Japan - Land of the Ninja Unicorns

It is a steady refrain: Japan doesn't have an entrepreneurial culture. Japan doesn't have a venture capital ecosystem like other developed nations. Japan has a risably low number of unicorns.

Given the position of Japan as the world's third largest economy on a nominal basis, the lack of startups which achieve a valuation in excess of $1 billion seems shocking. Given that the presence of unicorn firms is seen as a proxy for economic development and innovation, Japan would seem to be floundering. But perception is a bit misleading. Japan has many firms which would go through a unicorn stage in other countries, but in Japan do not. Why? Let's examine the causes:

First, Japan has a venture capital issue. SoftBank, famously the firm which invested in Alibaba early on and has large stakes in FlipKart, GoTo, Didi, and TikTok parent ByteDance, among others, has very little invested in startups in its home nation of Japan. This is caused by a number of factors. To be listed on the US NASDAQ exchange, to qualify for an IPO, a firm must have a minimum of 1,250,000 unrestricted publicly available shares. To be listed on Growth (a market designed for early stage startups previously called Mothers), the Japanese exchange for startups, a firm need only have 2,000 shares. In the US, that would be the realm of the Pink Sheets market. So if a firm has a lower hurdle to IPO, it will go that route rather than additional rounds of VC funding.

Second, Japan has historically had a subject matter expertise shortage in investing. In the US, investors can bring not just capital, but a wealth of expertise. Successful entrepreneurs often go back into investing in startups, but specialize in the field where they came up. In Japan, they are often financial institutions who judge a firm not on the basis of the potential of the product, but on the financials. In the Venn Diagram of paradigm shifting entrepreneurs and fiscally conservative business managers, there is almost no overlap. As a result, Japanese who have great ideas often go elsewhere to start them up so that they can bring in additional outside experts when they need them.

Third, traditionally smart young Japanese business leaders didn't start their own companies, but instead competed to get into top-ranked Japanese universities so that they could join large Japanese companies or government ministries. This means there is not a traditional path for highly educated Japanese to become entrepreneurs, and those who go to work in businesses don't spend their retirement growing entrepreneurs.

Fourth, the most common exit for startups in Japan is IPO, not M&A. Large Japanese firms have been less acquisitive historically, particularly for firms in early stages. This is the antithesis of the US model, where firms with lots of capital invest it in startups that might payoff huge, although many concepts fail. In Japan, it seems that failure is not an option, at least the small, frequent kind that the US embraces.

Japan has 4 times as many firms which would have almost certainly gone to the unicorn stage but in Japan exited through IPO before becoming unicorns. Coral Capital's Tiffany Kayo highlighted this in a 2022 article (https://coralcap.co/2022/05/uncovering-japans-41-hidden-unicorns/?lang=en). Keidanren, the influential organization representing Japan's largest firms, last year announced a plan to dramatically increase startups and unicorns in 5 years. Unless the structural incentives are realigned, Keidanren's goal will remain unrealized.

Japan's other problems; population aging and decline, increasing wealth disparity, ballooning national debt, etc. can all be as symptoms of a national lack of optimism for the future. Given the serious repercussions of this, Japan needs a change. To this end, is it necessary for Japan to change this system of entrepreneurship that doesn't create unicorns? While on the surface, there's no compelling reason to change, it is a fact that unicorns get a lot of press and get people excited about the future. Like him or loathe him, Elon Musk inspires a lot of Americans to try their hand at entrepreneurship. Hiroshi Mikitani of Rakuten or Tomoko Namba of DeNA are successful entrepreneurs, although of a slightly lesser magnitude than Mr. Musk, even after his recent spectacular stumble. Perhaps having more high profile successful entrepreneurs will inspire young Japanese to start new world-changing firms and create an inspiring future for Japan and the world. Japan has had periods of lot of entrepreneurship; in the Meiji period, when the country opened itself to the outside world after two centuries of isolation; in the period following WWII, when much of the country lay in ruins. Japan isn't facing external shocks like the end of isolation or the Allied Occupation, it is currently literally crumbling from the inside. Maybe unicorns can be the inspiration to build a new foundation for growth.