals, but not like, you know, body-type sort of food service VCs. They will invest, but not much; they will not get involved in the management that much. So they just kind of provide the capital.

So how did you learn the lessons that VCs in Silicon Valley traditionally help entrepreneurs? How did you learn how to run a company and grow it?

I don't know how she invited me. She's helping VC venture companies because I have never experienced that. But the way, again, I founded Rakuten with my own, you know, the money. Initial capital was just 200,000 USD, but since I knew that I was not going to be funded a huge amount from VCs, I created a sort of cash flow system so that I didn't need to rely on VCs.

We asked our merchants to pay 500 dollars per month, but we asked them to pay us six months upfront. So from the second month of our service, my company was cash flow positive.

Yes, very impressive. Is there any looking back to that first year, you know, when you were sort of becoming cash flow positive very quickly and figuring this out as you went? Are there any things that stick out that you would do differently?

Well, so again, we never raised any money from outside. We raised later on from friends and family. We didn't need any money, but this was kind of just a, you know, for the friendship's sake, which I wanted to make my family and my friends happy.

But how far along were you when you did that friends and family round?

No, that was like six months before we went public. Yeah, two days before our IPO, my friend Masayoshi Son from SoftBank called me and asked me to let him in, but I said it's too late.

Well, we were very patient. To be honest, we were very patient for the first three years and tried to create the, you know, kernel of our business model. So we were not trying to copy the business model of amazon.com or eBay; we were trying to create a great system to support medium to small-sized merchants to sell their products all over Japan. So we tried to create an extremely strong culture of the company because I knew that I was going to be in this business for a long, long time. So we didn't rush; we were very patient.

Did you figure out that kernel on the first try or did you get it right? The thing that made Rakuten what it is?

The first strategy was to iterate and evolve to get it. One thing we did differently from most of the US-based e-commerce companies is we tried to facilitate the communication between the merchants and consumers because the way I feel is, of course, in buying products, price is important, efficiency is important, but more than that, in my opinion, the buying thing, you know, should be fun, and we need to create a very rich experience.

So we tried to be a liaison between the consumer and the retailer. Instead of, you know, trying to compete against the retailer using the ID, we want to use our technology to help small to medium-sized enterprises do business with consumers. So that was a totally different idea, and I was 100% confident my employees would really like the idea of helping small to medium-sized companies rather than trying to destroy their business.

So, I mean, as you said, this is very different than anyone else was doing in e-commerce at the time; it really still is. Did you know that that was going to be the model you were going to pursue before you started the company? Were you convinced that this was what you were going to do differently?

We didn't think about how we're going to do it differently, but we knew what we wanted to do. I always don't think about our competitors that much because, you know, you cannot do too many things about that, right? You just need to focus on what you do to improve your, you know, service and improve customer satisfaction. I think that's part of the nature of Japanese companies—keep improving, improving, improving.

How did you grow both in the early days when you were signing up these small and medium businesses that you wanted to help, and then in the later days? Obviously, you made a lot of acquisitions to help drive growth. Could you just talk about how you figured out growth all along the way?

Well, of course, we have organic growth, and we buy many companies domestically and internationally. Domestically, we created three things: one, a great brand. By the way, we have a professional baseball team called the Eagles, and so everybody knows the Rakuten brand even if you don't use the internet. They know the Rakuten brand. We host a TV tennis tournament, so we have an extremely strong brand.

Two, we created the strongest mileage reward program called Super Points, so we can use those points to cross-sell our service.

Three, we also created a sort of consumer database to analyze consumer data, and now about 880 million, so about 90 percent of internet populations are our members. We can use our currency, our points, to cross-sell various services to them.

Back to the topic of acquisitions, what do you look for when you make an acquisition, and how do you integrate the company into Rakuten so that you're all one company together?

Also, there are two types of acquisitions we make. One is pure geographic expansion to buy a time, so we bought Buy.com in the US and Play.com in France, and really tried to use their presence and brand name and the presence to convert their business model to Rakuten's model.

The second type is addition to our ecosystem, a very chain, like Kobo, which is not doing as well as in other countries, but they are very strong. They have more market share in Canada and in France and in Japan. So we knew that we needed a digital book service in our sort of product lineup, and we know that we can use our membership to facilitate the growth of Kobo's business.

So, there are two types: geographic expansion to buy a time and also addition to our ecosystem. And then once you make these acquisitions, how do you integrate them into the culture of Rakuten, mission practice, and values?

