- Rakuten was founded in 1997 as an internet shopping mall in Japan and has since become the number one e-commerce company in Japan.
- Starting a company in Japan is different from Silicon Valley as there is no strong venture capital ecosystem.
- Rakuten became cash flow positive early on by implementing a cash flow system and getting upfront payments from merchants.
- The company raised money from friends and family before going public.
- Rakuten focused on creating a strong company culture and being patient in the early years.
- The company differentiated itself by facilitating communication between merchants and consumers, rather than competing against retailers.
- Rakuten grew through organic growth and acquisitions, focusing on building a strong brand, creating a loyalty program, and analyzing consumer data.
- Acquisitions were made for geographic expansion and addition to Rakuten's ecosystem.
- Integration of acquired companies into Rakuten's culture involved discussing goals, culture, and values before making the acquisition.

- The speaker emphasizes the importance of culture and shared values when considering acquisitions
- They mention a failure in partnering with Baidu in China, resulting in the closure of the business
- The speaker discusses the importance of innovation and strong operational culture for success in e-commerce
- Rakuten's investment in Pinterest is highlighted, with the speaker praising its graphical nature and influence on buying behavior
- The challenges and opportunities in retail and e-commerce are mentioned, including the importance of logistics and the rise of mobile devices for purchasing
- The speaker discusses Rakuten's shop-centric marketplace approach and the success of their social strategy
- The growing importance of mobile devices in Japan is highlighted, with a significant percentage of transactions already coming from mobile
- The speaker explains their approach to competition, learning from competitors but not being afraid of them
- Hiring for startups in Japan has become more popular, with many young people now wanting to work for startups and ventures.

- The speaker believes in hiring younger people to embrace the company's original culture.
- After going public, the company started hiring more experienced professionals.
- The company announced a shift from Japanese to English as the official language, which received backlash but has led to increased globalization in recruitment.
- The decision to make English the official language was driven by the desire for open culture and knowledge-sharing, which is common in Japanese companies.
- The TOEIC scores of employees improved significantly after the language change.
- The speaker had a previous encounter with Paul Graham, founder of VIAweb, but the deal fell through due to passport issues. The speaker was impressed by Graham's entrepreneurial spirit.

- Rakuten, founded in 1997, is the leading e-commerce company in Japan.
- They became cash flow positive early on by implementing a cash flow system.
- Rakuten focused on building a strong company culture and being patient in the early years.
- They differentiated themselves by facilitating communication between merchants and consumers.
- Rakuten grew through organic growth and acquisitions, focusing on building a strong brand and loyalty program.
- The integration of acquired companies into Rakuten's culture involved discussing goals, culture, and values.
- The speaker emphasizes the importance of culture and shared values in acquisitions.
- The speaker discusses the importance of innovation and strong operational culture for success in e-commerce.
- Rakuten's investment in Pinterest is highlighted, praising its influence on buying behavior.
- The challenges and opportunities in retail and e-commerce are mentioned, including logistics and mobile devices.
- Rakuten's shop-centric marketplace approach and social strategy are successful.
- The growing importance of mobile devices in Japan is highlighted.
- The speaker explains their approach to competition, learning from competitors but not fearing them.
- Hiring for startups in Japan has become popular, with a focus on younger people.
- Rakuten announced a shift from Japanese to English as the official language to promote globalization.
- The decision to make English the official language improved TOEIC scores of employees.
- The speaker had a previous encounter with Paul Graham, founder of VIAweb, but the deal fell through due to passport issues.

Hiroshi Mikitani, founder of Rakuten, at Y Combinator Startup School on October 20, 2012.

Presented in Stanford Memorial Auditorium by Y Combinator and the Stanford Technology Ventures Program.

Thank you very much for inviting so many people.

So maybe to start, you could just tell us a little bit about what Rakuten is and how you got started.

As a matter of fact, I was trying to partner with 1 of your founder, Paul Graham, and my concept was to recreate what we call internet shopping mall in Japan.

And it was very, very early days, and we tried to do it with 4 viruses and it didn't go through.

So we started to hire young graduate school students.

Started from initial capital of 200,000 USD.

Just hired young guys and went public in year 2000 and started to buy many companies.

Now we are number 1 in e-commerce, about 35 to 40 percent market share in terms of e-commerce.

Number 1 in online travel, number 1 in online banking, number 2 in online brokerage, and we do about 38 different businesses in Japan.

And we started to globalize our business, so now we are in more than 13 countries.

We bought the second largest e-realtor company called Kobo, which is doing extremely well in Europe, in Canada, in Asia.

So we are A little bit different internet company in Japan, and now trying to globalize our business.

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

Well, There is no really venture capital ecosystem.

There are venture capitals, but not like, you know, Silicon Valley type sort of food service VCs.

They will invest, but not much, they will not get involved into the management that much.

So, how did you learn the lessons that VCs in Silicon Valley traditionally help entrepreneurs with?

How did you learn how to run a company and grow it?

I don't know how Silicon Valley VCs are helping VCs, venture companies, because I have never experienced.

