Time to move to Tokyo...

... Here is how international startups can ease their market entry to Japan

Japan has long been seen as trailing behind when it comes to a startup ecosystem.

Things are changing though, and Japan is rapidly making waves on the startup scene, and indeed, Japan is becoming an increasingly attractive place for international startups to gain traction.

It’s arguable now that startups that don’t make inroads into the Japanese market, will likely miss out longer term.

A complex landscape

The business leaders of today can be forgiven for having a confused image of the Japanese business. They grew up listening to their Walkman and playing on their gaming stations, all straight out of Japan. Then today, they know, inherently, that Japan is the leader in the arena of robotics. Then there’s the fact that post-War Japan has been renowned as an R&D heartland.

Japan seemed as these business leaders were growing up and cutting their entrepreneurial teeth, as innovative as the bullet train itself.

On the face of it, it would appear that Japan is a natural hotbed for a startup ecosystem. With the 3rd largest global GDP, Japan counts 7 unicorns and 100s of soonicorns in the market.

However, in reality, Japan has been a difficult region for foreign startups. And that’s where the confusion comes. Japan isn’t lagging behind in innovation, it’s lagging behind in terms of startup dynamics, in a way that other startup ecosystems like New York or London simply aren’t.

But that is actively and rapidly changing, making it easier for startups to embark on their market entry to Japan.

Why has Japan lagged behind?

Paul McInerney, a General Partner at Incubate Fund, a leading seed-stage investor in Japan, explained in a McKinsey interview that the amount invested in Japanese venture companies in 2020 was under $4.5 billion compared to $164 billion in the US. The numbers are undisputedly stark.

Looking at my numbers for 2021, I can see an investment estimate in Japanese ventures of $3.8 billion and in the USA od $560 billion.

There are multiple reasons why Japan didn’t develop startup ecosystems with as much ease as other international cities.

Venture capital has been distinctly missing. Major banks and largescale corporate venture capitalists were lumbering dinosaurs, holding the keys to the cash. The regulatory landscape has been prohibitive. And the culture has struggled to welcome non-Japanese speakers. There have been notable gaps in terms of talent and distinct shortfalls in the education fostering the right talent for the tech startup world.

In a nutshell, Japan’s innovative backdrop didn’t translate well to a startup model. Indeed, it was a bit bewildering. For example, in 2010, 8 Japanese companies were listed as being in the top 15 most innovative global companies but by 2019 it had dropped to just two (EconSight 2019). It was overtaken repeatedly in the number of patents granted, after being a global leader in 2010.

Despite the few investment hiccups of the past few years, Still, an estimated 16,000 startups were founded in Japan and two made it to the unicorn list in 2021. These include SmartHR, a cloud-based HRTech platform that provides paperless employment contract and entry procedures to employees, and Spiber, a provider of sustainable fabric materials based on microbially fermented brewed protein-based yarns. It uses plant-derived biomass and a fermentation process including sugar and microbes to develop its products.

Phillip Vincent, Managing Partner of Plug & Play East Asia and CEO of Japan's office shares that Japan is going through a digital transformation. Japan today still remains very paper-based. A company that is already working on its digital transformation is likely to be ahead of its peers. International startups within the deep tech, factory manufacturing and robotics markets will probably do well in Japan because Japan remains highly knowledge-based. Japan collaborative ecosystems welcome companies that very much use insights and research to drive outcomes. So international startups with deep tech expertise have great opportunities to collaborate with Japanese corporations.

Further, the sustainability topic and climate action have hit Japan very hard. You will find employees across Japan wearing their SDG badges. Companies are looking to become carbon neutral and evaluate relevant actionable solutions. The latter has become the number one criterion to hit ESG and execution metrics.

In addition, I gathered from talking to local insurers that addressing issues linked to healthcare and an elderly population, natural disasters and the cybersecurity threat due to accelerated digitization trends are also relevant topics to investigate by international ventures wanting to enter the Japanese market.

What’s changed?

There are over 10,000 startups operating in Japan, according to J-Startup. Tokyo is holding its place as third (behind London and New York) in terms of attractiveness for relocation (looking at business startups, R&D and livability) according to the Mori Global Power Cities Index.

Like there are multiple reasons why Japan took its time to get off the starting blocks, there are multiple reasons why the situation is rapidly changing. Indeed, these multiple reasons are largely fuelling each other.

More and more western venture capitalists and investors, along with Japanese investors, are churning money into new opportunities – with more rounds than are seen elsewhere. ?While it’s becoming simply easier to access the various corporate investment channels, foreign startups are still going to find it very hard to get a loan from a Japanese bank, but it’s manageable because local players and corporations with an interest in venture investing are now doing things differently.

In addition, the regulatory landscape is easing, with the government and initiatives such as Invest Tokyo actively leading the way through initiatives such as tax breaks and personalised services with an awareness that things needed to change. Even very basic hurdles, like visas, are now being streamlined. Indeed, there now are such things as startup visas which simply didn’t exist before.

What is the startup visa about?

A specific startup visa enables entrepreneurs to move to Japan for 6-12 months, granting them temporary residence. It applies to special areas, known as National Strategic Special Zones. Tokyo is one of these.

Why Tokyo?

Japan is actually developing a network of startup ecosystems, with cities like Fukuoka, Kobe and Kyoto all making their move, but our attention is on Tokyo.

Tokyo’s potential is immense. It has all the markers of rapidly growing into a leading global deep-tech hub.

You only need to look at a list of the top startups in Japan to see the dominance of Tokyo. Recently, we’ve seen Axelspace (a data as a service space technology company) raising $24 million. And in 2020, Playco (a mobile gaming company) gained $100 million, pushing it to a valuation that turned it into a Japanese unicorn. These examples demonstrate how different things now look.

Indeed, Tokyo can rightly be called the largest innovation hub in the country.

It’s where you’ll find the highest number of businesses and people, and the entire infrastructure that is key to growth. It is where you’ll find 80% of the venture capital investment and start-up funding in Japan.

Gen Uehara, Head of Strategy and Planning, Asia Pacific Region, Symphony confirms current views below:

For any of tech platforms the size of Japan market which generates world #3 GDP is hard to ignore.?Tokyo Metropolitan Government's effort to support global tech companies to offer service to the local market has been very visible in the last 3 years.?With some commitment to participate in the local communities, we are seeing strong potential of growth especially with the current pandemic where the barrier of entry to the new technology has definitely been lowered.

For the next two years, I will be one of the UK ambassadors for Invest Tokyo, Japan.

It has been a pleasure working for the past few months with the Accenture team and Invest Tokyo to better understand how international startups can "make it in Japan".

Looking forward to channelling more thoughts as I learn more about the local market with my peers and international colleagues ambassadors.

Share your thoughts. Connect with me. And we will aim to make the right connections for you ASAP.