Japan’s startup scene, where flea markets grow up to be unicorns (Tokyo venture ecosystem)

This is the long version of an article that was published by cnbc in Nov. ‘16, it was cut by 75% to fit the allotted space. Here is the original. (Oh, and Pokemon Go has completely disappeared.)

Mercari CEO Shin Yamada (Photo by Julian Littler)

As more Japanese investment money flows into local start-ups, hopes rise for greater innovation

TOKYO — In the summer of 2016, while Japan’s Pokemon Go players silently crowded public spaces staring into smartphones, the nation’s start-up scene was flush with high-tech ventures, focused on tangible, long term goals. Ever hear of Mercari? It’s a flea-market app — and the country’s first unicorn. For that, it can thank, among other factors, good timing. In 2015, Japan saw another increase in venture capitalism.

High above the Japanese capital’s fashionably grungy Shibuya alleyways and Roppongi’s party-weary streets, brightly-colored helium balloons fill the air over desks in the offices of Japan’s first unicorn. Mercari now has 50 million downloads in Japan and monthly revenue of $88 million (According to Mercari this revenue figure has not changed in over a year since April 2015). It has raised some $116.7 million investment in only three years, all from Japanese funds.

It also has offices in the U.S and the U.K.

While Mercari’s funding successes are significant, the world’s former №2 economy is coming to the unicorn party rather late. In fact, Japan lags far behind in the unicorn stakes.

According to CB Insights, of the world’s 168 non-listed start-ups valued at over $1 billion, 96 are in the U.S., 33 in China, seven in India and three in each Singapore and South Korea.

Then there’s Japan.

[CB Insights now -June 2017- lists the U.S. as being home to 105 unicorns, with 51 in China, 9 in India, 3 in S. Korea and 2 in Singapore — Japan still has only 1.]

The balloons are not to celebrate the company’s status, gained in March 2015, as the nation’s debut venture with a pre-IPO valuation of $1 billion. Nor are they to proclaim the continuing rise in domestic investment. They are “welcome” decorations, each bearing the name of a new recruit. Mercari’s staff increased from 100 to 150 over the six months through March. The company also has 120 members based in Sendai, a northeastern Japanese city struck by the massive earthquake and tsunami of 2011.

Domestic help

In fiscal 2015, Japanese funds sunk 75.6 billion yen ($739 million on Aug. 1 ’15 exchange rates) into 890 domestic deals, according to the Venture Enterprise Center Japan (VEC) — an extra governmental organization associated with the Ministry of Economy, Trade and Industry. This was the most they had put into home ventures since collection of domestic deal data began in 2012.

Overall figures for investment by Japan’s VC funds for the financial year starting in March 2015 and ending in April 2016 is being preliminarily reported by the VEC as 134.3 billion yen ($1.31 billion). A return to 2008 venture investing levels, before the global economy crashed.

[Figures for Japanese funds spending on ventures for fiscal 2016 were 148.8 billion yen, an increase of 14.5 billion yen on the previous year. With 105.6 billion of that spent on domestic investments, a whopping leap of 30 billion yen.]

Japanese investments in offshore ventures in 2015 totaled 58.7 billion yen ($574.13 million), up from 42.9 billion yen ($419.74 million) the previous year, VEC data shows. For the sake of comparison, U.S. funds invested $59.1 billion in 2015, according to the National Venture Capital Association.

Tokyo-based serial entrepreneur and creator of the podcast Disrupting Japan, Tim Romero, emphasizes that compared to Silicon Valley, nothing is happening in Japan. But, he added, it is California that is the outlier; nowhere is comparable by scale.

IT-related industries in 2015 made up 49.4% of Japan’s VC investments, down from 58.7% the previous year, according to the VEC. “Biotech/Medical industries” came next, accounting for 18.3% of total investment.

While domestic investments overtook spending on international deals in 2015, the total capital outlaid by Japanese VCs rose 17.2 billion yen ($168.28 million) from the previous year.

