Despite efforts by the Japanese authorities to improve the venture ecosystem modelled on the US system, the local environment has failed to develop.
One reason is that large firms do not play a proactive role in the venture ecosystem, either by buying venturebacked companies or by investing or forming alliances with them as innovation partners.
For a long time, Japan has taken various steps to help generate venture companies to drive the Japanese economy, developing institutions, such as new stock markets for ventures, and a tax system to encourage angel investors.
The number of talented venture capitalists is growing, with communities forming for entrepreneurs and their supporters, but their exit routes are hampered by a lack of merger and acquisition (M&A) activity.
A Ministry of Economy Trade and Industry (METI) report in 2008 recommended corporate venturing to help large firms become more involved in smaller businesses and thereby improve the M&A market.
Since then, Fujitsu Research Institute has been conducting an empirical study on the corporate venturing relationships between large information and communication technology (ICT) companies and venture-backed businesses. We focused on the ICT industry because, in general, customers require such rapid innovation that we assumed it to be inevitable for large ICT firms to take advantage of smaller ventures in the sector.
FRI’s study analysed the prospectuses of 129 ICT ventures that were floated on a stock exchange from 2003 to 2010 to identify both investors and alliance partners during the process leading to initial public offering (IPO).
We found there were 700 corporate venturing deals – direct equity investment made by established companies in private businesses – worth an aggregate ¥153bn ($1.9bn) in these 129 ventures.
The chart shows the percentage of investment by industry sector. The ICT industry itself provided a little more than a quarter (27%) of the corporate venturing activity in its sector, with large ICT firms accounting for less than 10% of the total amount. It is difficult to compare total corporate venturing investment with other nations, but we can at least say that large ICT firms are not playing a leading role in Japan.
The same picture is true for strategic alliances between large ICT firms and entrepreneurial ventures. FRI found large firms tended to regard entrepreneurs as subcontractors rather than innovation partners. Of the alliances between large ICT firms and ICT ventures, 67% were subcontracting across the industry’s various subsectors, such as hardware, software, internet-related activity and services.
This study suggests large ICT firms have yet to become involved in mutual relationships with ICT venture companies, even though they are theoretically viable innovation partners, either by investing proactively or by forming strategic alliances with them as innovation partners.
There is a greater tendency for small and medium-sized ICT firms to invest in and form strategic alliances with entrepreneurs as innovation partners but it is more difficult for them to foster ventures or become M&A partners because of their size.
But while the research shows what seems to be the sad reality of current corporate venturing in Japan, like other venture-related issues, corporate venturing in Japan is better than it has been.
Communities of corporate venture capitalists have emerged and individual groups are more visible and collaborative. Because corporate venturing in Japan is not yet at a competitive stage, interaction among individual groups will bring about substantial results over time despite the relatively poor state of corporate venturing and open innovation.
Large companies must play a more active role in fostering corporate venturing, not only for Japan’s venture ecosystem but also in their own interests.