How the Japanese Startup Landscape Has Changed: Predictions v. Reality

I recently stumbled upon an article that piqued my interest. Titled Japan’s Startup Ecosystem: From Brave New World to Part of Syncretic “New Japan”, Stanford researcher Kenji Kushida takes a look at how the Japanese startup culture had changed since the 1990s, a turning point in the Japanese economy signifying the end of the post-war economic boom to the lost two decades of stagnation that followed. Being both a) a 90s Japanese kid born straight into a long recession that unfortunately became the new norm (so normal that I didn’t even realize that we were in a recession until later in life), and also b) a startup geek who’s been studying or working in the Silicon Valley for the last decade, Kushida’s article struck a chord.

Given that his article was published in 2016, I thought it would be interesting to compare what he wrote about the Japanese startup environment then, to what has since become 2~3 years after his publication.

About the Author

Kenji Kushida is a researcher at Stanford’s Shorenstein Asia-Pacific Research Center. His main research focus has been on Japanese business culture, especially in a multicultural context (i.e. international expansion, emulating Silicon Valley, etc.). He also is a founding member of the Silicon Valley-New Japan Project, a “Sustained Platform for Interactions Between Silicon Valley and Japan.” Born in New York and raised in Tokyo, Kushida completed his bachelor’s and master’s degrees at Stanford, moving on to the University of California, Berkeley where he received his Ph.D. in Political Science.

So, What happened in the 90s?

When people still thought Japan would be everywhere in the business realm. Oh how things have changed!

While the Clinton years and dot-com bubble thrusted the post-Gulf War US into a new economic and technological high, Japan was coming out of a decades-long real estate asset price bubble that resulted in two decades of economic stagnation. The era of conspicuous consumption, with glittery overtones of city pop music, and rumors of college kids renting Disney Land for the weekend stopped circulating. Japanese companies had scared themselves in their excessive buying spree of US companies, and some of you in the US might recall the potential results of this humorously depicted in Back to the Future 2 (Also, remember Nakatomi Plaza?).

It was a mark in history that delineated the post-WWII economic miracle that produced global brands like Sony, Toyota, Honda, and Nintendo that are still competitive today, and the slump that has put even the Japanese psyche into collective defeatism for over two decades. I know this all too well, having been born in the Summer of 1990. I had heard of the “Bubble Era” through nostalgia-filled TV programs alongside news reports of a nation-wide hiring freeze, or Shushoku Hyogaki, directly translated as the Employment Ice Age. Rapidly graying management mostly stuck to the old ways of doing things that had until then provided the means to rise in their organizations, unable to adjust to the new economic reality.

The dream of the 80s

But after almost three decades the beginning of the long and grueling recession, Japan is ready to bounce back. Japanese enterprises are sporadically buying US firms (like Recruit acquiring Glassdoor); a handful of Japanese startups were bought by Silicon Valley tech outfits (robotics startup Schaft once was a Google X company); more students from elite universities than ever are now choosing startups as their career path, foregoing the age-old path of sticking it out at the first company you are hired into until retirement. Perhaps it’s not as exciting as Silicon Valley, but it’s a start (who remembers the Valley in the 50s?). And it turns out, although the amount poured into the Japanese venture scene is a drop in the bucket compared to Silicon Valley, it’s still larger than that of the UK, Germany, France, and other European nations compared individually (according to Table 2 in Kushida’s article; surprising, right?).

But just as wind can burn out a tiny candle yet stoke the flames of a campfire, the growing Japanese startup and innovation ecosystem could easily be struck down if the right environment is not in place.

The Anatomy of an Innovative Market

What makes a market or an ecosystem innovative? To answer this, and understand the path Japan will have to take in order to pull itself back up, Kushida uses a framework proposed by Martin Kenney, author of Understanding Silicon Valley : the anatomy of an entrepreneurial region, to understand the Japanese innovation ecosystem of the past and present.

Kushida summarized Kenney’s list of six characteristics of Silicon Valley which thrusted the San Francisco Bay Area onto the global innovation scene as quoted below:

1. A financial system centered on venture capital
2. A labor market providing high quality, diverse, and mobile human resources
3. Industry-university-government interactions that generate streams of innovative ideas, products, and processes
4. An industrial organization in which large, established firms and startups grow together
5. A social system that encourages entrepreneurship
6. Professionals such as law firms and accounting firms that assist and the establishment and growth of startups

Kushida then applied this framework to the post-war and current Japanese state:

Post-WWI Japan

1. “A bank-centered, then financial market enhanced financial system”: In other words, money only to be funneled to low-risk low-return projects.
2. “Long-term employment and seniority wages”: You generally don’t get paid for your skills, but your age and time at a company, creating very low labor fluidity and no incentive for life-long learning to enhance your career.
3. “Corporate in-house R&D with limited university-industry ties”: The “we can build it ourselves” mentality ran deep, creating an environment in which startups and corporates do not mingle in general.
4. “Industrial organization focused on keiretsu structured centered on large firms”: Large, stable firms reining over the Japanese economy with a vertically-integrated subsidiary structure which sometimes created efficiencies, but ended up more of a headache when you consider the slow pace of innovation and lack of new ideas coming out of one large structure.
5. “A social system focused on channeling the best and brightest to large firms”: The “best and brightest” requires a bit of re-defining here, as university entrance hinges on a few academic exams, requiring no volunteer experience or extracurriculars outside of studying for these exams; do higher scores really correlate with what we would consider “best and brightest” when it comes to innovation?
6. “Lack of differentiation between traditional low growth small-medium firms and potential for high growth startups”: The question was never “how quickly can you grow,” but rather simply “will it grow and be stable?” This thought process led to a lack of distinction between high-growth and low-growth companies, placing small businesses and potential high-growth startups within the same mind space.

