Why you need to take another look at Japan as a new frontier for startups
日本語／English
Hello everyone! My name is Aya, an associate at Incubate Fund.
Which countries come to mind when you think of burgeoning startup hubs? The US, China, UK, India, and Brazil have seen the rise of startups worth north of tens of billions of dollars, and recently Indonesia and South Korea have also enjoyed the limelight with startups such as GoTo, Blibli and Coupang.
Compared to these regions it seems at first glance like Japan has lagged behind. What was once a global manufacturing powerhouse has had seemingly limited success in churning out leading players in tech, at least those with an impact on a global scale. However, I believe that Japan has been a missed opportunity for both overseas entrepreneurs and investors alike.
There has not been a better time for startups in Japan than now — here are the 6 reasons why.
1. There is truly incredible potential for tech-driven labor and capital productivity improvements in Japan
Japan has a long list of societal issues it needs to deal with.
First, its decreasing population has led to chronic labor shortages in almost all industries. The population of 15~64 yr olds is set to decrease 9.8% by 2030, and Nomura Research Institute estimates Japan will face a shortfall of 10.47 million workers, or 15% of the overall workforce.
As a result, boosting labor productivity has become one of its key priorities, however, Japan has consistently ranked lowest on this metric among G7 nations for 50 years straight, and GDP per person employed is nearly half that of the US as of 2021.
Additionally, with an approximately 3x difference in ROE vs. the US as of 2021, there is still a significant margin for improvement in its capital efficiency.
Japan also aims to reduce its CO2 emissions down to nearly half in 2030 vs. 2013, an ambitious goal which cannot be achieved unless we can come up with novel business models and technologies that can make this possible.
The good news is that on a global scale, there are vast amounts of venture investment into sectors that can directly address these issues.
Though multiple factors come into play in terms of a startups’ success, those building solutions in areas such as SaaS, e-commerce, and climate tech can expect to have an outsized impact especially in Japan, where these issues are most pronounced and the need for innovation is dire.
2. Investment levels in the highest potential areas are far from saturation point
The below is a comparison of investment* in the respective sectors in Japan vs the US and Europe — we’ve adjusted for economic size by comparing the multiple of the size of investment divided by GDP. Japan has the most room for further investment in areas that can supercharge its digital transformation.
3. You have a powerful combination of a desire to change and a tech talent gap that opens the door to AI and outsourced tech solutions
Despite the urgency for digital transformation in Japan, it has not been progressing at the necessary pace or scale. According to a study by McKinsey & Company, Japan’s business leaders understand that digital is the next promising opportunity, however, they do not feel that their organizations are sufficiently prepared to promote it. The widening gap between ICT (information and communication technology) investment in Japan vs. the US is a clear indicator.
Additionally, Japan only has a third of the ratio of digital talent in its labor force vs the US. Of this digital talent less than 30% are employed in-house, which has been a significant disadvantage in promoting and implementing digital on an organizational level. Japanese companies also tend to continue to rely on existing in-house IT systems; the ratio of public cloud costs vs. total IT cost remains a third of that in the US.
With the above obstacles in place, professionals who hold a global perspective are important catalysts for carrying out necessary changes, however, the downturn in US MBA graduates has not been an encouraging trend and highlights the necessity for Japan to attract overseas talent.
4. Japan is the 2nd largest SaaS market globally, and still has room for growth
Perhaps a little known fact to those outside of Japan is that it is the 2nd largest SaaS market in the world — though the gap may be widening, its total IT cost is second only to the US.
This article by UB Ventures provides insight into the current state of the Japan SaaS industry — notably only 0.4% of Japan’s total market is SaaS vs. 4% in the US, demonstrating the fact that the domestic SaaS industry is still far from established.
5. Despite the recent market downturn, Japan’s VC investment appetite remains strong
With the recent downturn in tech stocks and widespread layoffs, one may get the impression that they should hold off on their startup aspirations for a while — after all, are investors still willing to invest in startups?
There is no need to worry if you are a budding founder in Japan — the total amount raised by startups in Japan is on a trajectory to hit record high levels this year, showing stronger momentum compared to the US where the amount raised in the 1H of this year has fallen YoY. This is partly due to later stage startups delaying their IPOs and raising large amounts from private investors instead; however, the fact remains that Japanese VCs are sitting on dry powder that they are still actively looking to deploy, and seed~early stage investors are less likely to be influenced by public market activity.
6. The Japanese government is focusing its efforts on boosting the startup ecosystem
So far, we’ve seen that Japan has an acute need for startups to solve its impending societal issues, a sizable market with room for growth, and a stable VC appetite to back this. How, then, is the general political and societal sentiment toward startups?
As many are aware, the Japanese government has announced that it aims to turbocharge Japan’s startup ecosystem as part of Prime Minister Kishida’s New Capitalism agenda. Some of the initiatives expected to be rolled out include boosting government procurement from startups, and efforts to mitigate financial risks for individuals wishing to launch their own businesses.
On a municipal level, there has been a push for a more inclusive startup ecosystem — the most notable being the “Shibuya Startup Support” initiative by Shibuya Ward which aims to attract startups (both in Japan and from abroad) to Shibuya. As part of this program, the Shibuya City Office provides various assistance to foreign startups such as applications for a “startup visa”, finding office/residential spaces and the opportunity to implement PoCs in conjunction with the ward’s push for open innovation.
The newfound emphasis on startups found in the examples above is a promising step towards a more supportive environment for entrepreneurs from various backgrounds to kickstart and scale their businesses in Japan.
Although there are language and cultural barriers that require a good dose of tenacity and entrepreneurship to overcome — the scale of the opportunity and positive changes in the environment make Japan worth another look for investors and entrepreneurs alike. We at Incubate Fund believe this presents a unique opportunity for founders from all backgrounds to bring a new perspective and create real impact.
If you are a founder with aspirations to build your startup in Japan, we would love to hear your ideas — please feel free to reach out to team-p-global@incubatefund!
