The word “startup” tends to conjure up familiar images. Maybe it’s the tech bros of Silicon Valley, fist-bumping through the halls of an AI-controlled office where the PCs weigh less than the froth on everyone’s single-shot lattes. Or perhaps it’s the garage-bound hermit, toiling away in the LED-glow of scrapheap monitors with dreams of unleashing the next big commercial tech breakthrough.
One doesn’t often associate it with the buttoned-up suits and conformist attitudes endemic to traditional Japanese business culture. But take even a cursory peek at Japan’s startup world in 2021, and an entirely different narrative reveals itself.
University post-grads with bold new ideas, entrepreneurial foreigners tackling the Asia-Pacific (APAC) market, and Japanese born-and-bred innovators no longer lured by the cushy promises of corporate job security, have all combined to sow the seeds of a new-look Japanese economy set to boom over the coming decades.
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— Disrupting Japan (@DisruptingJapan) March 11, 2021
The Dawn of a New Startup Era
There are currently around 10,000 startups operating in Japan according to J-Startup, a government organization created to accelerate innovation. Tokyo also ranked third in the Mori Global Power Cities Index in December 2020 – a report which ranks cities’ attractiveness for relocation based on business startups and levels of R&D, among other indicators of livability – and ranked 15th in the Startup Genome innovation hubs survey last year, trailing only Beijing and Shanghai in the APAC region.
“If you’re comparing the startup ecosystem in Japan to that in San Francisco, yeah, it’s much smaller, things move much slower, and it looks like Japan’s way behind,” says Tim Romero of the Disrupting Japan podcast which covers the local startup scene. “If you compare Japan’s ecosystem today to the way it was 20 years ago, it’s unbelievably dynamic.”
When Japan’s economic bubble burst in the late 20th century, it altered the risk-reward nature of working at a startup. Today, employees at major Japanese corporations are no longer guaranteed the career of steady promotions as when the bubble was at its height. First-time entrepreneurs are now able to raise equity through early-stage investors and venture capitalists easier than ever before, while stock market IPOs (initial public offerings) have gone from fanciful pipedream to reality.
“What looks like extreme risk aversion in the ’80s or ’90s, and the lack of risk aversion today, it’s the same equation,” says Romero. “It’s really just people behaving rationally; it’s the situation that’s changed.”
“If you compare Japan’s ecosystem today to the way it was 20 years ago, it’s unbelievably dynamic.”
The Growth of Japan’s Startup Ecosystem
Traditionally, most of the investment money in Japan’s startup world was gatekept by the major banks and corporate venture capital firms (CVCs). The arrival of a new wave of foreign investors along with increased ease of access to corporate investment channels has opened up new opportunities.
Getting a loan from a Japanese bank is still “extremely difficult”, especially if you’re a foreign founder, according to Pat Ryan, a Tokyo-based Irish entrepreneur and angel investor who works closely with early-stage startups. But with increased investment in embryonic companies, more startups are showing the recurring revenue necessary to attract larger CVCs – across the country, venture capital funding increased by 50 percent to ¥345.7 billion in 2018 alone. Ryan notes that certain cities and governments are also streamlining the process through startup visas for foreign entrepreneurs and support programs for new businesses.
Under the stewardship of Mayor Soichiro Takashima, Japan’s fastest-growing urban center Fukuoka is striving to become a commercial tech hub and the “gateway to Asia”. Other cities from Kobe to Tsukuba, Nagoya to Kyoto have doubled down on startups, welcoming entrepreneurs from all over the world.
Government organizations such as the Ministry of Economy, Trade, and Industry (METI), J-Startup, and Tokyo One-Stop Business Establishment Center (TOSBEC) are also focusing on nationwide innovation, providing financial and business support to startups, and connecting them with investors.
The real benefit of government intervention, however, has been its legitimizing effect on the ecosystem. Since the early days of former Prime Minister Shinzo Abe, Japan has adopted a model of actively encouraging large enterprises to conduct business with small-scale startups.