Alongside the rise, new funds continue to open. In FY15, 50 new VC funds worth 172 billion yen ($1.68 billion) were created in Japan, almost double previous year’s 90.7 billion yen ($887.47) of new funds, according to a May 19 VEC document.

The VEC report also noted that in the last quarter of Japan’s fiscal 2015 (Jan.-Mar. 2016) Japanese corporate pension funds contributed to new VCs for the first time in four years.

Prime ministerial push

Prime Minister Shinzo Abe, who in 2015 became the first sitting Japanese leader to visit Silicon Valley, believes rapid growth start-ups can boost his troubled economy. But there is much to overcome.

Decades of stagnant growth continue to challenge Japan Inc.

The International Monetary Fund reported June 21, 2016 that Japan is expected to grow at a .05% clip before dropping to 0.3% in 2017 due an anticipated consumption tax hike in coming years. The last such increase, in 2014, the first in some 20 years, caused the economy to contract into recession.

Other obstacles to growth include the nation’s rapidly aging population and its high public debt, both of which await effective policy solutions.

The U.K.’s recent vote to leave the European Union sent waves through world markets. However, Nikko Asset Management’s chief strategist, Naoki Kamiyama, said he didn’t expect the uncertainty surrounding Brexit to impact Japan much due to the small number of exports and imports between the two nations.

Strategies hoped to act as catalysts for Japanese venture growth include increased government funding for start-ups, tax breaks for angels, early-stage investors, and the passing of a bill to urge government departments and divisions to offer contracts to new businesses where possible.

The Japan Finance Corporation (JFC) extended 167,952 loans to start-ups between 2008 and 2015, according to Noriyuki Takahashi, head of Global Entrepreneur Monitor Japan. The JFC was created by the merger of four policy-based financial institutions. The move was meant to further economic stimulus. Interest rates on loans granted vary depending on the year and contract, but the JFC’s current standard rate for ventures is 2.35%.

Other positive signs for entrepreneurism include today’s low bankruptcy rates for small and medium-size enterprises as well as upbeat investors. Many CEOs and investors credit Prime Minister Abe’s leadership for the positive zeitgeist.

Despite a slow start, the nation’s private venture capital funds, which spend far more than corporate funds, are quickly growing in number.

Rewiring the system

World Innovation Lab (WIL), one of Japan’s largest VC funds, with a pool of some $340 million, was launched in 2013. Co-founder and CEO Gen Isayama is a former banker and has over 10 years of venture capital experience in Silicon Valley. He raised money from major Japanese corporations, including Sony, NTT Docomo, Mizuho and Nissan. WIL plans to bridge innovative opportunities between Japan and the U.S, investing in both countries.

Isayama’s VC strategy is a little different. He has gained access to the patents and technology databases of his donor corporations — some of Japan’s biggest spenders on research and development — to search for marketable ideas.

WIL invested an undisclosed sum in Mercari during the start-up’s Series C round. “It’s good for them; it’s also good for us,” Yamada said with a laugh. “Before that, we were a little bit small.” The start-up used some of the investment to advertise on TV, a medium still widely adored by many Japanese. After the TV spots aired, Mercari’s download numbers shot up.

Silicon perspective

One huge challenge for Japanese start-ups is attracting foreign capital.

WIL’s CEO knows how Japan is considered by the rest of the world. Having worked in Silicon Valley VC for many years, the absence of investor interest in his country caught his attention. Unless people in the Valley have some kind of personal affinity for or relationship with Japan they are not interested in it, he said.

Mercari, completely funded by Japanese money, is a case in point, according to Isayama.

“Why weren’t Tyber Global, Fidelity, even Sequoia Growth Fund, Andreessen Horowitz … why didn’t they invest,” asked Isayama about the absence of major Californian VC funds. “It’s a great company. If you compare it to any of the unicorns in the U.S., I think this company is 10 times better, healthier financially.”

Silicon Valley’s absence from the investor syndicate represents the general view of Japan from the U.S., according to Isayama. He also hears that his U.S. peers are too busy with China and India to bother with Japan.