Japan in the 90s

1. Venture capital was nascent, and what little of it Japan had was operated by risk-averse corporate professionals shying away from high-risk high-reward opportunities where IPOs and M&As were few and far between.
2. Especially during the economic bubble, new graduates from top-tier schools went on to larger financial or trading firms, and stayed for as long as they could, creating not only illiquidity in the labor markets but also social stigma regarding career changes.
3. Many of top Japanese universities being public institutions and their faculty public servants, there was very little public-private partnering, and very few people understood technology licensing for ideas coming out of academia.
4. Large firms were still stuck building new services themselves, seldom engaging in M&A, slowing down the pace of innovation both within the organization, and in the Japanese innovation market as a whole.
5. People basically didn’t understand why you’d want to go into a startup when there were other stable options available. Working at a startup was perceived as an option once you had no other employment prospects. Also see #2.
6. Professionals, especially in the professional services business, had very little exposure to startups, and therefore also very little experience supporting them as accountants, networkers, coaches, etc.

What Did Kushida See in 2016?

In short, he saw some good news coming along.

As we’ve covered in Innovators in Japan, there’s a small, but growing venture capital scene with money coming from outside the large banking sector, from those who have had prior experience at or with startups.

Talent is moving more fluidly, especially in the IT sector where skills and results gain you respect and a career path rather than seniority; larger firms are finally taking notice, but haven’t been able to pivot as fast as they would need to. The youth of Japan, especially college students, have welcomed entrepreneurship into their mindshare as they consider their next steps in their lives, not wanting to go in the footsteps of their office worker predecessors. And as we saw even in the past few weeks, top-tier universities are actively participating in the research-to-product-launch pipeline through intellectual property management and launching venture capital funds of their own.

In fact, let me backtrack on that “small, but growing venture capital scene” comment. It’s easy to dismiss Japan when it comes to VC money compared to the US and China. But then again, anywhere compared to the US and China would seem tiny. Where, on the other hand, would Japan place compared to other startup hubs in the world?

It turns out, while Germany, France, and the UK had $870 million, $840 million, and $620 million in venture capital investments as of 2015 (2014 for UK), Japan spent $1.11 billion according to the Venture Enterprise Center (Table 2 in Kushida’s paper). So, in reality, things aren’t as small, or behind as casual observers might expect.

Why Things Are Getting Better

In addition to the general dollar amount being invested in Japanese startups, there are a few key shifts Kushida notes in his research.

First of all, there has been an increase in independent venture capital firms. As of 2015, independent venture capital firms such as World Innovation Lab, 500 Startups Japan, and other non-bank VC firms accounted for 35%, with corporate venture capital coming in second at 28% of total funding.

Secondly, Japan launched a stock market for small-cap firms (i.e. startups) back in 1999. Mothers and JASDAQ, as they are called, created a market through which companies can achieve liquidity much faster, easier, and at a significantly lower market capitalization than in more traditional markets. This, as we have discussed in a previous article, has created an environment where entrepreneurs are sometimes pressured into going public much earlier than they should. Overall, however, this has helped lower barriers to entry as well as providing legitimacy to the startup world, creating a much more predictable process to exit compared to exit strategies in the US.

A third point is about role models. As US startups expand to Japan as they grow, they bring a culture with them that encourages Silicon Valley-esque thoughts and actions. Things like bias towards action, skills rather than political standing, a fun and collaborative work culture, and cutting-edge technology tinkering have exposed Japan to a whole new way of working and living. Kushida notes that Wantedly, Freee, and Soracom all have founders with experience at Facebook, Google, and Amazon Web Services, respectively. Being exposed to a different culture that works helps lower mental barriers to approaching entrepreneurship in a traditionally seniority and corporate loyalty-based nation. And this creates a ripple effect through which startup workers, now experiencing how startups operate, found their own startups, or move and cross-pollinate with other startups rather than opting for a traditional career path.

My Two Cents

As a nation with long-standing incumbents resting on their laurels while taking advantage of the rigid employment system, the Japanese system itself is ripe for disruption.

I personally have a lot of hope for new entrants to insert the new generation of technology, work, and culture that transcends the startup scene — there’s a potential to change how Japan operates as a nation, from its education system to legal and employment frameworks, but most importantly the mentality of working on meaningful projects through helping creating something new and exciting in a world that’s constantly changing.