A look at Japan’s startup scene: Its global position, biggest challenges and hidden weapons
Who’s driving investment, traditionalism vs. tech innovation, and risky business in a risk-averse nation.
At their core, startups are born to service underutilized and underdeveloped market conditions to innovate, create, or disrupt stagnant industries. For Japan, it’s no different. The local startup space is comfortable sharing the spotlight with other major economic powers such as the US, UK, Germany and France.
But what does such a scene look like in a nation that still holds traditionalism and conventional corporate structures in high regard? In a country where fax machines, yes fax machines, still play a key role in many corporate spaces, how can a culture built on futuristic ideologies thrive?
It’s important to understand that the word “startup” broadly includes companies ranging from seed stage through to series C funding. For the sake of brevity, this article will focus on early stage seed investment. For those uninitiated in the world of startups, “seed investment” refers to the initial sum of money used to begin operations — when received externally, this type of investment is generally exchanged for equity in the newly formed entity.
In many ways, Japan’s startup ecosystem mirrors that of Silicon Valley, and other young, innovative tech meccas. Yet in many more, it’s akin to economist Simon Kuznets’ proverbial notion that there are four economic subtypes; ‘overdeveloped, underdeveloped, Argentina, and Japan,’ meaning in brief, it’s an entity with such unique history and trajectories, it’s near impossible to compare.
Big economy, small risks: What Japan invests in its startup scene
While Japan boasts the third largest economy in the world, its investment into the startup space is a modest 4.32B USD, compared to the world’s sixth largest economy, the UK, which saw a total investment of 15B USD in 2020.
According to Crunchbase’s 2021 Startup Ecosystem Report, Japan has maintained its global rank of 21st for the second consecutive year. Though Japan has remained competitive in Asia-Pacific (APAC), the gap is closing with countries like South Korea and India pulling further ahead, while countries with significantly smaller GDPs and population sizes, such as Taiwan and New Zealand, continue to gain ground.
Where is the investment coming from, and what does it say about Japan’s approach to startups?
Funding comes in all shapes and sizes, from informal loans (thanks mum and dad), to private equity and angel investment. The information surrounding these exact statistics is broadly unavailable, but estimates put forth by the Kauffman foundation suggest that in the US, 35% of the industry is financed through standard banking/loans, 30% through personal savings, 6% through friends and family, and a meagre 6%, and 4% respectively for angel investment and venture funding.
By contrast, 42% of funding in Japan comes from venture capital, and 30% comes from general business corporations. This constitutes a major departure from the ‘norm’ and belies, in this author’s opinion, one of the major barriers Japan faces in fostering innovation and growth within the startup space.
As most investment tends to be institutional, the types of investment are far more strategic and targeted with a particular focus on high growth industries such as banking, finance, fintech, AI, and other current technology trends. While this approach can create a crucible through which the ‘fittest’ and most appropriate technology is focused on and adopted, it also creates a dearth of more experimental technologies.
Social theories as to why startup culture in Japan is different
Startups are a risky business. The estimated global rate of failure within the space is over 90%. While this is global, important internal factors set Japan apart when considering a founder’s appetite for success, the most important among them being risk aversion.
Japan generally defines risk as ‘something dangerous that will lead to a negative outcome’ — a far cry from the more global definition that highlights the potential ‘exposure’ rather than the end result.
Japan ranks among the highest countries in the world for risk aversion; this may explain the differences in funding outlined above, with founders expressing a higher degree of reluctance to play with their own money. It also exposes and underlines a potentially significant psychological barrier that companies, founders, and even employees need to contend with.
So who are these employees? Japan’s labor demographics likely play a massive and complex role in how these startups form and perform. According to the Organisation for Economic Co-operation and Development (OECD), Japan ranks fourth in the world for total employment (ages 15–64), but this is an incomplete picture, considering Japan’s aging population, 28% of which is >65 years old, suggesting even higher overall employment.
Japan’s low birth rate, plus an aging population, may also contribute to the fact that 97.8% of students find full-time employment after finishing College/University.
An incredibly limited (by the numbers) talent pool, a high degree of risk aversion, and more limited funding availability don’t paint an idyllic picture for the future of startups in Japan. But…
Pressure does make diamonds
Of course, caution has its benefits. While the global statistics paint a challenging path for long term startup success, Japanese startups have managed to outlast their overseas counterparts in the US, Germany, France, and the UK by nearly 30% over their first three years, according to Eurostat and the Office of National Statistics.
Here are three theories for this;
- Higher degree of founder confidence
While throwing caution to the wind may work in specific markets, a deliberate, studied, and careful approach fuelled by risk aversion likely leads to greater company identity, core competencies, and founder vision. All of which are critical factors within the tumultuous world of startups.
- Excellent institutional support beyond investment
The same companies driving investment have a vested interest in the success and longevity of these investments. Many companies view startup investment and acquisition as an excellent avenue of potential future growth. For this reason, they continually provide support beyond financial backing, including cross-company business development opportunities, regulatory support, and crucial networking with other high profile industry players.
- Employing outside bounds
Although many are attracted to the stable and predictable life of Japan’s larger, traditional firms, a shift is happening. More are seeking the opportunity to work in companies where their voices are heard, management is flat, and the possibility for independence, quick promotion, and even faster earnings appears abundant (if you play your cards right).
The foreign element, a potentially powerful force
Another area in which startups are uniquely positioned is in their ability to capitalize on a relative abundance of highly qualified foreign labour. Although the situation is changing, most Japanese companies only hire native Japanese speakers or those with business-level (N1, N2) proficiency, which can take years of focussed study to achieve.
In general, for many foreigners, the easiest path to Japan — in the absence of high-level Japanese language ability — is through English teaching, regardless of skills, degrees, qualifications, etc.
Japan’s changing labour demographics have created a void in which foreign labour (particularly in the programming and engineering space) has begun to fill a market niche. Large technology firms are driving the trend by providing internal support mechanisms for non-Japanese speakers.
So, what will the future of Japan’s startups look like?
While Japan’s startup challenges may be unique, they’re not insurmountable. Startups exist on innovation, change, and opportunity — all of which can exist within Japan today and tomorrow.
The changing labour demographics, continued globalisation, and the success of its technologies position Japan well to adapt and overcome future challenges.
One such prominent tech journalist with extensive experience in the startup space believes, “if there is a silver lining to the cloud that has been COVID-19, the pandemic has sped up long-awaited societal and technological innovation in Japan as in many other countries.
The digitalisation of workplace processes is an example. Japanese companies, often led by domestic tech startups, are finally moving into the digital universe and, at the same time, letting go of paper-based work styles. Such innovation is taking place across society, not just in the private sector. This change, among other signs of change — such as government policies that seriously seek to attract foreign entrepreneurs and investors, including establishment of a “startup visa” program — makes me optimistic about the ecosystem.”
The government’s organisation, JETRO (Japan External Trade Organization), has been diligent in fostering the Japanese startup industry and new investments in Japan. With continued care and oversight, Japan has the skill-set, power and potential to become a competitive authority in the space in greater APAC and the world.
Written by: Q.R (Business Designer)
Edited by: Emma Araki + Lucy Dayman
Photography: Kim Marcelo