So before buying a company, we talk about our dream and goal and our culture and talk over and over and over again before we make our acquisitions. If they don't like our culture or our practice or mission, we are not going to buy, even if we like that service because it doesn't make sense to lose the founders and management of your company. So we talked over before the closure of the deal; we talked a lot about those kinds of things.

And what's your success rate for acquisitions in terms of good integration on those points?

Oh, difficult question. I don't know, but they're still on their work. One, you know, only one failure we made was we went into China partnering with Baidu, which is the largest search engine company in China, but it didn't work out well. So we discussed with them and agreed that we should shut the business down, and we withdrew from China a year ago. So that is the only, you know, big failure. I recognize at this moment.

Even more than the sort of the three cultures I'll use you've talked about, you know, one thing that I just heard again and again is that Rakuten is known for having a great culture. Could you talk about how you've held that culture all the way through for the last 15 years, as you said? How do you think about the culture the company needs to have to be successful?

So, in my opinion, you need to have two things. One is, of course, innovation, and the second part is operation. The innovation is kind of not so difficult to encourage people to be innovative, but at the same time, if you want to scale your business, you need to have a strong operation culture as well. And you wanted to achieve a strong operation culture; you need to have sort of, you know, the shared practices and the, you know, it's kind of a framework for managing the company, probably mainly using more numbers and KPIs.

But most likely, entrepreneurs don't like, you know, just running in the numbers, but I think being, you know, quantitative and analytical and qualitative is also very important.

So recently, you invested in Pinterest. Could you talk a little bit about how that came together and what you see in Pinterest and how you hope the relationship is going to evolve?

Well, I think Pinterest, of course, been spoken. I just had a phone call with him, and I think he's great. He's great. We like the company, and I think Pinterest is very different from other social networks. It's very, you know, graphical and appeals to the heart of your interest. It has a strong influence over buying behavior and buying decisions of the people. So as an e-commerce company, I think Pinterest is the best social network.

So we found Pinterest, and I had a meeting with Ben; had a drink, and Cara was okay. He liked me; he led us in. I think maybe he has seen something different in us, you know, compared with other US-based internet companies or VCs.

I will ask him, what do you see as the big challenges and the opportunities in retail and e-commerce coming down over the next few years?

Of course, you know, I think this is the stage stage one for e-commerce. Now we are seeing a lot of these content sales, so the books, CDs, DVDs, and games, everything will be digital and online. Definitely, the logistics will become more and more important, and there are lots of innovative logistics companies using, you know, robots and automation to improve the efficiency.

Also, the devices, the mobile phones, smartphones, and tablets will become the major devices to deliver products. Maybe there will be a certain social—I think the social shopping is still nobody. We'll find the strong answer to it, but I think individually will come for social shopping or anything else.

Are there other major ways you've identified that the Japanese consumers behave differently than consumers anywhere else in the world?

Well, Rakuten is what I call a very shop-centric marketplace, meaning that every shop has a very different, you know, character and also the design and user experience. We provided all sorts of tools for them to create fans around shops. So I think Rakuten was very social from day one. We try to create fans around shops, not around Rakuten's OCAP, but the fans around shops.

And all these shops have, you know, professional staff, and they are the sort of curators of the wines, or sports goods, or groceries, and so forth. So I think my question is, if you want to buy some product, do you want to ask your friend, or do you want to ask the staff at a pro shop?

Of course, sometimes your friend can give you better advice than the staff at the pro shop, but most of the time, you know, I think we usually ask professionals. So that was our approach, and I think it worked extremely well in Japan, and now we're testing in other countries, and I think it's working very well as well.

And can you talk a little bit? You talked a little bit about mobile and tablets, but obviously in Japan, that's become a huge way that people are, you know, probably even bigger than here, where it seems like our own right on the phone all the time. How much are you thinking about mobile, and how are you thinking about mobile as sort of the future of the company?

Well, already 25% of Rakuten's transactions, which is big. We do about 15 billion USD or even more this year just for pure e-commerce in Japan, and already 25 percent of transactions are coming from mobile devices, including feature phone and smartphone—maybe 60% for smartphones and 40% for feature phones. Smartphone transactions are growing about 300 to 400 percent year-on-year, so it will be more than 50 percent within a couple of years. It's huge.

You said something earlier that was so interesting to me; I made a note to go back to it, which is that you don't think a lot about competition because you can't do much about that. One thing that I find startups all the time is fear about competition. So when you were starting the company, and Amazon and eBay were huge, was that a problem for you? Do people ask you, "What are you going to do about eBay? How are you going to beat them? How can you compete with them?"

How did you stay focused on doing your own thing and ignoring competition?

