Meet Teppei Tsutsui, Managing Partner at GFR Fund

GFR Fund works with strategic partners in Asia, and is an affiliate of mobile gaming company GREE

Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed! While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.

But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?

We're highlighting key members of the community to find out.

Teppei Tsutsui is a Managing Partner at GFR Fund.

Tsutsui has led several key investments and acquisitions in Tokyo, including GREE's acquisitions of OpenFeint and Funzio. He is currently leading GFR Fund in San Francisco.

Prior to working for GREE, Tsutsui was key to advising M&A strategy at Morgan Stanley, where his strength in the Asian market and as an investor grew. He also worked in Japan in business development at Mitsubishi Corporation. He earned a bachelor’s degree in Law from Hitotsubashi University and MBA from the University of Chicago.

VatorNews: What is your investment philosophy or methodology?

Teppei Tsutsui: We’re going to invest in emerging technology which disrupts the digital and entertainment space. We love to work with founders who understand the market, who are ahead of the social trends and who try to create new user experiences by combining existing technologies.

One example I can mention is Discord, a communication tool for gamers. If you think about communication tools, that’s pretty tech much old technology, dating back to Skype, but the founder of the company tailors it to the eSports audience, which was pretty new at that time. Now Discord is one of the biggest eSports companies in the world. So, we are looking for those kinds of new trends and combining them with existing technologies.

VN: What are your categories of interest?

TT: We look at spaces like VR and AR, eSports, live streaming, AI, blockchain. Those spaces that people call "emerging technologies."

If you step back and look at the gaming industry as a whole, it’s actually been growing over decades, at the pace of 10 percent or more, and I think that’s driven by multiple things. One is that people are getting multiple touch points. For example, gaming has been really dominant in PC and also consoles, but now people are spending more time on their smartphones and now we have emerging technologies like VR and AR, smart speakers and smart TVs. With these multiple touch points I think people spend more time on the games, and time is money. So, these are trends we are seeing when we are looking at potential investment opportunities.

VN: What's the big macro trend you're betting on?

TT: One is the smartphone, obviously, and, over time, the smartphone allows for higher resolution game play, like with Fortnite. People can still play the same quality of entertainment experience, even on the smartphone, which they only used to have on a PC or a console. The other trend is the multiple touch points with the emerging tech technologies on those platforms. So, that’s the two big trends we’re looking at right now.

VN: What is the size of your current fund and how many investments do you typically make in a year?

TT: Right now our fund size is $20 million. We’re targeting 20 to 30 investments out of this fund, but we’ve only completed three so far.

VN: What stage/series do you invest in and how much is that in dollar amount for you?

TT: We primarily focus on seed stage, but we sometimes do pre-seed or Series A. Our typical check size is somewhere between $100,000 to $500,000, and we invest up to $1 million in a company over time.

VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?

TT: It’s hard to say there’s one common, specific number for all the businesses; it depends on the situation and also the market. What I love to see is that there’s a product, any playable product, and if there’s some sign of early traction that would be better, but it doesn’t have to be a revenue generating business yet. Product and early traction are most important. 

VN: What other signals do you look for? Team, product, macro market?

TT: In terms of the founding team, there are few things that we like to see. People talk about product market fit but we like the founder market fit. So, if the founder has relevant expertise and experience in what they’re trying to do in their new venture, and if they have good connections to industry players, like potential partnership players, something like that. The second is if the team is working well; we don’t want to have three engineering founders, but more of a good combination, like one business, one finance and one engineering.

Third is that, honestly, we love to see the founding teams being really excited about what they’re doing. Last year, or maybe two years ago, we saw a lot of people working on blockchain, but we weren’t really sure if they were working on blockchain because they love it or because they wanted to make quick financing from investors. We love to see people who are really passionate about what they’re doing and there are lot of ways you can tell. What he or she has been doing in the past tells you what they want to do, and just letting them talk about why they’re pursuing this. You can tell from his or her face, or how they talk about it. It’s not really difficult, actually, to get to know why they’re doing this.

VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?