Meanwhile, in Japan, a constellation of coffee table-size satellites, 3-D printers producing human organs and machine learning are among the projects that cutting-edge ventures are hard at work on. Axelspace, Cyfuse Biomedical and Preferred Networks are entirely funded by Japanese money, though it didn’t flow easily.

Axelspace secured $15.8 million in its Series A funding round, closed in September 2015. However, Yuya Nakamura, the aerospace start-up’s bubbly CEO, said raising money was tough.

Axelspace CEO Yuya Nakamura with a miniature model of his early microsatellite (photo by Julian Littler)

“It was so difficult to find a customer,” Nakamura said, “because there are no customers, there was no market.” A grant for new businesses from the government got the company started, but things were still slow.

Having launched his first satellite at university with a team of fellow students, the future CEO was hooked. But with no business creating microsatellites, he had no choice other than to start his own. After several years without a client, his team now designs and builds microsatellites in his downtown Tokyo office.

“Everyone wanted to hear about the microsatellite, because it’s exciting, right?” Nakamura asked. “But when it came time to talk about business, they would always go silent.” This despite the company making it 100 times cheaper to produce and launch space probes. Besides miniaturization, Nakamura also cut costs by piggybacking, securing room in the payload of a larger takeoff.

The aerospace company finally found a client in Weathernews, the world’s largest private weather company.

Data is digital gold. A single image taken by a large commercial satellite costs around $10,000, so the weather network decided to save money by owning it’s own miniprobe. The deal resulted in the first private microsatellite in space. Next, the CEO is planning a constellation of the machines to take photographs of anywhere on Earth at any time. Each unit in the constellation will have a different owner, and all parties will be able to share information. It is called Axelglobe and will consist of 50 machines.

The CEO said some local prefectural governments have also expressed interest in being able to monitor their jurisdictions, especially for agricultural purposes.

Robot-suit maker Cyberdyne, meanwhile, has invested in Cyfuse Biomedical because it hopes to integrate the start-up’s tissue engineering into its robotic exoskeleton. The robot-maker hopes to regenerate the damaged spines of their robot-suit users by utilizing Cyfuse technology, said Koji Kuchiishi, a co-founder of Cyfuse. The robot maker was part of a 2015 syndicate of 12 Japanese investors that provided some $12.85 million in funding.

Cyfuse is a regenerative medicine start-up that has created a 3-D printer which produces human tissue. The robot-like bioprinter was developed with medical device maker Shibuya Kogyo, using techniques pioneered by co-founder Dr. Koichi Nakayama. It “prints” 3-D artificial human tissue from living cell aggregates.

In February 2015, Cyfuse closed a Series B round of some $12 million. To date, the venture has raised 1.98 billion yen ($19.12 million) since being established in 2009. But starting a biotech company soon after a global economic turndown makes finding funds harder than usual.

Koji Kuchiishi, Former CEO of CyfuseBiomedical (Photo by Julian Littler)

The company resulted from the chance re-acquaintance of two former high school friends at a wedding. At the party, human tissue engineer, Koichi Nakayama, told Kuchiishi, then a consultant with McKinsey & Co., that he wanted to commercialize his research on regenerative medicine, but he himself wished to continue as a university researcher.

Kuchiishi left the consulting firm to co-found Cyfuse Biomedical. Initially, things were tough. His wife was unhappy with all the uncertainty. But money would come. First, $400,000 from the government. Later, a $3.15 million grant from the Japanese government’s New Energy and Industrial Development Organization (NEDO) to conduct joint research with Kyushu University, where the start-up’s technology was developed.

In 2012, stem cell researcher Shinya Yamanaka won the Nobel Prize. The award placed biotech firmly in the consciousness of Japanese investors. In this climate in 2013, Cyfuse closed its Series A round with some $5 million.

In February 2016 Virginia-based Lifenet, a regenerative medicine and transplant specialist, was the first to buy Cyfuse’s Regenova bioprinter system. It was the start-up’s first sale in the U.S. Now there are Regenova systems at John Hopkins University and Indiana University — the first academic institution in North America to access the machine.

