A report into Japan’s young, high-growth companies has found local corporations are buying relatively few domestic start-ups and could become a more important part of the entrepreneurial ecosystem as they seem to have created more value than traditional venture capital firms. See the linked powerpoint slides here.
The US-Japan Innovation and Entrepreneurship Council, an organization sponsored by the two countries’ governments, said: “While additional research will be needed, early indications are that in Japan corporate venture-backed startups have created more value than traditional venture capital firms, possibly because they bring a more rigorous and industry-specific strategic focus to the transaction.”
And the report identified a “rapid expansion of corporate venturing activity in recent years, with 2011 witnessing a record number of corporate venturing funds raised”.
A number of notable launches coming from high-growth companies with previous venture backing.
Of the 12 venture-companies identified by the report as having substantial impact on the Japanese economy – having more than 2,000 employees, a market capitalization of more than Y30bn ($378m) or more than Y45bn of consolidated sales – at least five have subsequently become corporate venturing investors.
The five identified corporate venturing units with prior venture backing are:
Social media group Gree set up Gree Ventures and indirectly invests via DCM’s A-Fund and with Infinity Ventures;
Online gaming group DeNA also set up its Incubate Fund and is a limited partner in Infinity;
Social network Mixi that has committed to Infinity and US-based venture firm NetService Ventures;
Electronic commerce website Kakaku with incubator Open Network Lab; and
Entertainment content provider Dwango, which has made minority to majority deals, such as Maho no iLand.
And the council added “the present entrepreneurial environment [in Japan] offers more potential sources of venture financing than ever before” but more could especially be done to support the exit routes for these venture-backed companies, such as through tax incentives so the transaction cost was considered a one-time expense.
The report to the council’s leaders said: “In the United States, exit via IPO [initial public offering] has declined while exit via M&A [mergers and acquisitions] has gained in importance; in Japan, IPOs predominate while M&As remain relatively rare.
“Government policy should facilitate all three options, with perhaps greatest attention to encouraging an active and efficient M&A environment, including through wider use of preferred stock.”
The report added: “In the challenging economic climate since 2009 a growing number of Japanese companies have completed an unprecedented number of corporate acquisitions overseas, including of venture companies, as part of an effort to expand business operations globally. They have pursued relatively few acquisitions of domestic startups by comparison [see chart].”
The report’s other recommendations looked more broadly, including the public image of entrepreneurship and funding of start-ups and how to increase risk tolerance.
“Given the inevitability that some ventures will fail, policy must also incorporate ways of lowering the cost of failure by, for instance, allowing legal discharge of company debts through bankruptcy without burdening founders with continued personal liability.”
Other policy measures to help support Japanese young, high-growth companies, included the government buying more goods and services from them, job mobility, cross-border exchange with other centres of innovation, tax incentives for angel investors and permitting company registration with English language documents in Japan and Japanese documents in the US.
The report to the council’s leaders said university and research institutes as well as corporations were primary sources of innovation and called for funding mechanisms at Japanese research universities to be set up to bridge the gap between research and commercial application.