But the way, again, I funded Blackton with my own money.

But since I knew that I'm not going to be funded a huge amount from BC, I created sort of cash flow system so that I don't need to rely on VC.

We asked our merchant to pay $500 per month, but we asked them to pay us 6 months upfront.

So from the second month of our service, my company was cash flow positive.

You've been cash flow positive every month since the start?

Looking back to that first year, 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 families.

We didn't need any money, but this was kind of just for the friendship for sake.

Because I want to make my family and my friends happy.

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

No, that was like 6 months before we go public.

2 days before we, our IPO, my friend Masa Song of SoftBank called me and asked me to let him in, but I said it's too late.

But, well, we were very patient, to be very honest.

We were very patient for the first 3 years and tried to recreate the kernel of our business model.

So we're not trying to copy the model of Amazon.com or eBay, we are trying to create a great system to support medium to small-sized merchants to sell their product all over Japan.

So we really tried to create an extremely strong culture of the company because I knew that I'm going to be in this business for a long, long time.

Did you figure out that kernel on the first try?

Did you get right the thing that made Rakuten what it is, the first try?

Did you have to iterate and evolve to get there?

1 thing we did differently from most of US-based e-commerce company is we try to facilitate the communication between the merchants and the consumers.

Because the way I feel is of course, buying products, price is important, the efficiency is important.

But more than that, in my opinion, buying things should be fun, and we need to create a very rich experience.

So we try to be a liaison between the consumer and the retailer instead of trying to compete against the retailer using the IT.

We want to use our technology to help small to medium sized enterprise do business with consumer.

So that was totally different idea and I was 100% confident my employees will really like the idea of helping small to medium-sized companies rather than trying to destroy their business.

I mean, as you said, this is very different than anyone else was doing in e-commerce at the time, and really still is.

Did you know that that was going to be the model you were gonna go after before you started the company?

Was that, were you convinced that this was what you were going to do differently?

We didn't think about how we were gonna do it differently, but we know what we wanted to do.

I always don't think about our competitor that much because you cannot do too many things about it.

You just need to focus on what you do to improve your service, and improve customer satisfaction.

I think that's part of 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've 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, and domestically and internationally.

By the way, we have a professional baseball club, Rakuten Eagles.

Even if you don't use internet, they know Rakuten brand.

2, we created the strongest mileage reward program, called Rakuten Super Points.

So we can use those points to cross-sell our service.

And we also created the consumer database to analyze consumer data.

And now about 80 million, so about 90% of internet populations are our member.

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 1 company together?

1 is purely a geographic expansion to buy a time.

So we bought a buy.com in the US, play.com in UK, price minister in France.

And we try to use their presence and brand name and their presence and convert their business model to Lockdown model.

The second type is addition to our ecosystem, our value chain, like Kobo, which is not doing as well as in other countries, but they are very strong.

They have number 1 market share in Canada and in France and in Japan.

So we knew that we need a digital book service in our sort of product lineup.

So we know that we can use our membership to facilitate the growth of the Kobo business.

So there is 2 types, geographic expansion to buy our time and also addition to our ecosystem.

And then once you make these acquisitions, how do you integrate them into the culture of Rakuten?

So before buying a company, we talk about our dream and our goal and our culture, and talk over and over and over again before we make acquisitions.

If they don't like our culture or our practice or our mission, we are not, we are not gonna buy, even if you like that service, because it doesn't make sense to lose the founders and management of the company.

So we talk over, before the closure of the deal, we talk a lot about those kind of things.

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

I don't know, but they're still on our work.

1, you know, only 1 failure we made was we went into China partnering with Baidu, which is 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 big failure I recognize at this moment.

Even more than the 3 culture values you've talked about, 1 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?

in my opinion, you need to have 2 things.

1 is, of course, innovation, and the second part is operation.

And innovation is kind of not so difficult to really encourage people to be innovative.

But at the same time, if you want to scale your business, you need to have a very strong operation culture as well.

And in order to achieve strong operation culture, you need to have sort of, you know, the shared practices and the, it's kind of the framework for managing the company.

Mainly using more numbers and KPIs, but most likely the entrepreneurs don't like just running the numbers, but I think being quantitative, analytically quantitative is also very important.

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, Ben spoke.

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, and it has a strong influence over to buying behavior and buying decisions of the people.

So as an e-commerce company, I think that Pinterest is the best social network.

So we found Pinterest and I had a meeting with Ben, had a drink and a karaoke, and he liked me, and he let us in.

I think maybe you should ask Ben, but I think he has seen something different in us compared with other US-based internet companies or VCs.

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, I think this is still stage 1 for e-commerce.

Now we are seeing lots of digital content sales, so the books, CDs, DVDs, 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 robots and automation to improve the efficiency.

And also the devices, the mobile phones, smartphones, the tablet will become the major device to buy products.

And maybe there will be a sort of social.

I think the social shopping is still, nobody really find the strong answer to it, but I think in the future it will come.