Regenerative tissue medicine is not a short-term project. Only three years ago, the former Cyfuse CEO was alone in Tokyo trying to drum up funds. Now, with a staff of 23, the company has started a clinical trial of their lead project, has eight 3-D printer systems operating at Japanese universities and two in the U.S.

Preferred Networks (PFN), an artificial Intelligence and machine learning venture, also had a great 2015. Toyota invested 1 billion yen ($9.50 million), and Fanuc, the big industrial robot maker, contributed 900 million yen ($8.63 million). This start-up is also 100% Japanese funded.

Toyota is using PFN technology to develop mobility machines and self-driving automobiles, while Fanuc is working toward fully networked factories.

PFN was spun out of its parent company, Preferred Infrastructure, in March 2014. The moment came when its members realized the huge potential for both machine learning and industrial applications for the Internet of Things.

Shohei Hido, PFN’s chief research officer, shared how in the beginning, all the company’s revenue came from contracts, not investors. “Preferred Networks never got investment from external entities like VCs or angel investors or banks,” HIdo said. “We did jobs and business from the beginning.”

All co-founders at that time were graduate students, so there was no need to pay them salaries, according to the CRO. “We didn’t need money from VCs or … banks,” Hido said. Income initially came from search engines tailor-made for the Asahi newspaper and national broadcaster NHK.

Although it started life as an open-source software development project, the company began thinking about ways to make money. How could it profit from machine learning software? Funding for research and development was not hard, but selling services or products was difficult, Hido said. The first commercial examples were speech recognition and image recognition, similar to the technology used by Google and Facebook.

Hido said the company is now focused on automotive and industrial robotics but is seeking bio-healthcare opportunities in Japan and the U.S.

There is also a community of Japanese start-up founders and CEOs from abroad. These ventures often offer solutions to particular issues facing sectors yet to cast off local business traditions. Gengo and Makeleaps are are two examples.

Gengo CEO Matthew Romaine (Photo by Julian Littler)

Tokyo-headquartered Gengo, the company’s name means language in Japanese, has raised some $25.6 million to date and is working on smooth, fast translations using crowdsourcing. Their last round brought in $5.4 million in 2015. But starting in 2008 with much less of a Japanese venture ecosystem was tough, said co-founders Matthew Romaine and Robert Laing, in separate conversations.

Makeleaps is a start-up helping Japan’s growing ranks of workers having to file timesheets. It simplifies invoicing using cloud computing. Australian Jay Winder co-founded the company after Angellist founder Naval Ravikant convinced him to pursue his business as a start-up, together with co-founder Paul Oswald, during a random meeting at a Tokyo dinner gathering. Ravikant visits Japan often and his wife is Japanese.

Ravikant and 500 Startups first invested in the venture. Its latest funding round was closed in July for an undisclosed sum, led by Japan’s Rakuten Ventures.

CEO Winder shared one experience of a meeting with an interested VC, who once told the start-up was incorporated in Delaware said their funding contracts only allowed investment in Japanese companies. But feeling like outsiders at home is slowly fading.

Continued change

Some Japanese start-up trends are changing. The Tokyo Stock Exchange offered Mercari the chance to go public after its billion dollar valuation, but CEO Shintaro Yamada decided to remain private.

Yamada is no stranger to the world of start-ups. In his first interview in English, Yamada explained that he sold his last company to games giant Zynga, worked for them for a year and a half, and then left to travel the world.

When he returned, he discovered Japan’s mobile market had switched to smartphone. So, he launched an app company, no website (Mercari has since launched a website version).

“I was really surprised, after travelling, everyone was using Line,” the CEO said, referring to the popular Japanese messaging app that listed on the New York exchange on July 14. The change was a huge one for a nation that had clung to domestically produced galakei — a Japanese portmanteau of Galapagos and keitai, Japanese shorthand for cellphone.