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The Power of Community
Venture Café Tokyo, an innovation community builder founded on the principle of “serendipitous collision” and sister organization of CIC Tokyo, is one of the major platforms for connecting founders, investors, students, and entrepreneurial individuals in Japan.
Takuo Urushihara, Venture Café’s Director of Operations, believes Japan’s current innovation sphere is “very forward-thinking”. Since the organization opened its doors in Toranomon Hills three years ago, Urushihara has witnessed a huge spike in the number of attendees at Venture Café’s weekly events, recently surpassing a cumulative total of 30,000 participants.
Amid Japan’s third wave of Covid-19 infections, I zoomed into a floating head chat room for Venture Café’s signature Thursday Gathering, where groups of young entrepreneurs outlined their business ideas to the rest of the attendees in a rapid-fire format: the “rocket pitch”. The series of three-minute concept decks was a crash course in modern Japanese innovation: software that aims to foster a more efficient virtual learning experience at universities, an app designed to create the optimum dine-at-home restaurant experience, and an AI chatbot for downtrodden company employees featured in the evening’s lively affairs.
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Startup Lady Japan, a non-profit network that helps women conduct business locally and internationally, has amassed 1,300 members since its inception in 2017. The organization has also seen a significant attachment rate in its 60-day Startup Challenge, aimed at developing business and personal skills, and is rolling out a six-week startup boot camp from April featuring intensive workshops and mentorship.
“In Japan there’s a lot of cultural bias; a lot of limitations placed on women. They’re supposed to be a certain type, they should not think a certain way, or they should not think at all,” says Koko Sato, CEO of Startup Lady Japan. “With our program we’re more focused on providing community support which shows women that they don’t need to put themselves last.”
Old Habits Die Hard
Though Japan’s startup ecosystem is on the rise, some common struggles persist: linguistic and cultural translation, localizing international businesses for the Japanese market, navigating Japan’s bureaucratic waters, and dealing with the stigmatization of failure.
These issues may be contributing to Japan’s perceived lack of unicorns – privately-held startups valued at over US $1 billion – which are often used as the barometer for an ecosystem’s success. Japan currently has four unicorns according to analytics platform CB Insights, whereas in relation to GDP, it should probably have several times that.
Tim Romero of Disrupting Japan views unicorns as “primarily a macroeconomic result rather than a measure of innovation”, citing that there were essentially zero unicorns 15 years ago, now there around 500.
“We are not 500 times more innovative than we were fifteen years ago,” he says. “That said, any healthy startup ecosystem should produce a large number of healthy, competitive companies… and Japan could do a lot better there.”
The Future of Startups in the New Normal
In 2018, Abe announced that movements in fintech, health tech, automated driving and digital governance were “the start of a fourth Industrial Revolution”. Japan’s lack of state-wide digital infrastructure notwithstanding, it has seen significant innovation in these fields, as well as in Esports, education tech, smart cities, SAS – statistical analysis system – platforms and cryptocurrency.
The Covid-19 pandemic largely disrupted face-to-face pitching for investment and the use of collaborative workspaces, but innovators and startups tend to thrive on such sudden change. In the world of health tech and telemedicine, already a priority for Japan where almost 30% of the population is over 65, Tsukuba University recently announced its ground-breaking Smart Wellness City-AI program. Last August, Tokyo-based startup SkyDrive Inc. successfully conducted Japan’s first public manned flight of a flying car. While space robotics startup Gitai, recently raised $17 million for its next on-orbit mission to demonstrate the efficacy of its latest technology.
Though continued innovation gives him hope for the future, Urushihara of Venture Café cautions there’s still a long way to go for Japan to reach the heights of Silicon Valley, Beijing, or Boston. “It’s baby steps: we may have taken two or three steps in the right direction, but in a three-mile walk,” he says. “The technology, the space, the opportunities are in Japan. It’s about how fast we can move, and how we can communicate with everybody else, that’s going to be the most interesting thing to see in the coming years.”