Well, let me put it this way: I learn from competitors, but I'm not afraid of competitors because even if you're afraid of it, it doesn't do any good for you. So I learned what they're doing, and then maybe, you know, try to match if I have to, but I think the way we approach e-commerce is totally different from amazon.com.

Because again, we are trying to facilitate the transaction with medium to small merchants to the larger ones to the consumers. As a consequence, you know, we have big brands—almost all department stores and big fashion brands; almost entire photonic companies are using our platform. But that is the major portion of our business, but our approach is to help small to medium-sized merchants to do business with the consumers.

So, let's see, I think we have a philosophical difference between ourselves and amazon.com, so I'm not very afraid of them, but I'm always thinking about how we can scale our business.

How would you know, by the way, five?

Let's see, what's most interesting is here. We were talking a little bit backstage about just sort of Japanese culture and the differences between starting a startup here. We talked about investing; could you talk about hiring and how you hired the initial people, especially in a culture where joining a startup is not as cool as it was maybe now as it is in the Valley?

Well, now, of course, it's different from fifteen years ago when I started a company; you know, nobody wanted to work for small startups. But now they have seen many successes, and there are so many young people who want to work for, you know, startups and ventures and so forth.

I think the way I am in hiring is younger people and not to hire the upper-aged people as much as possible because I knew that we wanted to impress our original corporate culture. So that was very important for me to hire younger people and educate them. Especially nowadays, after we went public, we started to hire many more. We got great, great people, and, you know, we need that. We have more professional expertise.

And two and a half years ago, we announced that we are going to convert our internal communication language from Japanese to English, and this was a big splash in Japanese society. Some CEOs, you know, explicitly announced that we are a crazy company, as well as we are. But now 70% of new engineers joining are Japanese, and 30% of new employees are non-Japanese.

So we have had to decolonize our, you know, recruitment. Mark Zuckerberg, a few years ago, made a comment about hiring young people preferentially, and it was all that the press talked about for two weeks. So maybe you'll be featured a lot now, talking on that.

Why did you make that decision to make English the official language of the company?

Well, so the thing I have done in Japan is we try to create an open culture company, so we discuss almost all information to entire employees. So the people who are doing e-commerce know what's going on in our banking business, and we cost-share all these expertise and platforms as possible.

You know, web marketing, engineering, and so forth and so forth, so that was our strength.

How common is that for Japanese companies to do, to share everything openly?

Well, sharing the code and opening up is very common, and we call this "Yoko ten," meaning a horizontal particle, you know, a transfer of expertise. I think that is one of the strengths of Japanese companies because, you know, it's not good or bad. It's not a performance-oriented, devious system, and I wanted to do this globally. But I couldn't because most of the expertise is in Japan, and most of our staff cannot communicate in English.

So, you know, I was kind of a liaison between our global business and Japanese business, and I was getting really tired just, you know, talking and being translating everything. And so one day I woke up and, you know, thought about everything in English.

And so I stood in front of the entire service employees and told them, "I am going to convert the official business language of Rakuten from Japanese to English." Almost the reaction in that room was very quiet—very quiet.

But it has totally changed. The TOEIC scores of our employees improved almost 200 points over the last two years.

What score, sir?

I said, "I got an English test", you know, and most of the staff can manage to communicate in English. They are not afraid of, you know, going abroad or joining international conferences. Now we have so many people, you know, Japanese and foreigners in their Tokyo office, and now they started to benchmark international failures instead of domestic players.

So I thought I changed— that's great.

One last question. We were talking backstage, and the last time that Paul and Miki met was 16 or 17 years ago when Paul was working on Viaweb. So, Paul loves to ask people at these—what was someone like the first time you met them?

So finally, we get to ask what Paul Graham is like! So, it's in the Harvard Business School case. So, initially, when after I left my bank, I started a sort of a, you know, business consulting firm, and I was looking for something new to do. And, you know, came up with the internet shopping idea.

One of my classmates at Harvard Business School called me and said, "Miki, you need to look at this company. It's called Viaweb, and it's my friend's company." So I went to Viaweb.com and looked at it, and the next day I put an economy class airplane ticket and flew over to Boston. I visited Paul, and it was a five-person company. We kind of agreed that we're going to do things together, but at the last minute, you know, Paul was supposed to come over to Japan, but at the airport, he found out his passport was expired, and that's why he couldn't come.

And somehow the deal didn't go through, so I feel that was really the first moment I met a truly strong entrepreneur, and I felt the excitement and energy important in his team.

That was great! Thank you very much. Thank you.