Bound by the Sea of Japan to the west and the Pacific Ocean to the east, Japan spans a territory of close to 378,000 sq km, 364,000 of which are land and the rest water. Often referred to as “the Land of the Rising Sun” because of its Japanese name “Nippon” – literally “the sun’s origin” – the country consists of 6,850 islands, the largest of which are Honshu, Hokkaido, Kyushu and Shikoku, which together make up about 97% of the territory.
Home to the world’s 11th largest population with more than 127 million people, Japan has often been singled out as an early demographic example of a population diminishing, rather than growing. Current estimates project that by 2065, figures could plummet to 88 million – a drop of as much as 30% compared with 2015.
Not only is Japan’s population shrinking, it is also ageing. With a median age of 46.7, it is the world’s second oldest, right behind Monaco, where the median age is around 53. Recent government studies also forecast that by 2065, people aged 65 and above will account for around 38% of the population.
A mitigating factor may, however, be that Japan has one of the world’s highest life expectancy, ranking second at 85.52. It also has one of the world’s most educated populations, ranking second – right behind Canada – with 50.5% of 25 to 64-year-olds having completed some form of tertiary education, according to the Organisation for Economic Cooperation and Development.
More than 70% of the land is mountains and volcanoes, and the country has often been seen as one that offers few natural resources. It is perhaps no wonder then that the country is known mostly for its groundbreaking contributions to technology and innovation, particularly in the areas of electronics and automotive.
The world’s third-largest economy, with a GDP of nearly $5 trillion, the archipelago has been home to some of these sectors’ most successful businesses, such as Canon, Casio, Nikon, Sony, Panasonic, Nintendo, Hitachi and Fujitsu for electronics, and Yamaha, Toyota, Nissan, Mitsubishi, Honda, Suzuki and Mazda for automotive, to name a few.
More recently, these traditionally strong areas have been supplemented by new technologies, which are progressively reshaping the innovational landscape in Japan. Ken Yasunaga, managing director at the public-private investment fund Innovation Network Corporation of Japan (INCJ), said: “Initially, internet services were the strongest and biggest source of entrepreneurs on the Japanese market.
“We have now started seeing new kinds of opportunities, including in the life sciences space – mostly dedicated to drug discovery – and in IT and software. But most of all, it is the internet of things (IoT), artificial intelligence (AI) and robotics that always the top the list these days.”
Flourishing activity
According to a report by the Japan Forum for Innovation and Technology, 32 of the top 300 corporate investors in 2016 were Japanese.
Mitsui & Co Global Investment, venture arm of the Tokyo-based general trading business Mitsui & Co, ranked first on the Japanese market and seventh worldwide. Other corporations listed among the 32 included Mitsubishi UFJ Capital, Cyberagent Ventures, DG Incubation, Astellas Venture, Gree Ventures, NTT Docomo, Takeda Ventures, and Nissay Capital.
While local corporates are being increasingly generous towards young innovative businesses – exactly 27 times more than five years ago, according to the Asia-focused finance publication Nikkei Asian Review – corporate venturing activity has been rising in Japan over the past few years. Last year alone, the country hosted 73 deals for a total $671m in funding, ranking 14th and sixth respectively worldwide.
Both deal value and volume have been increasing nearly consistently since 2011, with numbers jumping from $6m in 2011 to a record $671m last year, and from six deals to a record 73.
Hiroshi Saijou, CEO and managing director at Silicon Valley-based Yamaha Motor Ventures & Laboratory Silicon Valley (YMVSV), said this acceleration was largely triggered by Prime Minister Shinzo Abe’s visit to Silicon Valley in 2015, when Abe met and talked with some of the valley’s top entrepreneurial figures, including Facebook founder Marck Zuckerberg, Tesla founder Elon Musk and Twitter CEO Jack Dorsey.