For social shopping or anything else, are there major ways you identified that Japanese consumers behave differently than consumers anywhere else in the world?

Well, Rakuten is what I call very shop-centric marketplace, meaning that every shop have a very different characters and also the design and the user experience.

And we provide all sorts of tools for them to make fans around shop.

So I think Rakuten was very social from the day 1.

We try to create fans around shops, not around rakuten.co.jp, but fans around shops.

And all these shops has professional staff.

And they are the sort of curator of the wines, or sports, and goods, or groceries, and so forth.

So I think my question is, so if you want to buy some product, do you want to ask your friend or do you want to ask the staff at the pro shop?

Of course, sometimes your friend can give you better advice than the staff at the pro shop, But most time, I think you should 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, you talked a little bit about mobile and tablets, but obviously in Japan that's become a huge way that people are interacting.

Probably even bigger than here, where it seems like everyone's on their phone all the time.

How much are you thinking about mobile and how are you thinking about mobile is sort of the future of the company?

Well already 25% of Rakuten transaction, which is big we do about 15 billion USD or even more this year just for pure e-commerce in Japan and already 25% of transaction is coming from mobile devices, including feature phone and smartphone.

Maybe 60% smartphone and 40% feature phone.

And smartphone transaction is growing about 300 to 400% year on year.

So it will be soon more than 50% within a couple of years.

You said something earlier that was so interesting to me, I made a note to go back to, which is that you don't think a lot about competition, because you can't do much about that.

1 thing that I hear from 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?

Did people ask you, what are you gonna do about Amazon and eBay?

And how did you think about, how did you stay focused on doing your own thing and ignoring competition?

I learned from competitors, but I'm not afraid of competitors, because even if you're afraid of, it doesn't be any good for you.

So I learn what they're doing and then maybe 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 a 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, big fashion brands, almost entire electronic companies are using our platform, and that's a major portion of our business, but our approach is to really how to help small to medium-sized merchants to do business with the consumers.

So, but that's the, 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.

All right, let's see, what's most interesting here?

We were talking a little bit backstage about just sort of Japanese culture and the differences between starting a startup here and 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 15 years ago when I started a company.

Nobody wanted to work for small startups.

And there are so many young people who want to work for the startups and ventures and so forth.

I think the way, I mean hiring younger people and not to hire upper-aged people as much as possible.

Because I knew that we want to embrace our original corporate culture.

So that was very important for me to hire younger people and educate them, especially in the early days.

After we went public, we started to hire many, what we call gray hair people.

And because we need that, we need to have more professional expertise.

And 2 and a half years ago, we announced that we are going to convert internal communication language from Japanese to English.

And this was a big splash in the Japanese society and some CEOs explicitly announce that we are crazy company, as matter how we are.

But now 70% of new engineers joining are non-Japanese.

30% of new employees are non-Japanese, so we are truly globalizing our 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 2 weeks, so maybe you'll be featured a lot.

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 disclose almost all information to entire employees.

So the people who is doing e-commerce know what's going on for our banking business.

And we cross-share all these expertise and platforms as much as possible.

You know, web marketing, engineering, and so forth and so forth.

How common is that for Japanese companies to do?

Well, sharing the, opening up is very common.

And we call this yokoten, meaning horizontal, how do you call it, transfer of expertise.

And I think that is 1 of the strengths of Japanese company because it's not good or bad, it's not so performance oriented review 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 I was kind of a liaison between our global business and Japanese business, and I was getting really, really tired just talking and being translated, everything.

And so 1 day I woke up and thought about doing everything in English.

I stood in front of entire 7,000 employees and told them I am going to convert the official business language of Rakuten from Japanese to English.

The TOEIC score of our employees improved almost 200 points for the last 2 years.

And most of the staff can manage to communicate in English.

They are not afraid of going abroad or joining to the international conference.

Now we have so many people, non-Japanese foreigners in our Tokyo office.

Now they are starting to benchmark international players instead of domestic players.

We were talking backstage, and the last time that Paul and Mickey met was 16 or 17 years ago, when Paul was working on VIAweb.

So, Paul loves to ask people at these, what was so and so like the first time you met them?

So finally we get to ask what Paul Graham was like the first time you met him.

So it's really in the Harvard Business School case.

So I initially, After I left my bank, I started a business consulting firm.

And I was looking for something new to do, and came up with the internet shopping idea.

And 1 of my classmates at Harvard business school called me, Mickey, you need to look at this company, it's called BioWeb.

I went to BioWeb.com and took a look at it.

Next day, I bought an economy class airplane ticket and flew over to Boston and I visited Paul and it was 5 people company and we kind of agreed that we're gonna do things together.

But the last minute, Paul was supposed to come over to Japan but at the airport he found out his passport is expired.

So he couldn't come and somehow the deal didn't go through.

So but I feel that was really the first moment I felt I met the truly strong entrepreneur and I felt the excitement and energy in Paul and in his team.

See all Y Combinator transcripts on Youtube

Hiroshi Mikitani at Startup School 2012