Why is Japan lagging behind startups?
Japan is generally considered to be technologically ahead of the game, being the birthplace of huge players such as Sony and Toshiba – yet the country has tended not to support startups. Now, although the Abenomics era appears to be over, with another election on the horizon and the current Prime Minister pledging to create a £ 637million fund for advanced technology: could this be the turning point? for Japanese startups?
Crunch the numbers
Compared to other developed countries, Japan has few unicorn companies and low levels of startup funding, says Harunori Oiwa, business partner at Plug and Play – an organization dedicated to connecting startups with businesses. more established, especially in Japan. Oiwa points out that, according to CB Insights, there were more than 800 unicorns in the world as of October 2021, but only six of them are in Japan. By comparison, there are 432 in the USA.
He adds that in 2020, the total amount of venture capital (VC) investments in the United States was around $ 166 billion, compared to just $ 1.5 billion in Japan, a difference of 110 times. And the number of deals concluded in the United States in 2020 was 12,254, compared to 1,160 in Japan.
To help develop the startup ecosystem, Oiwa believes Japanese startups should be viewed as an investment asset for foreign investors. Ideally, startups should not just aim for a small initial public offering (IPO) in their home market, but should expand their business with a view to being taken over by foreign companies. A leading startup is Spiber, which has raised $ 312 million in funds from global private equity firm Carlyle this year. “This is the group’s first minority investment without a buyout, which is very rare,” Oiwa explains.
Things are improving, however. Funding for startups in Japan totaled $ 3 billion in the first half of 2021, while there was only $ 5 billion in funding for all of 2020, says Kenichiro Hara, director of the capital firm. DCM risk. This is a tripling since 2016 and ten times the amount of funding provided ten years ago.
Still, the numbers are still small compared to the size of the market: South Korea, with a third of Japan’s GDP, has seen $ 4 billion in venture capital investments. This is in part due to a lack of late-stage mega-deals: Japan saw just two funding rounds over $ 100 million in all of 2020, and only six in the first half of the year. 2021. “If we see an increase in deals at a later stage, the growth of startups and their successes will certainly accelerate,” says Oiwa.
Take the world
Another negative factor for the Japanese startup scene is that traditionally setting up a business or joining a startup was not seen as an attractive career path for students in the country, says Masaya Kubota, partner of the largest company in Japan. venture capital of Japan, World Innovation Lab (WiL). Risk-taking was not encouraged, failures were severely stigmatized, and banks were reluctant to invest in new businesses.
“One of the main reasons Japan is lagging behind is the lack of self-reinforcing mechanisms between innovators and financiers that we’ve seen in places like Silicon Valley,” he says.
This has changed, however, as large companies have started to lose their status and seem to no longer take the lead in technological innovation. Kubota also points out that Japanese startups tend to focus on the domestic market – but with entry barriers falling for foreign companies wishing to invest in the country, this in turn may offer Japanese companies an opportunity to compete. worldwide.
Indeed, there are a growing number of leading investors around the world looking for opportunities. Enterprise venture capital (CVC) activity in Japan quintupled between 2013 and 2018, and startups are raising record amounts.
The Japanese government also offers incentives, ranging from tax breaks for companies investing in startups to domestic funds like the Japan Investment Corporation, which has a budget of more than $ 20 billion.
To help the startup ecosystem, Kubota says continued government financial and business support is needed, as well as increased involvement of large companies in investing and using startup services.
Get out of the mold
According to Masako Eguchi-Bacon, CEO and founder of Ocean Bridge Management, Japan’s rapid economic growth in the 1960s and 1970s fostered the general feeling that the best career path was to graduate from a prestigious university and to work for a top-notch company. During this period, most of the big companies offered a good salary and a job for life.
Despite this, she notes that the late 1990s saw the emergence of a startup culture in Japan, as elsewhere, with a famous cluster of IT startups in Tokyo’s Shibuya area known as Bit Valley.
Over the past five years, startups have once again become an important priority. Japanese government agencies, both central and local, have launched various support programs, and as technological development has accelerated, many large companies have realized that they need to look for innovative technologies and ideas outside of the industry. organization, which led them to engage more with startups.
“This time, I think, it won’t just be a ‘trendy boom.’ Startups will play an important role in Japanese society,” says Eguchi-Bacon.
She adds that since there weren’t many startups in the country before, there has been a lack of experienced investors – but that is about to change. As startups grew larger, local businesses began to set up CVCs, resulting in an influx of Japanese VCs and angel investors in addition to a growing number of non-Japanese investors.
Japanese startups also face a major challenge in finding the right talent, says Joshua Flannery, Founder and CEO of Innovation Dojo Japan. He notes that not only do new businesses require engineers and other skilled partners to compete on the global stage, but they also need English skills and cross-cultural communication experience – and these are not to be found. always with the founder or the average employee of a startup. .
Indeed, due to a long-term national focus within Japanese industry, global practices and frameworks for growing companies have only recently been introduced in accelerators and incubators. These efforts have mainly been led by foreign players, such as UK Rainmaking (via Startupbootcamp), US Plug and Play or Australia’s Innovation Dojo.
The startup environment in Japan is already strong in one area: The country has one of the largest pools of corporate capital floating around the ecosystem for startup investments and M&A deals, reveals Flannery. While the number of startups receiving funding has decreased, the amount raised per startup is increasing significantly. In 2021, the top three deals were $ 142.5 million in cloud-based HR software company SmartHR, $ 230 million in media technology company SmartNews, and a $ 2.7 billion acquisition in financial technology company Paidy.
“The area that needs the most attention is the pre-seed and seed stage, where in other markets angel investors and other very early stage investors are active,” says Flannery, adding that While some angel investors do exist in Tokyo, the number of deals is relatively low, and outside of Tokyo, you rarely hear about them.
Nonetheless, Flannery believes things are improving quickly. The government has designated several sites as official “start-up towns” and provided funds to them to strengthen their start-up ecosystems. In Kobe, he invested in a digital platform called Kobe Startup Hub to help members of the startup industry connect with each other. At the end of August of this year, he launched the Global Mentorship Program, aiming to support 200 startups by March 2022 and at least 1,000 by 2025.
Flannery says what is needed now is an effort to help graduates prepare for start-up and prepare them for the future of work. He also argues that paths must be mapped to help foreigners enter Japan and develop the pool of available talent.
Finally, it recommends that more education and support for angel and start-up investors is needed to help young businesses thrive and that the concept of starting or working in a startup needs to be standardized, entrepreneurship. being recognized as an essential part of the future economy of Japan.
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