Currently the unicorn flea market app is funnelling efforts toward the U.S., where it has 25 million downloads, more than double this time in 2016. Yamada has his eye on success in the №1 economy before launching in Europe.

According to Jeffrey Char, a Tokyo-based serial-entrepreneur and chairman of J-Seed Ventures, the latest generation of venture leaders are more interested in social impact. They are determined to make a difference, rather than try to make fast cash. Yet, the number of founders remains low.

Entrepreneurial aversions

Japan Inc. is well-known for being risk-averse. Overcoming the idea that job security is the domain of large companies and a workforce that makes vocational decisions based on family expectations remain obstacles to starting new businesses.

The Global Entrepreneurship Monitor (GEM) ranks Japan’s entrepreneurial activity second last on its list of surveyed countries, only Suriname rates lower.

According to GEM, only 3.4% of Japan’s population between the ages of 18 and 64 fit into the nascent entrepreneur or business owner categories. This compares to 15.53% in China and 13.8% in the U.S.

Professor Noriyuki Takahashi of Musashi University, team leader of GEM’s Japan team, said that following the 2008 global economic downturn, surveys showed Japan bucked the worldwide trend of losing trust in large companies.

Takahashi believes attitudinal change toward founding new businesses needs to start in school classrooms and university vocational advice centers.

One positive sign of entrepreneurial activity from the GEM report is that 19.5% of Japanese adults who believe they have the ability to start a business, actually do. In the U.S., this figure is 17.4%.

Increasing VC investment is also raising hopes that recent success stories will help change negative perceptions of entrepreneurs.

Yoshito Hori, managing partner at Tokyo-based VC fund Globis Capital Partners, said the reason Japan’s funds invested more domestically in 2015 was because there are now so many good investment opportunities.

Hori pointed to Mercari, one of his portfolio companies, as an example of a Japanese venture with the potential to become a world-leading customer-to-customer service. Perhaps this is the new inspiration young Japanese entrepreneurs need. The influence that success stories, such as that of Sony’s Akio Morita, once had over the university mind is losing sway.

VEC president Ryuji Ichikawa thinks fast-growth ventures such as Peptidream, a biopharmaceutical discovery company, can change the image of start-ups in Japan. The company won the Prime Minister’s Prize at the 2016 Japan Venture Awards.

IPO fever

Going public in June 2013, Peptidream rallied investors. It gained a market value of some $1.4 billion tripling its IPO price on its second day of trade on Tokyo’s Mothers, meant to be a market for high-growth and emerging stocks. The achievement was made despite listing during a volatile time.

Three years after going public, Peptidream now has a market value of some $3 billion. It is not the only recent IPO success story. Tsukuba University-based Cyberdyne now has a market cap of some $2.86 billion; it listed in 2014. However, not everyone thinks fast exits are the best option.

In Japan, jokes are frequently made about start-up IPOs being the same as Series B funding rounds, aimed at fast growth. Many think the trend toward IPOs needs to shift toward mergers and acquisitions.

VEC executives showed a chart mapping Japan’s IPOs against mergers and acquisitions in their annual White Paper, noting Silicon Valley is the opposite of Japan’s IPO-heavy exits. Japan’s current IPO trends are similar to California’s situation 20 years ago.

The Financial Times reported in June 2016 that the growth of Tokyo’s Mothers index in 2015 was surpassing that of all other Japanese markets. The exchange is markedly up despite the earnings of many of the companies listed not seeming to justify the gains. The June report singled out Cyberdyne as an example. The company is projected to finally move into the black after being listed for three years. This suggests it is this market’s own success that may well be drawing more to the fast-growth index.


Fast growth is not easy. “I think that engineers are a big problem,” CEO Yamada said, referring to Japan’s programmer situation. “The first engineers define the level of engineers for that company.”

The first two engineers Mercari asked to join were busy with another project. To overcome this, Yamada switched office hours to Tuesday through Saturday for 10 months. This way, they could work with the engineers on Saturdays and on some evenings. Once they started working together, the CEO could rely on the carefully selected engineers to make the best choices about who to hire next.