TT: It’s quite hard to justify the valuation in the early stage of the company, but, since we’ve been investing in the Valley since 2011, we have a good idea of what that valuation looks like at each stage, meaning pre seed, seed or Series A. We have some sort of guidance within us that, if the founder’s asking for this valuation that’s a little bit higher compared to the market standard, it definitely affects our decision to invest and we also negotiate sometimes too. Usually we advise founders to think about the fact that they can raise a high valuation doesn’t really mean that they’ll be successful at the next financing round. They might suffer from lack of interest because of the high valuation so there should be some balance that they’re thinking about. Higher valuation doesn’t always mean that it’s good for the founders or the existing investors.

VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?

TT: Our first fund was focused on VR and AR, so we only invested in virtual and augmented reality. When we were thinking about the investment thesis for the second fund, we went back to our basics, because we all came from the gaming and entertainment industry, so why not do that? We actually don’t really see any other funds that are focused on the entertainment space, especially in North America, so that’s our leverage.

There aren’t other funds because a lot of investors are focused more on the B2B. They like enterprise businesses because it’s predictable and the market is growing, compared to B2C, where all the giant companies, like Google, Apple, Amazon, Facebook, can deliver their expertise, so there’s no space for startups. Our counterargument is that may be true in the past, but that might change in the future, because of the trends that I was describing, including new, emerging platforms. That’s our investment thesis; it may have been beneficial for the big companies in the last decade, but going forward there might be some chance for the startups to win. That’s what we’re betting on.

VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?

TT: It’s not something special, actually. We are from the game industry, so we speak the same language as the founders speak. We’ve been investing in the Valley since 2012, so we know a lot of the investors there, so we can bring in Series A investors or co-investors in the seed financing round, so that’s the second part. The third part is our connection to Asia; we have LPs mostly from Asia, they're less financial investors and more like strategic investors, so we’re happy to bring them as potential partners or potential investors in our companies.

Japan is the country we have the most access to. We are an affiliate of mobile gaming company GREE, which is based in Tokyo, and have so many connections to all those traditional game players, like Nintendo and Capcom. We can bring those potential partners to our companies. Japan is often an early adopter or a test bed, so it can be a good place for early stage companies, where they can to try out some new technology. We also have access to Korean companies and Chinese companies.

VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?

TT: We invested in three companies; one is still under embargo, so I can’t talk about it right now, but I can talk about the two other companies.

One is FanAI, which is an audience monetization platform for sports and eSports teams. Usually, eSports team get the majority of their revenue from sponsors, and the FanAI platform allows them to maximize monetization from brands as a sponsorship. We are excited about this investment; Johannes Waldstein, the CEO, has been in the analytics industry for a long time, and he found out that the market for eSports is still premature, so there should be some chance for creating a big business in the market. We love their vision and we also the teams he can bring together. We’re really excited about working with them.

The other is ProGuides, which is also an interesting company. They are creating a video platform for people to connect and also learn, so the pro-gamers can explain and offer training on video and users can watch and learn from it. They can also learn from other people too. They launched the app in January and it’s been growing really fast, so it proves that there are so many people who want to potentially to be customers of the product.

VN: What are some lessons you learned?

TT: The founding team is the most important factor because a company will fail if the founder gives up. It comes back to your question about we select the founders we invest in; if the founder is passionate about what he or she does, there’s less chance he or she will give up. So, the team is the really important factor for the company to be successful. That’s the key lesson I’ve learned from my experience,

VN: What excites you the most about your position as VC?

TT: I read a book after college called the eBoys, which is about Benchmark Capital. That was so fascinating that I saw that this is the job I wanted to do. Maybe 20 years after, I joined GREE and I’ve been investing on behalf of companies since 2011 in Tokyo, and then I moved to the U.S. five years ago to start investing in startups in the Valley. I’ve had investing experience over a decade now. This is the job I wanted to do, and here I am, so I’m excited to be working as a VC. Day to day, what I like about it is you meet new people, you meet people who are passionate about really different things. You can learn from them. Those founders are trying to change the world and you can be a part of it, so that’s really fascinating to me.

VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?

TT: One thing I will add is that we looking for founders with experience outside of traditional entertainment. With the advancement of technology, anybody can create a new experience for users, so anyone who has a really interesting idea, we’d love to talk to them.