What’s going on in Japan’s startup Ecosystem?
An Unconventional Exploration (for us!)
Today, we’ll be taking a slightly unconventional route, as far as Revaia content goes. As a global fund, with a focus on Europe and the US, it’s important to expand our horizons and see what’s taking place in the rest of the world from time to time. When it comes to tech innovation in Asia, the media tends to focus on China and India as the powerhouses of the region. And for good reason. The two countries are ranked 2nd and 3rd worldwide for total unicorns created, behind the US.
But if we think back to a few decades ago, Japan was a pioneer in cutting edge hardware, robotics and technological innovation. Today, you’ll find it challenging to find a major press release announcing the next emerging tech platform from the country. So what happened?
A Changing Zeitgeist
Japanese culture, at least from an outsider’s point of view, has an aura of futuristic charm and unusual inventions — using technology to construct a whole new world. This image certainly still exists, but Japanese innovation simply hasn’t maintained its grasp on the zeitgeist, perhaps as a result of the shift in focus from consumer hardware to consumer software. Take this atypical litmus test, for instance: top premier league sponsors across the decades. In the 90s, uniforms were dominated by the hardware giants of the day (many of them Japanese): Sharp, JVC, TDK to name a few. Today, the tables have turned. Major sports sponsors have shifted to the modern tech giants — primarily software companies, mobile betting apps and crypto exchanges.
- So what exactly happened in this transition?
- Did Japan’s innovation ecosystem get lost in the shuffle?
- Are they still a hardware hub struggling to penetrate the brave new world of software?
- How has Japanese business culture impacted the ability for subsequent generations to break the mold and experiment with entrepreneurship?
There are 4 Types of Countries
Economist Simon Kuznets once said, “There are four kinds of countries in the world: developed countries, undeveloped countries, Japan and Argentina” — an allusion to the uniqueness of the two aforementioned economies with near opposite fates. Japan, by all accounts, is a 20th century rags to riches story, rising from undeveloped obscurity to global economic leader in a remarkably short period of time. Today, Japan is the world’s 3rd largest economy ($5T GDP) but ranked 14th in terms of unicorn production (a mere 8 private companies valued over $1B to their name). It’s a noticeable discrepancy, especially for a once dominant tech hub.
Business culture undoubtedly plays a role in Japan’s diminishing presence in the highly competitive world of software startups. If you recall our reading list from a couple of weeks ago, The Culture Map serves as a good starting point for understanding how exactly Japanese business culture works and how it may clash with the common startup wisdom of the 21st century.
Generally speaking, Japan tends to foster a high-context communication environment, meaning lots of implicit meaning as opposed to direct and transparent discussion. Paired with a hierarchical organizational structure and a decidedly non-confrontational approach to feedback and collaboration, it possesses traits that go against the grain of conventional startup wisdom. However, it’s not strictly the business culture that plays a role in shaping the current ecosystem, but an inherited sense of career ambition and loyalty that don’t fully align with today’s obsession with serial entrepreneurs and impressive acquisitions.
Incubators & IPOs
Despite Softbank dominating the headlines, CEO Masayoshi Son is better known for pouring billions into American startups than promoting the local Japanese ecosystem. In light of recent developments, that may be a good thing… Nevertheless, there is a thriving startup ecosystem. In fact, if you were to visit Tokyo and explore up close, you’d likely see a number of similarities to your average Silicon Valley scene. The differences, however, are in the details.
IPOs vs. Acquisition
According to a 2017 Silicon Valley Bank survey, 77% of US founders expected a merger or acquisition (instead of reaching an IPO). In contrast, roughly 80% of Japanese startup exits happen via IPO, as stated by James Riney of 500 Startups Tokyo HQ. So why do we see a near opposite trend in Japan compared to the US? Masako Ueda, an economics professor at Northwestern University, attributes it to loyalty.
“If starting your own company instead of joining a stable organization was once unimaginable, having your leaders ousted by the management of another company is still abhorrent to many. The risk of cultural clashes keeps many startups from choosing the same path.” — Masako Ueda
Evidently, many founders start out with the intent of going public. The thought of handing over company control to an acquirer is antithetical to the prevailing cultural norms.
Institutional Funding
In the US, funding mechanisms vary widely in tech: bank loans to personal savings to friends and family — despite the publicity, venture funding and formal angel investments account for only 10% of total startup investment. In Japan, 42% of funding is from VC and 30% come from Enterprise and corporate investment arms (source: Y+L Projects). This implies less room for experimentation. Corporate partnerships have strategic goals in mind and generally invest in the safer choice; venture capital, although more risk-seeking, is also designed to identify macro trends and invest accordingly, typically allocating funds towards high ROI opportunities in AI, fintech and the banking sector. This is a limiting factor in the variety of startups that can successfully be launched in the region.
A Culture of Risk Aversion
Anyone who’s spent time in the startup world knows that risk is inherent to the system. Something like 90% of startups end up failing in one way or another. Most founders understand that risk and march forward anyway. Japan is ranked as one of the most risk intolerant cultures in the world, a fact that is incongruent with traditional startup profiles.
Entrepreneurial Ikigai
Japan’s 21st century tech ecosystem may be off to a slow start, but we shouldn’t write them off just yet. In many ways, there are parallels between other societies whose culture didn’t quite conform to the free-wheeling philosophy of San Francisco tech leaders. France, for example, also encountered the “trough of disillusionment” for adopting an entrepreneurial mindset and adapting certain elements to meet and align with cultural standards. With government support coming from former Prime Minister Shinzo Abe’s commentary on Japan’s role in the 4th industrial revolution and evolving attitudes around risk, startup best practices and new forms of leadership, Japan is well-positioned to accelerate in the coming decade.
A strong community, entrepreneurial dynamism and the democratization of building great companies will help usher in a new dawn for Japan’s startup ecosystem. The Japanese term “Ikigai” is a motivating force or something that gives you meaning and purpose. The startup ecosystem in Japan is en route to find theirs!