In a public address, Abe declared his intention to support and develop the Japanese venture ecosystem. He announced a number of plans and projects, the highlight of which was the creation of the Stanford Silicon Valley-New Japan Project (SNVJ) – a platform aiming to establish a sustained collaboration between Japan and the valley.
This joint initiative included the launch of incubators and accelerators that would boost the global development of some of Japan’s most promising startups. At the time, the SNVJ had set out to incubate 200 startups in strategic sectors including design, transportation, healthcare, robotics and retail. It also planned to encourage the collaboration of US and Japanese universities and research centres such as the Byers Centre for Biodesign and the Hasso Plattner Institute of Design at Stanford in the US, and the Tokyo, Osaka and Tohoku universities in Japan.
Saijou said: “I believe Japan has been getting much more hyped in terms of CVC activity lately, with established corporations being more proactive and more eager to acquire new opportunities. The market is growing, and the environment is generally positive.
“Over the past two years, the scene has become particularly exciting for hardware-related businesses. Robotics, IoT and AI are all new areas of innovation that have been brought to hardware design, giving way to new opportunities. Japan has always been known for the quality of its hardware manufacturing, and so foreign investors are starting to look to the Japanese market for good sourcing in these fields.”
GCV Analytics data, however, reveals that the strongest sector last year was media, with 13 deals. IT followed with 12, while financial services reaped 11. Other noteworthy areas were healthcare, with nine transactions, consumer and services with eight, transport with six and industrials with five.
Japan’s traditionally strong automotive industry has been playing a pioneering role in the country’s CVC effort, with flagship corporations such as Toyota and Yamaha the first to establish independent units.
Last year, Toyota launched its $100m venture arm, Toyota AI Ventures, dedicated to early-stage investments mainly within the autonomous driving and robotics spaces. Two years earlier, Yamaha had created YMVSV, with an original investment capacity of $450,000.
Jim Adler, managing director at Toyota AI and executive adviser to Toyota Research Institute, said: “There has been quite a bit of interest from abroad in finding startups in Japan. Japanese companies have, in turn, started doing more VC investments, which means we can expect CVC activity will continue to grow there. Certainly, within the automotive space, the fact that companies the size of Toyota are expanding their CVC activity is a clear signal that it is becoming more important.”
Toyota’s recently announced $2.8bn development effort in Tokyo – Toyota Research Institute-Advanced Development – co-led with suppliers Denso and Aisin Seiki, may drive even more CVC activity, Adler added.
In March this year, Aisin Seiki announced the launch of a $50m US-based investment fund in partnership with VC firm Fenox Venture Capital, which will manage the fund. And Denso last year said it planned to expand its venture investments in new technologies, working towards the creation of connected self-driving cars.
In 2015, Toyota also launched Mirai Creation Investment – a ¥13.5bn ($111m) vehicle co-founded with Tokyo’s Sumitomo Mitsui Banking Corporation and the asset management firm Sparx Group, targeting startups developing advanced technologies for the car industry.
And the recently formed strategic alliance Renault-Nissan-Mitsubishi rolled out a $200m venture fund largely devoted to autonomous driving and AI, with Renault and Nissan each providing 40% of the capital, and Mitsubishi committing the rest. The conglomerate reportedly said it would look to invest up to $1bn over the next five years.
Other sectors, too, have given birth to significant venture arms, progressively establishing Japan as a player in global CVC. In 2016, optics and imaging products specialist company Nikon partnered asset manager SBI Investment to launch the $100m Nikon-SBI Innovation Fund dedicated to IT, AI and robotics. The same year, electronics, gaming, entertainment and financial services conglomerate Sony introduced its ¥10bn Innovation Fund, which has supported around 15 robotics and AI startups to date.
More recently, consumer electronics manufacturer Panasonic earmarked an investment of $100m for its new California-based venture arm Panasonic Ventures. Last month, this initial commitment was completed with the launch of BeeEdge, a US-based accelerator co-founded with San Francisco-based VC firm Scrum Ventures.
