Japan’s politicians are expected to vote this week on a law to provide tax breaks of up to 80% for corporate venturing.
This is the latest of recent government-sponsored initiatives around the world, including France’s fiscal incentive scheme, which allows businesses to depreciate their minority participation in the capital of an innovative small- and medium-sized enterprises over a period of five years, and Turkey’s act that effectively allows corporations to deduct from their annual taxable income all the money they invest in a corporate venturing scheme.
Under Japan’s Industrial Competitive Advantage Law, which is expected to pass and come into force from January, 80% of corporate venture investment through funds is deductible from taxable income.
Japan’s Ministry of Economy, Trade and Industry (Meti) said both the size of tax break and speed of its expected implementation was “unprecedented”. The law is part of the Japanese government’s “third arrow” to revitalise growth in the government follow the first two measures under Abenomics (named after the prime minister, Abe,) for fiscal and monetary stimulus.
The government will have to qualify the corporate venturing funds for their eligibility for the tax breaks. Meti said out of about 100 venture funds in the country, about 30 were “good” and likely to pass its tests but it hoped the tax break would “encourage new corporate venturing programmes to start and established ones to improve”.
Japan is already the second-largest country for corporate venturing activity in the world with 96 active units, according to Global Corporate Venturing in a presentation at the trade body Japan Venture Capital Association’s (JVCA) second corporate venture capital event hosted by phone operator Nippon Telegraph and Telephone (NTT).
Many of the new corporate venturing units launched in the past three years have come from companies that have previously been venture-backed themselves, including Rakuten, Gree, Dena and CyberAgent.
The 120 attendees at the JVCA event welcomed the update by Yoshiaki Ishii, director at Meti, on the tax break.
Toshihisa Adachi, chairman of the JVCA and head of trading company Itochu’s corporate venturing unit, in a keynote address said it was “fortunate” to be seeing several new policies being discussed to help create start-ups and legacy corporations become more keen on open innovation and venturing. He said: “Entrepreneurs change Japan for the better.”
Adachi concluded with a vision for governments, corporations, universities and start-ups to work together to “change Japan and the world”.
And, while many of these corporate venturing units have an international focus committing substantial amounts, including online retailer Rakuten that has backed US-based media group Pinterest, drugs groups Takeda and Astellas and NTT, their domestic investments were often relatively small compared to the largest market of the US.
Last year, across the entire venture capital market, less than $1bn was invested in 824 companies, according to Japan-based data provider VEC.
In the US last year, more than $25bn was invested by venture capital funds in 3,723 companies, according to local trade body National Venture Capital Association.
Alongside the corporate venturing tax break, Zeniichi Shisho, professor at Hitotsubashi University and an expert in venture law, said the tax authorities had also just decided to treat preferred and ordinary stock differently in a bid to encourage start-ups and venture investing. This was a “small but significant change,” according to Shishido, who organised a workshop at Hitotsubashi last week on Collaboration to Innovate: Academia, Industry and Venture Capital. He added the tax authorities could eventually lead to other moves to encourage founders to potentially offer employees “sweat equity” – shares earned by working at the start-up.
In this university workshop, Masato Hisatake, visiting professor at Tohoku University and former director at Meti, said over nearly 20 years the authorities had made nearly “every effort” to provide a comprehensive system of support for start-ups but more attention could be focused in particular on the “human resources” aspect of the venture ecosystem.
He said venture capital in Japan was “a bit peculiar” in that many of the investment managers had a “banker mentality” and wanted to avoid risk. Hisatake added that his analysis of the thousands of science and technology coordinators in Japan, subsidised by more than a dozen government schemes, needed better-designed incentives, governance and career paths.
As a result, Japan’s authorities are overhauling other tools to support start-ups.
Meti said it had set up a Mekiki programme, called Jump Start Nippon Project, to build a venture ecosystem through a network of mentors and supporters, including top-rated venture capital firms, such as Globis Capital Partners, which has recently made an initial close of its latest fund; corporate venturing units, including Global Brain and CyberAgent Ventures; and university venturing funds, such as the University of Tokyo-affiliated UTEC Capital.
Meti said it also wanted to enhance the $20bn Innovation Network Corporation of Japan (INCJ), a government-backed organisation. The INCJ has set up a division to increase its venture investment, especially at an early stage, with decision making on deals delegated from Meti to the INCJ.
The INCJ has this month hired Ken Yasunaga, former managing director at the JVCA, to run this division.
Japan’s Ministry of Education has also been reforming its system to incentivise universities to boost start-ups as part of the government’s plan to ensure the business start-up rate exceeded the closure rate and increased from 5% of all companies to 10% over the next 10 to 20 years.
A large part of the planned increase in start-ups is expected to come from universities and government research laboratories, the authorities said.
The Ministry of Education has agreed a $1bn investment programme for four universities – Tokyo, Tohoku, Kyoto and Osaka – to encourage their start-up rate.
While Tokyo and Kyoto have well-established university venturing units following 2004 changes in regulations to allow them to effectively incorporate and become independent, sources close to Osaka and Tohoku said they were exploring how to set up their own funds and collaborate more with industry.
The ministry’s plan follows on from a 2001 initiative, the Hiranuma Plan, that called for 1000 start-ups from local universities in the three years from 2003 to 2005. This plan delivered 1,600 start-ups of which Hisatake said 0.7% floated on the stock market and 60% survived at least five years, albeit most had added almost no net new employees.
But some university spin-offs have seen rapid growth, including UTEC-backed PeptiDream, which recently floated with a $1bn valuation, Naked Technology, which was acquired by games group Mixi in September 2011, Phyzios, that exited in February after four years, while Meti also pointed to Tokyo University start-up Euglena, which produces healthcare supplements and jet fuel and “can save the earth”.