This April, 500 Startups hosted our Geeks On A Plane (GOAP) tour here in Tokyo.
For those that don’t know, GOAP is an invite-only tour for startups, investors, and executives to learn about high-growth technology markets worldwide.
To kick off the Tokyo leg of the tour, I gave an ecosystem overview presentation while we cruised through the Tokyo waterways on a yakatabune (Japanese style boat). Many followed up with me afterwards asking whether I could share the slides, so I decided to write a quick blog post on what I shared.
I knew getting people to pay attention after a long trip would be a challenge, so I kept it short and sweet.
#1 Venture investment in Japan is small.
If you combine angel investment, venture capital, and crowdfunding, the difference between capital available to startups in Japan and U.S. is roughly $1.2b vs $75b. Granted, Japan is a smaller economy, but it is still about 1/3 of the U.S. in terms of GDP. Japan has a lot more room to grow.
#2 There is not that much M&A activity for Japanese startups.
Despite having a lot of cash on their balance sheets, Japanese companies historically have not been very active domestic acquirers. In most cases, they strongly prefer to build products and services in-house rather buying.
The very general rule of thumb for exits is…
#3 The bar to IPO for Japanese startups is low.
About 70% of companies that IPO in Japan have a market cap of $30m or less. (U.S. is 8%)
Fortunately, companies can go public at a market cap as low as $10 million, and listing on the Tokyo Stock Exchange is relatively cheap. Some people jokingly call the Japanese IPO the “Series B,” since that tends to be how many companies raise growth capital.
#4 Corporate venture capital is KING.
As I wrote on TechCrunch a while back, venture capital in Japan is fundamentally corporate capital, not only in the form of CVC, but also in the form of limited partners for independent firms. Japanese institutional investors tend to be much more risk averse, and venture capital is widely considered too risky an asset class to place money. And, unfortunately, Japanese venture returns haven’t quite reached Silicon Valley altitudes to get over this aversion. As a result, most of the money is deployed for strategic reasons rather than financial.
Which is why there is another general rule of thumb: 20% of startup investment in the U.S. is from corporates, 80% is from independent firms. In Japan, it is roughly the opposite.
#5 Smart people in Japan are finally joining startups.
Historically, students from the best universities in Japan would go straight to big, brand name companies like Mitsubishi, Toyota, or Sony. That’s changed a lot. The students now coming into the workforce grew up in the lost decade(s), and never saw an era where these large corporates seemed invincible. They grew up in a world where the enormous wealth creation came from startups like Facebook, Uber, and Airbnb.
#6 There’s a lot of COOL SH*T being developed.
A common criticism of Japan is that there are not enough great startups here. I think the bigger problem is that Japanese startups are not very good at marketing to a global audience. Elon Musk is often compared to Ironman, but Cyberdyne literally created an Ironman suit. The terrifying videos of robots from Google often feature technology from SCHAFT. Euglena cultivates the euglena microorganism for food, beverage, and fuel. All of these are Japanese startups, yet all of them are likely unknown by most of the global startup community.
#7 The hammers are pulling out the nails.
There is a common saying in Japan, “the nail that sticks out, gets hammered.” In other words, keep your head down and don’t stand out. The mentality has changed. There is more top-down support than ever before. The government is providing funds, support programs, and office space to encourage startups. All we hear about from our Japan LPs (who are mostly large Japanese corporates), is how they can engage with startups. It seems as though the hammers are now pulling out the nails.
So there you have it. 7 things to know about the Japanese startup ecosystem. If you just learn these 7 things you’ll have a general understanding of what is going here.
If you have any questions, please tweet me @james_riney.
You can also follow me here: fb.com/jamesriney.
Thanks for reading!