It would be impossible to talk about Japanese corporate venturing without mentioning the country’s behemoth market player, SoftBank, and its near-$100bn SoftBank Vision Fund.
As reported by GCV, news of the fund first broke in October 2016 when the group announced plans for a $100bn fund that would be equipped with $25bn of its own capital plus $45bn from Saudi Arabia’s Public Investment Fund as a limited partner (LP). The fund reached its first close in May that year, having accumulated $93bn from LPs, including $15bn from Abu Dhabi’s Mubadala Investment Company, and $1bn each from electronics producers Apple and Sharp, chipmaker Qualcomm and contract manufacturer Foxconn.
By that point, SoftBank had already made some big moves, having chipped into a $500m round for online lending platform SoFi and a $330m round for India-based ride-hailing platform Ola in February, and provided $300m for co-working space provider WeWork the following month. The company also agreed to a $3.3bn acquisition of Fortress Investment Group – an investment manager with $70bn of assets under management.
A milestone in the firm’s investment history, however, was passed when it invested $5bn in China-based on-demand ride-hailing platform Didi Chuxing as part of a $5.5bn round that reportedly valued the company at more than $50bn.
More recently, SoftBank led a funding round estimated at roughly $9bn to acquire a 17% stake in peer-to-peer ride-sharing app Uber, with Dragoneer, Tencent, TPG and Sequoia as co-investors in the transaction. The firm also said it considered making an investment of up to $1bn in China-based courier and delivery services provider Manbang Group.
In the most recent news, SoftBank said it was looking at fusing its investment activities, with plans to create a new entity – SoftBank Financial Services – which would incorporate both the Vision Fund and Fortress Investment.
However, the fund has so far made a negligible contribution to Japan’s local investment market, as most of its activity has been abroad, comparable to peers, such as Rakuten and Gree, which have focused in markets, such as Southeast Asia. And relatively few international corporations, apart from corporate venturing groups from US-based Intel and Salesforce, have tapped Japan’s local entrepreneurs. Ken Asada, head of Intel Capital in Japan, pointed to deals such as Trigence Semiconductor, which was founded in 2006 as a spinoff from Hosei University and received its first investment in 2012 from Intel Capital.
But returns are being seen by some of these international CVCs, with Shinji Asada, head of Salesforce Ventures in Japan, citing its first trade sale and three flotations, including Hottolink.
Government support
The Japanese government is keen for more and adding its weight. Ever since Abe’s visit to Silicon Valley, the government has made it a high priority to support its venture ecosystem. Over the years, the number of government-backed deals has increased consistently, with two transactions recorded in 2015, and 11 in each of 2016 and 2017. Deal value also inflated, with $26m, $94m and $293m respectively invested over those three years, according to GCV Analytics.
Some entities in particular have been more active over the past two to three years, including the Japan International Cooperation Agency, the Japan Science and Technology Agency, the National Federation of Agricultural Cooperative Associations, and Singapore’s sovereign wealth fund GIC.
But most of all, the government has been active through its own investment arm, the Innovation Network Corporation of Japan (INCJ). Launched in 2009, the INCJ is a Tokyo-based stage and sector-agnostic joint venture involving the Japanese government and 26 corporates, including large corporations such as Sony, Toyota and Mitsubishi.
So far, the government has contributed $2.6bn to the fund, while corporates have invested around $100m. In addition, the government guarantees a credit line of up to $16.4bn, bringing the fund’s total funding capacity to almost $21m.
One of the INCJ’s flagship transactions was the backing in 2012 of the merger of Sony’s, Toshiba’s and Hitachi’s liquid crystal display divisions into a single entity, Japan Display, with a rumoured ¥200bn. In 2016, Japan Display secured a further ¥75bn from the government-backed fund, aiming to develop new technologies. By then it had gone public two years previously.
Yasunaga said: “Our goal is to bring innovation to the Japanese industry by making investments, and we do this in two ways – through private equity and venture capital. We try as best as we can not to compete within the small domestic field, and so mainly target areas in which private VC money is insufficient. These, for instance, include capital-intensive or long-term sectors such as hardware, life sciences or semiconductors.
