Successful Japanese corporate venture capital (CVC) investments into US startups tend to be entered into with a long-term view and as a partnership with the target company. When taking a strategic decision to invest, capital gains are an important aspect, but it is also vital to see the investment as a positive business collaboration. In Part One of this series, we explored investment structures and fund formation factors in these collaborations. Here we take a closer look at key terminology and deal terms relating to governance, exit strategies, and national security, as well as best practices to navigate potential challenges.
The Foreign Investment Risk Review Modernization Act (FIRRMA), passed in 2018, allows not only acquisition of control of a US company by non-US investors, but also investments in “critical technology,” “critical infrastructure,” and “sensitive personal data” to be subject to review by CFIUS.
FIRRMA added mandatory filing requirements for certain investments involving critical technology and foreign government-related persons. Even where there is not a mandatory filing requirement, there are many cases where a joint voluntary notice is filed in practice in order to avoid the risk that CFIUS will negate the transaction after the closing.
Consideration should be given to mandatory filing requirements, and whether a joint voluntary notice or declaration should be filed. It usually takes at least 4-5 months (90-day review period, plus 1-2 months of preparation prior to formal application) to complete a CFIUS filing, so it is important to consider this in the very early stage as it significantly impacts the schedule of the investment.
Culturally there are considerations for Japanese companies when looking to invest in the United States. Comparatively there may a tendency for more detailed documentation, which can lack speed and confidentiality in decision-making. Often friendly relationships are sought over tough contract negotiations. Furthermore, there have been examples where an organization may have one of the best technologies in the world but is reluctant to enforce its rights. Many organizations often take a risk-averse approach and attempt to avoid litigation.
For more details on key deal terms, please see our full presentation, Corporate Venture Capital Investments in US Startups (Part 2): Getting the Deal Done: Key Terms and Considerations (conducted in Japanese). This event is part of our 2023 series designed for Japanese companies and funds developing new business models through investment in US startup companies.
For more information, please contact Ayumi Yokoyama.