Koki Kimura, Mixi Inc. Director and General Director of XFLAG STUDIO (Photo by Julian Littler)

Mixi Inc. Director Koki Kimura, is also general director of XFLAG STUDIO, creator of the hit social networking game Monster Strike. He agreed that finding good engineers is difficult but was philosophical about it suggesting it is also hard to define a good engineer — is it the code they write, their sense of design or human interface, he wondered.

Mixi was Japan’s big social network — before Facebook showed up on the scene.

Others think education is key. William Saito, special advisor to the Cabinet Office advising Prime Minister Abe on innovation, is a serial entrepreneur and cybersecurity expert. Saito said he is pushing for programming to be included in Japan’s school curriculum to boost coding knowledge and skills.

But not everyone agrees. Yusuke Takahashi, the California-based CEO of Appsocially and co-founder sees the situation a little differently. He thinks the level of programmers in Japan is not so different from in the U.S. However, employing people in Japan is far cheaper than in Silicon Valley.

Takahashi, who has a doctorate in computer science, moves back and forth between San Francisco and Tokyo. He shared why he thinks Japan’s market is good for those with access.

“Less competition is the advantage of working in Japan,” he said. “Less companies, less start-ups, a closed market because of the language barrier. It’s not easy, but it’s easier than working in San Francisco, trying to expand in the U.S. and the English-speaking world.”

On the mentor front, the Appsocially CEO said he listened to Dave McClure from 500 Startups speak in Tokyo some four years ago. The managing partner of the well-known Silicon Valley fund suggested all Japanese entrepreneurs in the room write blogs asking why people like Rakuten founder Hiroshi Mikitani or Gree founder Yoshikazu Tanaka were not in the room with them, while he was.

McClure pointed out that the difference between California and Japan was that in the U.S., successful founders are more active about giving back to the community that helped them succeed.

That said, at Open Network Lab’s 12th batch demo day in April 2015, run by Digital Garage Incubation (DGI), co-founder Joi Ito, director of MIT Media Lab, welcomed contestants and expressed joy over the presence of a biotech start-up in the field. Then he left the stage and didn’t return.

That DG incubator program had 93 applications out of which only six were chosen to enter the program. Just five were ready to take the stage to show off their ideas.

Everyday people

Mercari’s secret is appealing to everyday people. Its typical users are young moms. They use the app to buy and sell clothes for themselves and their children. But you can find almost anything for sale on the app. Roughly half of all sales closed on the service sell within 24 hours.

Mercari shopping app (Photo by Julian Littler)

Part of its attraction is its user interface. The home screen resembles the experience of window shopping, items randomly pop up for perusal.

“Normal people launch the app five or six times a day and use it for six or seven minutes, whenever they have some spare time — in bed, in the toilet or while commuting — and then buy a good deal when they see one,” the CEO said.

Yamada thinks that the co-founders’ collective experience creating online social games has helped their success. Attention to detail regarding numbers, retention rates and user surveys ensures the customer remains the center of attention.

The CEO was unsurprised that many in Japan don’t know his company, despite its huge success. “Our users are very normal people,” he said, “not early adopters.”

Speed is one of their best features, according to Yamada. Anyone can download the app, snap a photo on their smartphone and list an item within minutes. Others are also paying attention to this opportunity.

Dave McClure said 500 Startups has wanted to increase its activity in Japan for years. In late 2105 it launched 500 Startups Japan, currently a $30 million fund. The Managing Partner is concerned that Japanese start-ups are too focused on “going global” and not paying enough attention to basic Japan-oriented online businesses that make money.

“It’s the biggest start-up market no one pays attention to,” McClure said after meeting in Tokyo during a Geeks On A Plane tour through Asia. Japan has a, “big online economy, lots of consumer spending, but still small amount of entrepreneur and investor activity relative to size of opportunity.”

With so many possibilities for disruption, Japan needs to help people like Gen Isayama, Naval Ravikant and Dave McClure encourage deeper affinities for the country from the world’s investors and innovators.

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