“We also try to grow the Japanese VC space by making limited partner (LP) commitments to VC funds and try to promote international exchanges by encouraging Japanese corporations to export themselves and acquire foreign businesses.”
Following INCJ’s trail, other government-backed funds have since been created. An example of these is Cool Japan Fund – a Tokyo-based public-private initiative supporting the international expansion of Japanese businesses mostly operating within the media, consumer and services industries.
Part of the government’s wider Cool Japan strategy, which aims to promote Japanese cultural exports, the fund was established in 2013 with an original target of $1bn. So far, it has raised about $630m, 85% from the government. Since inception, the fund has supported around 20 companies, including Japanese TV channel operator Wakuwaku Japan, and cafe chain Green Tea World USA.
Last year, Cool Japan Fund also announced a $10m contribution to the Japan-focused entity of San Francisco VC firm 500 Startups, becoming its largest LP. The partnership was reportedly the first time the state had directly backed a non-Japanese venture capital firm. It also brought the total raised by 500 Startups’ Japanese branch, launched in 2015, to $35m – ahead of its original target of $30m.
In spite of these efforts, the idea prevails that Japan’s CVC market is still too small considering the size and weight of its economy. The INCJ’s Yasunaga said: “The venture market here is still very small, with around $2bn of startup investment per year – a comparatively weak number next to the EU, the US or China.”
According to the PitchBook-National Venture Capital Association venture monitor, venture investments in the US hit a record high in 2017, at an estimated total of $84.2bn – 16% more than the previous year. Meanwhile, Japanese startup funding reached ¥75bn – around $1.98bn – last year, according to consulting group Japan Venture Research.
“Ideally, a fully functioning venture ecosystem should not necessitate government intervention,” added Yasunaga. “But Japan has not reached that stage yet.”
Lacks and limits
Considering Japan is the third-largest global economy, 500 Startups partner James Riney, in a recent interview with the Financial Times, declared that “for the size of [its] economy, [Japanese VC] should at least be at the $10bn mark”.
Toyota AI’s Adler said: “Large nationals and multinationals can be part of Japan’s venture growth, but cannot do it alone. Growing a venture ecosystem is a difficult task that requires a concerted and sustained effort across many components. It requires access to capital across the entire lifecycle of a company, year on year, decade on decade. This means a capital supply chain, starting from friends and family, to angel investors, to institutional investors, to VCs and CVCs. In Japan’s case, that supply chain needs to be developed to help create a strong startup ecosystem.
“Another important ingredient is willingness to take risks, and to fail. Risk-taking is not as common in Japan” added Adler. “The propensity for people to join a startup, or start their own company, is a new thing in most areas in the world – unlike Silicon Valley, which has been developing an ecosystem of universities, capital, and risk-friendly entrepreneurs for decades. That ethos is rare.”
An element of response to this apparent shortfall may have to do with Japanese culture itself. According to a report from the Science and Technology Office in Tokyo, the Hofstede model, which evaluates national cultures based on six criteria, scored Japan 92 out of 100 on its “uncertainty avoidance index”, highlighting an inherent aversion to risk.
“There may indeed be some cultural issue around risk-taking, which is more common in other areas of the world,” added Adler. “The propensity for people to join a startup or start their own company is a rather new thing outside of the areas that have for decades been developing an ecosystem with the relevant universities, capital and risk attitude. These trends are common in only few places around the world right now.”
This idea was further confirmed by Yasunaga, who said: “A lot of Japanese corporations are still very shy about working with VCs. It is all a matter of credibility, as you cannot guarantee the long-term existence of a venture business.
“CVC is something that has only started to happen in Japan, and it is still very much an emerging space. Three years ago, the Japanese Venture Capital Association counted two CVC members – right now, this number has gone up to 28, but that is only the tip of the iceberg.
