The Fate of Start-ups in Japan

Kunio Katsube, Managing Director, Head of Investment Research, Japan Investment Corporation

Late in February, Tokyo International Forum, a modern convention center characterized by its striking glass atrium, was crowded with more than 25,000 visitors. They were joining “City-Tech.Tokyo 2023”, an inaugural two-day tech event hosted by Tokyo metropolitan government. Entrepreneurs, investors, and corporate delegates gathered not only from Japan but also from various parts of the world to watch startup pitch contests, expert round tables, and keynote speeches.

Ben Horowitz (a16z) took part in a keynote speech talking about leadership in the changing environment. Kyoto Fusioneering Ltd., a deep tech startup founded in Japan, won the grand prize in the pitch event joined by finalists from U.S., Taiwan, Singapore, and European counties. Speeches made by Yuriko Koike, Governor of Tokyo, and Shigeyuki Goto, Digital Minister, impressed the audience with their firm determination to support startups. Despite the slowdown in startup activity globally, the venue was filled with enthusiasm. Why? The keyword is an expectation for long-awaited change.

Although Japan used to be known for producing many startups that have grown to global enterprises like Sony, Honda, Nidec, and Kyocera, prolonged economic stagnation in the last couple of decades has been the primary cause and effect of lukewarm entrepreneurship in the country.

Now, the situation is fast evolving. Recent changes in the global geopolitical environment have made capital allocators and entrepreneurs seek desirable destinations for their startup investment or business headquarters in the Asian region and the dynamics are working in favor of Japan. On top of the advantages that Japan has been famous for, namely stable democracy, safe and clean society, and highly educated and diligent workers, Japanese startup eco-system is getting more traction; advanced scientific institutions and universities are getting connected tightly with the startup eco-system, serial entrepreneurs and/or angel investors who had made successes in their former ventures are breeding next generation of entrepreneurs, etc.

Furthermore, last year the government published a “5-year startup development plan”, which is a package of funding support, tax incentives, and streamlined regulatory procedures to accelerate the eco-system development in Japan. The plan is significant because it outlines a comprehensive strategy to promote and support the growth of startups in Japan for the first time.

" Although Japan used to be known for producing many startups that have grown to global enterprises like Sony, Honda, Nidec, and Kyocera, prolonged economic stagnation in the last couple of decades has been the primary cause and effect of lukewarm entrepreneurship in the country "

Working in tandem with the government is Japan Investment Corporation (JIC), which is a government-sponsored investment company with a mission to promote the Japanese startup eco-system by providing risk capital through its investment in venture capital funds. JIC has been working to solve the “Equity Gap Issue”, i.e., lack of sufficient supply of risk capital, in stages like seed/pre-seed and growth, and in segments like deep tech and life science. Since its inception in 2018, JIC’s cumulative commitments to various venture capital funds, including sole commitments to two funds operated by its subsidiary, Venture Growth Investments (VGI)1 , have amounted to about 433 billion ($3.2 billion2 ).

JIC not only provides risk capital to these venture capital funds but also tries to nurture emerging venture capital operators by giving them advice in forming their first fund in hoping that they will become top-notch Japanese venture capital firms in the future. JIC will further reinforce its investment strategies in response to the government's plan. One of the strategies is “Go Global”, where JIC will make commitments to international venture capital funds that have the ambition to work with Japanese startups and help them to do international business.

In 2022, the size of the startup funding market was 877 billion ($6.4 billion) in Japan. Compared with Japan’s GDP, which is the third largest in the world, the market was only 0.13 percent of the GDP. In peer countries like U.S. and U.K., the ratios were much larger (U.S.=1.02 percent, U.K.= 0.99 percent), indicating that the Japanese ecosystem is in still nascent status. However, the status has worked in favor of Japan. While U.S. and European markets recorded a huge decline in startup funding in 2022, the Japanese market performed relatively well with a year-over-year growth rate of plus 3 percent (preliminary). This is partially explained by the fact that, even back in the boom period in 2021, growth stage funding was still under-developed in Japan, and, therefore, market correction in the stage during the year gave a relatively small impact and, on the other hand, growing early-stage funding led the total funding volume to increase. This would bode well for Japan.

The Japanese government aims high. The five year plan targets to create a 10 trillion ($76 billion) startup funding market in five years and to produce 100 more Japanese unicorns by then. Japan Business Federation or Keidanren, an industrial organization representing leading Japanese companies, is also promoting the growth of startups and working with the government to make it happen. In five years, people will learn whether the public and private initiatives eventually paid off. The author believes the enthusiasm observed at City-Tech.Tokyo 2023 is a harbinger of good fortune.