Your Quick Guide to Japan's Past & Present Startup Ecosystem

Your Quick Guide to Japan's Past & Present Startup Ecosystem

For the first time since the Global Startup Ecosystem Report began, Tokyo broke the top 10, recording a 9th place finish in their 2021 ranking! 

Japan’s current startup ecosystem is looking less and less like it did in years past—and that’s amazing news for startups in Japan and foreign investors eager to find new opportunities.

However, understanding Japan’s past startup culture is essential for understanding how far it’s come and where things are headed now.  

I talked with Business Success Japan by Lydia Beukelman and discussed the following: 

  • What's it like fundraising for startups in Japan vs. fundraising in the US?

  • What happens when inward foreign direct investment in Japan is low? And why variety in fundraising capital matters

  • The Tokyo Mothers stock exchange and how it influences Japanese VC decision-making

  • What hinders foreign VC investment in Japan? And where/how things are looking up

Listen to the full conversation on Business Success Japan. Out soon.

Apple Podcasts | Google Podcasts | Spotify


Thanks to more coverage of startups in mainstream and new digital media, public awareness of Japan's startup ecosystem has grown. 

That's a good thing because it makes working for startups in Japan more socially acceptable and respectable than a few years ago.

For instance, the number of venture capital firms in Japan has more than doubled in the past 10 years—from 80 venture capital firms in 2010 to more than 200 today. 

About 10 years ago, there were maybe 1 or 2 well-known startups, and working at a startup after college was considered an odd career choice, one that couldn't guarantee support from one's family. 

However, nowadays, you can easily learn about startups in Japan through Nikkei or other business news sites, and smart young professionals are increasingly willing to think of startups as a career option. 

Additionally, today, there's a much, much more diverse venture capital landscape in Japan in terms of the taste of venture capitalists and the things they care about, the industry segment, or business segment they are interested in than in years past. 

What's it like fundraising for startups in Japan vs. fundraising in the US?

Historically, fundraising from Japanese VCs has different characteristics from the US. 

Firstly, in Japan, you find a lot more corporate venture capital funds (CVCs). Perhaps at first glance it looks like venture capital, but looking closely, you'll see that the fund is backed by a big corporation. 

Pre-COVID, when there were networking events you could attend to meet with VCs in person, you'd ask these VC representatives about their personal background, career background, etc.,  and you'd often find out the individual is from a big company's VC business division.

There are not that many venture capitalists in Japan who have experience working in a startup, and even fewer who've had experience building a startup or being a founder. The majority of Japanese VCs come from the finance industry or corporate planning from a big corporation background. 

Essentially, this means that the amount of detail required in your business plans or revenue projections you need to include in your pitch deck is more demanding, even in earlier stages as well. 

For example, I've looked at pitch decks from US startups at the seed stage or the series A stage, and they had very few slides or details, and I was like, "Huh, they got funding using that pitch deck?" 

The detail of information required to gain VC trust in Japan in the early stage of investing is more than in the US.

What happens when inward foreign direct investment in Japan is low? And why variety in fundraising capital matters

A few months back, reporting done by Richard Katz in Toyo Keizai placed Japan at the bottom of 196 countries when it comes to inward foreign direct investment (aka FDI).

This wasn't surprising. Friends of mine who serve as consultants for startups discussed this very issue before Toyo Keizai's report: that the FDI in Japan is way too low and that we needed to do something about this. 

The lack of foreign direct investment in Japan's startup ecosystem means there's less variety when it comes to the kind of capital circulating for Japan's startups. 

Before I go into detail about why this is a problem for Japan, here's why variety in capital matters:  

As a startup (or any company), if you get a business loan, it's just money. The only difference between picking the loan from this bank or that bank would just be the interest rate. 

But when it comes to the capital you raise, or "equity finance," this means you're selling your company's shares. So the money that you receive as equity is like blood: it becomes part of the culture of the company, and it influences the kind of decisions you're going to make because when investors put money into your company, they expect a return from that money, which has to be higher than if they put money in a bank to receive interest rates. 

So it matters who gives that money to you and what they expect from your startup in terms of how fast it grows, what scale it should be, and when they want you to "exit," either by going public or selling your company. 

Those who invest in your company are interested in the startup growing as much as possible, so they want to give you advice. Naturally, the advice is coming from a good place (a desire to see the startup succeed), but you need to know they will give you advice, and they will introduce you to business partners or potential customers, etc. Taken as a whole, you can see that accepting capital influences the business in multifaceted ways.

Now, if there's a lack of foreign direct investment, it means that only the same type of blood is circulating. And so, with only a few foreign direct investors here in Japan, many Japanese entrepreneurs only get feedback and advice from Japanese VCs with mostly little experience in building or working in a startup or scaling a new business or new technology. 

Subsequently, especially in the past, Japanese VCs will often discourage startups from going too big or bold. This year and last year, this has changed a little bit, and it is in the process of changing, but traditionally speaking Japanese VCs are prone to take a conservative approach. 

The Tokyo Mothers Stock Exchange and how it influences Japanese VC decision-making

In Japan, there isn't really a market for selling stocks that aren't publicly traded (aka “secondary market”). And that means, from a VC perspective, unless the startup goes public or does an M&A, the venture capitalist doesn't get a return on their investment for 7 to 10 years.

So until recently, the overall trend was Japanese VCs pressured startups and entrepreneurs to go public prematurely or sell the company because they wanted to get a return on their investments; they didn't want to wait more than 7 to 10 years. 

Furthermore, in Japan, there's a stock market called Mothers. And it allows for a much, much smaller scale IPO, where you only need more than 200 shareholders or 1 billion Japanese yen, roughly 1 million USD in company valuation. So you can go public at a much smaller scale in Japan.

Note: Blue Circle, a consulting firm, published a post on Linkedin that summarizes how startups in Asia are looking at the Tokyo Mothers stock exchange as an attractive choice for going public. It’s an informative read if you want to grow your knowledge of IPO options in Asia. 

What hinders foreign VC investment in Japan? And where/how things are looking up

During conversations with foreign VCs on the topic of investing in Japanese startups, the problem they often mention is that most of the Japanese media and startups' websites are only in Japanese. To them, that's like a Black Box. Naturally, these investors know Japan has the third-largest GDP; they know the macrodata, and they are aware Japan is a big market. 

Yet, for foreign investors, the lack of fresh, current information is a non-trivial barrier. Of course, you can read translated articles of Nikkei Asia or BBC Asia, but that's highly summarized, and it's not in-depth. 

However, some recent good news for Japan's startup ecosystem: foreign VCs are increasingly participating in the later stages of fundraising—when it's clear that it's just a matter of time until the company goes public. 

Another interesting news article widely discussed in our community listed the top 5 startups in terms of the amount of funds raised—all top 5 had foreign investors

So, basically what we're seeing: In the early stages of a Japanese startup, it's still pretty rare to find foreign investors. In later stages, you see more foreign VCs getting involved because then there's more information available about the company and maybe because there's more budget to spare for translating materials. 

Additionally, more and more successful startups are "paying it forward" by starting their own VC fund, so now we actually see an increase in VCs with startup experience, which is vital for a healthy startup ecosystem. This, along with the increase in the number of Japanese VCs overall, means more variety and more diverse opinions about how to value the business potential of any startup.

To summarize, especially in the last 2 years, the Japanese startup environment has matured a lot. For any investors out there, it's worthwhile to pay attention to Japan because the pandemic has necessitated IT solutions, elevating the market potential for B2C and B2B tech companies in Japan.  


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