“Besides, most of the money still comes from the government and from corporates, while very little money is provided by institutional investors. The best scenario would be if there was enough LP money for the government to stop its intervention. But at the moment, there is still a severe lack of institutional money in the market – including foreign institutional money.”
The fact that Japan’s VC market has been dominated by corporate rather than financial VCs, may not have been positive for the ecosystem’s development.
Kay Enjoji, president of TEL Venture Capital, the investment arm of the electronics and semiconductor group Tokyo Electron, said: “Some key issues in the Japanese venture ecosystem are the lack of strong financial VCs to support our investments, and the lack of professional CEOs to run them. Compared with other places, such as Israel or the US, it is difficult to find co-investors to partner and quality managers to rely on.
“I also find that Japanese financial VCs tend to go for easier exits, investing in less capital-intensive sectors such as software, rather than in long-term businesses operating in the life sciences or hardware industries, for example.”
Enjoji was also keen to highlight the difficulties sometimes encountered by local startups in winning support from foreign investors. First because of potential issues caused by the language barrier, and second because some sectors are still restricted by the Foreign Exchange Control Law, and need approval to access such funding.
There is also the belief that Japan’s foreign policy has failed to encourage immigration over the years. According to official records, the number of foreign residents living in the country hit a record high of 2.23 million in 2015. However, foreign residents account for as little as 2% of the population.
It is perhaps no wonder that foreign CVCs have reservations about investing in Japan. According to GCV Analytics, among the country’s top 20 corporate investors between 2011 and 2017, only the two US-headquartered groups Intel and Salesforce, with nine and 12 deals respectively, were foreign.
For Yamaha’s Saijou, it was clear the local market needed to open up. He said: “Japanese corporations and startups still operate in a very Japanese style. Their structure itself is Japan-unique, and very domestic. I believe they should operate with international standards. Even within our own [Yamaha’s] strategy, we do not really look at Japanese startups at present, as we believe they are not international enough, and too inward-looking.
“At the same time, the local innovation ecosystem should be modelled to fit in with the Japanese culture. There is so much potential for established corporations to use their human and financial resources to their full extent, to be innovative and to find new business opportunities.
“Educating people to VC, putting training systems in place for company employees, being more open and working together with local startups – these are all challenges that Japanese corporates should take up right now.”
To an extent, Japan has made some efforts to open its borders. In 2014, Abe’s government introduced a skilled worker visa, aiming to lure fresh talent from abroad. Last year, the rules on permanent residency were also loosened, enabling skilled workers from overseas to apply for permanent residence after just a year living in the country. Finally, and perhaps as a way of soothing the severe workforce shortages currently facing the archipelago, the government announced earlier this year another review of visa rules by the summer, saying it would consider an extension of visa categories, mainly targeting technology professionals.
Could foreign talent and capital therefore be the key to unleashing the potential of Japan’s venture ecosystem? The INCJ’s Yasunaga seems to think so. “Japanese startups need foreign capital and support from international VC players to support them in their cross-border enterprise,” he said.
“What I would like to work on is getting more international CVCs to come and play in this market, and discover the resources of our little treasure island – a hidden gold mine.”
Japan’s strategic leadership on university venturing
James Mawson, editor-in-chief
Japan’s most prestigious academic institution, University of Tokyo, has a challenge. It estimates 90 of its 27,449 students each year form a spinout or startup.
It, and the Japanese government, look at the “billionaire factories” in the US, such as Stanford University or Massachusetts Institute of Technology, and estimate that each student there tries about two startups before leaving the institution.
The government, therefore, has funded a $1bn university venturing scheme so Japan’s top four universities can encourage more startups and spinouts, while other universities in the country, such as the prestigious Keio business school, have set up their own innovation initiatives.
But funding without a mindset shift will make little difference, so the Ministry of Education, Culture, Sports, Science and Technology developed the “learning from university-initiated venture creation symposium” organised by the Japan Venture Capital Association and hosted at the University of Tokyo to try to speed up the changes before the Olympics in 2020.
To encourage the next generation of students at universities to be more open to startups, Japan’s Ministry of Economy, Trade and Industry is encouraging those in school over the age of 10 to think that entrepreneurship is better than learning even how to ride a bicycle or swim.
In this, having role models is useful. The symposium heard from Mitsuru Izumo, president and CEO of Euglena, a Japan-listed producer of food and energy from algae, how he had been inspired while a student on a trip to Bangladesh.
The startup was formed out of research at the University of Tokyo before listing in 2012, and Euglena has since become a limited partner (LP) in the $17m Next-generation Japan Advanced Technology Development Fund, targeting academic research-inspired startups, such as robotics developer Miraikikai.
Other corporate-backed university-focused venture funds include the $33m raised by Mirai Souzou from 13 LPs, including Denso, Astellas, Mizuho and Mitsubish-UFJ, according to Daisuke Kaneko, co-founder of the fund. He described part of his investment strategy as looking for the professors’ side hustles, or work outside their public research.
However, such examples have been relatively rare, although the symposium also heard from Hiroaki Tsujimoto, chairman of power device sensor Sirc, Shingo Aka, president and CEO of surface acoustics monitor Ball Wave, and Kotaro Tanano, director of surgical robotics company Riverfield, as three startups hoping to emulate Euglena’s success.
But as with the Euglena-backed venture fund, a funding ecosystem to support the startups has been developing to cater for the increased entrepreneurial activity.
Apart from active corporate venturers in Japan, market insiders pointed to Globis and University of Tokyo Edge Capital (Utec) as two local VCs able to raise money relatively quickly from institutional investors.
Dai-ichi Life Insurance Company last month committed ¥1bn ($9.4m) to the Utec 4 fund with an eye on potential strategic insights as well as financial returns. Dai-ichi had earlier committed to the Keio Innovation Initiative 1 fund in July 2016 and the Miyako Kyoto University Innovation fund in November 2017.
Utec 4 is expected to close this month at ¥25bn and has been complemented by one of the four government-backed university venturing initiatives targeting the University of Tokyo. This initiative was UTokyo Innovation Platform Company (UTIPC) as a fund of funds able to commit to an expected five or six venture capital firms supporting startups from the University of Tokyo, including Utec 4 with a ¥2bn commitment, and 360 IP Japan fund and Global Brain No 6 fund, both with ¥500m commitments last year. In addition, UTIPC can invest directly in startups, usually at a later stage of development than those backed by Utec, such as wearable clothing company Xeome.
The other three government-backed university initiatives are targeting Tohoku, Kyoto and Osaka universities but Katsuhiko Oizumi, president and CEO of UTIPC, described the challenge as one of increasing the number of spinouts and startups from Japan’s premier research university. He said University of Tokyo had between five and six spinouts a year and about 30 to 40 startups from a research base turning out about 600 patents a year. One effort UTIPC was funding was an incubator for pre-seed stage companies, with 64 applications last year.
Oizumi said: “There has already been an amazing change,” with entrepreneurship now considered as an occupation. Previously, working for large corporations was favoured, but now students are advised that recruits there are not happy and instead are looking at entrepreneurial role models from the past 15 years, such as Kotaro Yamagishi, co-founder of Japan-listed games developer Gree and CEO of Keio Innovation Initiative (KII) since the end of 2015.
Yamagishi described his motivation for developing KII for Keio, Japan’s oldest institute of modern higher education, as a way to “give back, as I was helped”.
Having initially donated money to universities for brain research, then angel investing in startups, he was invited to lead KII. He described private universities as similar to large established corporations in having challenges in decision-making given a relative lack of ownership and leadership and “most not wanting change”. As a result, he has set up KII with a small team and a focus on bringing professional investment and the right people to the science.
And the timing seems well-judged, given the increasing demand.
Disclosure: Japan’s government paid for the author’s flights and accommodation to address the symposium in Japan